LESCO, Inc. 10-K

LESCO^® is a leading provider of products for 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, grounds and gardens. In the fourth quarter of 2005, the Company’s strategic restructuring was completed with the sale to Turf Care Supply Corp. (TCS) of LESCO’s four blending facilities and the majority of the Company’s warehouse and distribution centers, combined with the closing of four distribution facilities that were not purchased by TCS.

Effective with the Company’s sale of its supply chain assets on October 1, 2005, we have realigned our reporting segments for which separate information is available. The new reporting segments are Stores and Direct. 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 (LESCO Service Center^® stores, Stores-on-Wheels^® vehicles and Direct) and product lines. See MD&A for further discussion of customer sectors and transacting selling locations. See discussion of product lines below.

We sell an extensive array of consumable turf care products to the green industry, including fertilizer and combination products, control products, turfgrass seed, and pest control products. Additionally, we offer equipment, parts and service. 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.

Fertilizer and combination products. We sell a broad assortment of standard blended fertilizers and combination products that combine fertilizer with control products. We also provide custom-blend fertilizer according to customer specifications. Our fertilizers include products for use in the lawn care industry along with specialized products for golf course applications, including greens, tees and fairways, as well as products for trees, shrubs and landscape beds. Fertilizers generally are 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.

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. 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 nutrition to the plant as well as the removal of crabgrass, insects and fungus.

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

Equipment, parts and service. We source a broad assortment of equipment, including rotary mowers, spreaders, sprayers, aerators and renovation equipment, primarily 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 turf-care market. In addition, we offer a broad assortment of branded handheld power tools produced by third parties. Equipment sales are supported by repair facilities in or near Service Centers and a toll-free hotline staffed by trained technicians. Parts support is fully computerized, and we generally are able to provide overnight parts delivery nationwide. We source replacement parts primarily from Gardner, Inc.

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 2005, we had more than 36,500 production acres under contract in these regions. Our seed line includes 39 proprietary varieties as well as 28 standard blends and mixtures. Our turfgrass seed line, including a variety of mulches and soil amendments, are blended and packaged primarily through contract manufacturers under the LESCO brand.

Pest control. We offer a full line of pest management products, including LESCO and third-party branded products, all of which are sourced from third-party suppliers. Our assortment includes a number of the top names in the pest management industry. Our offering covers products to manage termites and wood-destroying pests, general insects, rodents and a complete line of application equipment. With 305 Service Centers conveniently located across the United States, we are able to provide the country’s pest management professionals with a level of service unparalleled in the industry.

Other. On a regional basis, our merchandise mix includes ice melt and other snow removal products that are sourced from third party suppliers. We offer underground irrigation equipment, protective gear, such as goggles, masks and gloves, and hand tools, such as tree pruners, shovels and rakes. We utilize Par Aide Products Co. (Par Aide), a leading supplier of golf course accessories, to distribute Par Aide-branded products, including ball washers, tee markers, sand trap rakes, putting green cups, flags and flagpoles.

Sources of supply. Subsequent to the sale of substantially all of the Company’s supply chain assets, the Company relies on one supplier (TCS) to manufacture and source substantially all of its consumable products, which represent over 80% of our sales volume. The Company continues to source hard goods from vendors other than TCS. It is our policy to identify acceptable substitutes for all products we sell and all raw materials used in our products in case an alternate product or raw material is needed. The only exceptions to this policy are our purchase of specialty products and certain equipment items.

Our selling efforts are conducted through the three channels within our two operating segments. In some instances, the same customer often is serviced through multiple channels. Although the square footage and lease terms of our stores vary, Service Centers generally are approximate 5,600-square-foot facilities leased for a period of five years or more. Approximately 640 standard merchandise items are displayed prominently in

We own patents of various durations, trademarks, copyrights and other intellectual property, and rely on them to protect our interest in products and technology. LESCO Technologies, LLC, a wholly owned subsidiary of LESCO, Inc., owns common law and registered trademarks including, among others, LESCO, ELITE and Poly Plus. 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.

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 United Agricultural Products (UAP — formerly known as 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, physical location and price.

Fertilizer products are also regulated by individual state departments of agriculture and generally must 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 also are required to obtain licenses and permits from a number of governmental agencies in order to conduct various aspects of our business. These licenses and 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.

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 insurance industry and are not unique to us. In determining our insurance programs, we regularly evaluate the cost of insurance as compared to the risks assumed.

The Company maintains a website at www.lesco.com. The Company makes available through its website its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after it electronically files such information with or furnishes such information to the SEC.

You should carefully consider the risks described below. In addition, the risks described below are not the only ones facing us. We have only described the risks we consider to be the most material. 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. When we say below that something could or will have a material adverse effect on us, we mean that it could or will have one or more of these effects. 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.

Sales of our products are seasonal. A large percentage of our sales occur during the spring and summer. 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 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.

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.

One of our key business strategies is to expand annually, by 10% to 15% 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.

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 21.0% of the Company’s gross sales in 2005, a decline from 24.8% 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.

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., J.R. 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 (i.e., 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.

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.

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.

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 U.S. Environmental Protection Agency (“U.S. 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 U.S. 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 U.S. 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 U.S. 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. For example, the Company and its employees must maintain current licenses in order to sell restricted-use pesticides. 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.

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.

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.

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.

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

In 2003, an administrative complaint was filed against the Company by the State of New York Department of Environmental Conservation (“NYSDEC”) alleging violation of state law regarding the registration of pesticides. The complaint alleges that the Company distributed 3,400 bags of Dimension^®Crabgrass Pre-emergent Plus Fertilizer to one of its retail customers in New York State without having proper registration thereof. The complaint seeks a civil penalty of $3,440,000. NYSDEC filed a similar complaint against the retail customer seeking a civil penalty of $3,440,000. The Company intends to indemnify the retail customer for such claim pursuant to a vendor agreement between the parties. The Company has held discussions with the NYSDEC relative to a settlement.

There are other legal actions, governmental investigations and proceedings pending to which the Company is a party or to which its property is subject. In the opinion of our management, after reviewing the information that is currently available with respect to these matters and consulting with counsel, any liability that may be ultimately incurred with respect to these matters is not expected to materially affect our consolidated results of operations, cash flows or financial condition.

Jeffrey L. Rutherford has been President and Chief Executive Officer of the Company since October 2005. Mr. Rutherford joined the Company as Senior Vice President and Chief Financial Officer on February 18, 2002. From 1997 to 2001, he served as Senior Executive Vice President and Chief Financial Officer of OfficeMax, Inc., a retailer of office supplies, and from February 1997 to July 1997 as Senior Vice President and Treasurer of that company.

Bruce K. Thorn has been Senior Vice President, Chief Operating Officer since October 2005. Prior to October 2005, Mr. Thorn was Senior Vice President, Operations overseeing all aspects of the Company’s marketing and supply chain functions. Mr. Thorn joined the Company as Senior Vice President, Logistics & Operations on March 18, 2002. 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.

Michael A. Weisbarth was appointed Vice President, Chief Financial Officer and Treasurer in October 2005. Mr. Weisbarth joined the Company in March 2004, as Vice President, Controller. Prior to joining LESCO, Mr. Weisbarth spent eight years at OfficeMax where he held the positions Vice President/ Controller and Senior Vice President/ Treasurer as well as a variety of financial positions. In addition, Mr. Weisbarth has worked for Deloitte & Touche and Things Remembered, a division of Cole National.

Kathleen M. Minahan was appointed Vice President, General Counsel and Secretary in October, 2005. Ms. Minahan joined the Company on March 15, 2004, as Senior Corporate Counsel. Ms. Minahan was in private practice from 1995 through 2004, most recently as a senior associate with the law firm of Thompson Hine LLP where she practiced in the business litigation and labor and employment practice groups. Ms. Minahan joined Thompson Hine LLP in June 2002 when the firm combined its practice with Kaufman & Cumberland Co., L.P.A., a boutique litigation firm where Ms. Minahan had practiced since 1999.

We did not pay dividends in 2005 or 2004. Certain provisions of our previous credit agreement prohibited the Company from paying dividends. The current Revolving Credit Facility (the Facility) allows for the payment of dividends as long as certain conditions are maintained. Under the Facility, the Company may distribute cash dividends or redeem common shares worth up to $30 million in the aggregate over the term of the Facility provided that the Company maintains certain covenants. Among these covenants are requirements to maintain at least $5 million of available, undrawn borrowing capacity (and up to $10 million for various periods during the year) along with a certain fixed charge coverage ratio and a net worth requirement.

LESCO is a leading provider of lawn care, landscape, golf course and pest control products to the $6 billion professional green and pest control industries. The professional users of our products include lawn care and landscape firms, pest management professionals 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 other organizations that use in-house employees to maintain lawns, grounds and gardens.

Our Lawn Care sector includes all non-golf related customers and is dominated by lawn care and landscape firms. Historically, industry-wide distribution of products into this sector has been fragmented and inefficient. We believe that our model of Service Centers and direct selling efforts provides efficiency to the sector’s distribution channels through easily accessible, strategically positioned real estate, where we provide agronomic expertise through our 305 Service Centers and direct sales associates with products specifically

targeted to the Lawn Care sector. We generated $55.2 million of sales through the 79 Service Centers opened in the last three years. We estimate the market for our consumable Lawn Care products at $6.0 billion, of which $2.8 billion is in the professional sector and $3.2 billion is in the consumer sector. Independent research indicates that organic growth in the industry is expected to exceed 7% annually for the next several years due to the aging of the “baby boomers” and their increasing desire to contract lawn care professionals due to time or ability constraints coupled with their desire to have healthy and aesthetically pleasing lawns, and the higher number of dual-income families.

The golf industry is a smaller market estimated at $1.4 billion and is not expected to grow significantly during the near future, nor do we believe our opportunities are as great in this sector as they are in the Lawn Care sector. Over the past few years, the industry has experienced a decline in annual rounds of golf played, which has decreased the budgets of golf course superintendents. Additionally, the expansion of golf course acreage, in terms of new course construction, has slowed in recent years. The ability to capture incremental market share is limited as distribution of products to the golf industry is dominated by a few national and regional distributors. We currently operate 111 Stores-on-Wheels that service the golf industry. During 2005, we expanded our fleet of vehicles by 38 units from our base of 73 at the end of 2004. The vast majority of the fleet is comprised of smaller, more cost effective vehicles compared to the larger tractor trailer units that the Company historically operated. We believe that these smaller units will allow us to expand the concentration of our customer base beyond the golf customer.

Our historical financial performance and returns on invested capital through 2001 were unacceptable. We operated three business lines that consumed capital: selling product, manufacturing and distribution operations (supply chain) and credit financing. Based upon the opportunities that were available in our customer sectors and opportunities for improvement in our financial performance, we embarked in 2002 on a strategy to reposition LESCO in order to capitalize more effectively on our opportunities. In 2005, the Company reached a significant inflection point as it completed its strategic and financial restructuring, culminating with the sale of LESCO’s supply chain assets. The following is a summary of the changes we have made to our business over the past two years, along with any financial impacts from these changes:

The following are the operating results of each of our operating segments. Earnings before interest and taxes (EBIT) is a non-GAAP financial measure that reflects our earnings before the payment of interest on indebtedness and taxes. We use EBIT as a measure of the profitability of our segments because it excludes the effects of our capitalization structure and taxes. Interest and taxes are accounted and paid for on a consolidated Company basis. Neither capitalization structure nor taxes reflects the efficiency of the operation of our segment assets. Additionally, we use EBIT in determining whether to finance a project with debt or equity. EBIT should not be considered an alternative to net income (loss) calculated in accordance with GAAP.

Our Stores Segment is composed of the operating results of our Service Centers and Stores-on-Wheels along with our field management organization. We maintain Four-Wall P&Ls for each Service Center and Stores-on-Wheels. These Four-Wall P&Ls include the sales, cost of sales and operating expenses (including payroll, benefits, rent, utilities, in-bound freight to selling locations and out-bound freight to customers) necessary to operate the individual selling locations. The Stores Segment operating results reflect the aggregate Four-Wall P&Ls of Service Center and Stores-on-Wheels selling locations adjusted for vendor and customer rebates, sales commission expense, warehouse and distribution costs, and merchant discounts and other income and expense items not directly charged to the Four-Wall P&Ls.

Service Centers: Service Centers’ gross sales reflect sales transacted through our 305 Service Centers in operation as of December 31, 2005, including 31 new Service Centers opened during 2005. The total gross sales increase of 10.3% in 2005 reflects a same-store (including stores opened in 2003 and prior years) increase of 5.8% and 4.5% from 2004 and 2005 Service Center openings. Service Center sales for the 79 stores opened in the last three years were $55.4 million. We plan to open up to 40 additional Service Centers in 2006.

Stores-on-Wheels: Stores-on-Wheels gross sales for the year reflect sales transacted through our 111 Stores-on-Wheels in operation as of December 31, 2005, including 38 new Stores-on-Wheels placed into service during 2005. The total gross sales increase of 9.8% in 2005 was predominantly driven by the incremental units on a year-over-year basis. The vast majority of the new Stores-on-Wheels were added in markets where LESCO already had a presence through an existing Stores-on-Wheels unit or a golf direct sales representative. The golf direct sales representative model was essentially disbanded and merged into the

Net sales adjustments: The Company has entered into agency agreements with certain of its suppliers whereby the Company operates as a sales agent of those suppliers. The suppliers retain title to their merchandise until it is sold by the Company and determine the prices at which LESCO can sell the suppliers’ merchandise. As such, the Company recognizes sales on a net basis and records only its product margin as revenue. Agency sale adjustments, combined with freight revenue, which represents fees charged to customers in sales transactions for shipping and handling, and customer discounts and rebates decreased $0.4 million in 2005 compared to 2004.

Gross profit as a percentage of net sales increased to 27.8% in 2005 from 27.2% in 2004. The increase is an outcome of the Company’s improved pricing strategy (implemented throughout 2005) and meaningful margin rate gains in the grass seed, control, and fertilizer product categories. This expansion in product margin is despite an approximate 11% year-over-year comparative price increase for urea and increased fuel surcharges in 2005. Urea is used as the nitrogen source for blended fertilizers and combination products. Urea can represent from approximately 8% to 10% 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 2005, we entered into a contract with our urea supplier to fix the cost of a majority of our urea needs at a price reflecting the prevailing market. Fuel surcharges, included in our costs of distributing product to the selling locations, nearly doubled on a year-over-year basis, compounded by the 31 incremental locations added to the distribution network.

As a measure of the productivity of our significant investment in real estate and inventory, the Company analyzes the gross profit on sales per square foot of rental space for each of the Service Center classes. This non-GAAP measure is calculated by dividing gross profit on sales for each Service Center class by its respective leased square footage. The following table illustrates the improvement in this metric on a year-over-year basis:

Selling expense includes all operating expenses of Service Centers and Stores-on-Wheels, and field management. The increase of $14.5 million, or 1.5% of net sales, to $82.8 million, or 16.6% of net sales, in 2005 is directly attributable to $4.5 million for new Service Centers and $3.9 million for the 38 Stores-on-Wheels openings. Other significant increases, on a year-over-year basis, were $2.7 million for the expansion of the field management team to enhance the structure to support future store growth and $2.6 million incremental field personnel incentive compensation due to the achievement of sales and productivity goals. The majority of the remaining increase is related to the new systems connectivity and technology that was deployed into the Service Centers beginning in 2004 and completed in the second quarter of 2005.

Merchant discount fees incurred for regular payment terms increased to $8.4 million, or 1.7% of net sales, from $6.3 million, or 1.4% of net sales, in the previous year. This increase as a percentage of net sales was driven by a shift in mix of customer credit usage towards higher-cost bank cards from the Company’s private label credit program. Bank card usage increased to 10.4% of sales in 2005 from 8.7% in 2004.

During 2005, LESCO increased its Service Center base by 11%, adding 31 Service Centers to its base of 274 stores at the end of 2004. Management views new Service Centers as the primary method to leverage our cost base and grow earnings consistently over the long term. The Company currently plans to open up to 40 new Service Centers in 2006. Below are the 2005 and 2004 operating results by class of Service Centers:

As a result of the foregoing factors, including the operating results of the new Service Centers and Stores-on-Wheels, the Stores Segment had EBIT of $47.5 million in 2005 versus $48.4 million in 2004 with the 2005 results reflecting the additional $3.9 million in costs related to the conversion to, and expansion of, the Stores-on-Wheels model. See management’s discussion regarding the use of EBIT on page 18.

tives through our direct sales programs. The decrease of 27.3% in 2005 compared to 2004 is primarily attributable to the year-over-year decline of 73.5% in sales to customers in the golf industry reflecting the effect of our disbanded golf sales representatives program. The decline in year-over-year golf sales is attributable to both the inclement weather during the first quarter in the Northeast and Midwest regions of the country along with the previously described transition of our golf direct sales and Stores-on-Wheels sales channels. We continue to evaluate the return on investment relative to our contract accounts and have instituted disciplines to assure contracts meet acceptable return thresholds. We analyze customer profitability across the entire Company as certain national account customers may elect to transact sales in our Stores Segment as well as in our Direct Segment. This program has, on occasion, resulted in lost contract sales, and we will continue to eliminate direct sales that do not produce an acceptable level of return on our overall investment.

Net sales adjustments: Net sales adjustments decreased $3.1 million in 2005 compared to 2004 as freight revenue, which represents fees charged to customers in sales transactions for shipping and handling, declined, and customer discounts and rebates increased as the Company implemented a customer incentive plan targeted at garnering market share for specific LESCO-branded products.

Gross profit as a percentage of net sales decreased to 11.7% in 2005 from 14.9% in 2004. As the Company analyzed the profitability of major national accounts, contractual agreements and/or pricing were renegotiated to improve LESCO’s return on investment. The effect of these actions is demonstrated in the gross profit rate improvement by quarter in the Direct Segment as follows:

The decline in gross profit in the third quarter of 2005 is due to the deleveraging of allocated fixed warehousing and distribution costs. After the sale of the supply chain assets to TCS at the start of the fourth quarter, these costs became variable and this change is evidenced in the improved gross profit rate reflected in the fourth quarter results. Based on the change in our operating model, we anticipate gross profit on sales to be approximately 16% in 2006.

Selling expense includes all operating expenses of direct sales activities, including, but not limited to, payroll and related costs, incentive compensation, trade shows, and targeted marketing campaigns. In 2005, selling expense declined $7.6 million to $5.6 million, or 7.3% of net sales, from $13.2 million, or 12.2% of net sales, in 2004. The primary reductions in selling expense are $3.8 million of payroll and $1.3 million in incentive compensation due to the restructuring of our direct sales representative model in the first half of 2005, and $0.4 million of marketing expense based on a reduced number of campaigns.

Merchant discounts increased to $1.9 million, or 2.5% of net sales, from $1.7 million, or 1.6% of net sales, in the previous year. The merchant discounts expense includes fees incurred for regular payment terms and the write-off of specifically-identified customer accounts receivable which were owned directly by the Company or under a recourse agreement with GEBCS, our private label business credit provider. The write-offs were recorded at $0.6 million, or 0.8% of net sales, in 2005 compared to no write off activity in this segment in 2004.

The two operating segments are supplemented by Corporate costs incurred for support functions, including Corporate selling expenses consisting of marketing costs, general and administrative expenses, any charges and all costs from the manufacturing and distribution facilities, marketing costs, merchant discounts for promotional activities, pre-opening costs for new Service Centers and Stores-on-Wheels, and other expenses that are not allocated to the Stores and Direct Segments.

Merchant discounts increased $2.9 million to $5.6 million from $2.7 million in the previous year. The merchant discounts expense includes promotional discount term fees incurred for the extension of customer payment terms and the net change in the allowance for doubtful accounts. In 2005, promotional discount terms were 1.0% of consolidated net sales compared to 0.4% in 2004. The increase was driven by market conditions necessitating more aggressive promotional offerings combined with customer participation at higher-than-historical levels.

Pre-opening expense increased $0.4 million in 2005 compared to 2004 results. As the fixed charges for payroll and third-party consulting fees have increased, pre-opening expense in 2005 increased to approximately $52,000 per new Service Center from $43,000 per opening in 2004. The Company opened 31 new Service Centers in 2005 and 27 in 2004. Pre-opening expense, which consists primarily of grand opening advertising, payroll, supplies, third-party consulting fees, distribution and storage costs, is expensed as incurred.

in expense year over year is due to lower expenses related to the Company’s corporate headquarters lease and related costs, reduced management incentive costs, and a reduction or elimination of some expenses as a result of the supply chain transaction, offset by $2.6 million for expenses associated with a stock option repurchase from a former executive and severance costs related to the departure of the Company’s former President and Chief Executive Officer in the fourth quarter of 2005.

On October 11, 2005, the Company announced that it had completed the sale to TCS of its supply chain assets and consumable products inventory, including fertilizer, seed, control products, combination products, and related products. The supply chain assets included all four of LESCO’s blending facilities and the majority of the Company’s warehouse and distribution centers. The Company incurred $24.0 million in charges in 2005, including $2.2 million of expense to close the four distribution hubs that were not purchased by TCS. The charges primarily were related to the loss on sale of certain assets.

In the fourth quarter of 2004, we informed our supplier of methylene urea fertilizer, KPAC Holdings, Inc., that the Company would no longer operate under the terms of its Supply Agreement with KPAC. In the second quarter of 2005, the Company and KPAC reached a settlement through a court appointed mediator. The settlement required the Company to make a cash payment that exceeded management’s initial estimate by $0.5 million. The initial estimated expense of $5.2 million, including product markdown costs, was recorded in 2004. The Company has no further obligation to KPAC as final payment has been rendered.

During the third quarter of 2004, LESCO entered into agreements to relocate its corporate headquarters from its approximately 94,000 square foot facility in Strongsville, Ohio to an approximately 39,000 square foot facility in downtown Cleveland, Ohio. Relocation costs during 2004 were $6.9 million, primarily related to tenant and landlord inducements along with broker commissions and legal fees.

During the third quarter of 2004, the Company incurred losses at its Sebring, FL and Martins Ferry, OH manufacturing facilities due to hurricane activity in Florida and the related rainfall and flooding activity in Ohio. The total damages recorded were $1.2 million primarily resulting from the loss of approximately $1.0 million of bulk urea and sulfur coated urea that was stored at a third party terminal located adjacent to the Ohio River. Additionally, there was roof and siding damage sustained at the Sebring facility from the hurricane activity.

As a result of the foregoing factors, including the transition of the golf direct sales organization to a Store-on-Wheels model, the supply chain transaction, vendor settlement, product rationalization to eliminate certain under-performing SKU’s, restructuring of the Company’s parts sourcing model, and the operating results of new Service Centers opened in 2003, 2004 and 2005 as well as the 38 new Store-on-Wheels which have not yet matured in their operating results, the Company had a pre-tax loss of $26.7 million in 2005 compared to a pre-tax loss of $5.3 million in 2004.

The net loss for 2005 was $26.7 million, or $3.00 per diluted share, compared to a net loss of $5.6 million, or $0.65 per diluted share, for 2004. The 2005 results were reduced $24.0 million, or $2.70 per diluted share, due to costs of the supply chain transaction, $6.3 million, or $0.70 per diluted share, for the markdown charge to restructure the parts sourcing model and product offering, $2.6 million, or $0.30 per diluted share, for stock option repurchase and severance costs for former executives, and $0.5 million, or $0.05 per diluted share, for settlement costs paid to KPAC Holdings, Inc. The 2004 results were reduced by $6.9 million, or $0.79 per diluted share, for costs related to the Company’s headquarters relocation; $5.2 million, or $0.60 per diluted share, for the costs associated with a supplier contract termination including product markdown costs; and $1.2 million, or $0.14 per diluted share, for costs related to hurricane and flood damage.

In accordance with the provisions of FAS 109, in the fourth quarter of 2003, the Company recorded a charge to establish a valuation allowance for its net deferred tax assets, including amounts related to its net operating loss carryforwards. The Company intends to maintain a full valuation allowance for its net deferred tax assets and net operating loss carryforwards until sufficient positive evidence exists to support a reversal of some portion or the remainder of the allowance. Until such time, except for minor state and local provisions and adjustments to federal tax refunds, the Company expects to have no reported tax provision or benefit, net of valuation allowance adjustments. LESCO increased its valuation allowance $9.5 million and $2.4 million in 2005 and 2004, respectively.

The following are the operating results of each of our operating segments. Earnings before interest and taxes (EBIT) is a non-GAAP financial measure that reflects our earnings before the payment of interest on indebtedness and taxes. We use EBIT as a measure of the profitability of our segments because it excludes the effects of our capitalization structure and taxes, neither of which reflects the efficiency of the operation of our segment assets. Interest and taxes are accounted and paid for on a consolidated Company basis. Additionally,

Service Centers: Service Center gross sales reflect sales transacted through our 274 Service Centers in operation as of December 31, 2004, including 27 new Service Centers opened during 2004. The total increase of 9.5% reflected a same-store (excluding new and closed units) increase of 3.0% and an increase of 9.3% from new (2003 and 2004 openings) Service Center sales of $32.8 million.

Direct: All other gross sales reflect sales transacted as direct (non-store) sales with our national account customers, including large retailer accounts, along with the operations of LESCO sales representatives through our direct sales programs. The increase of 7.3% was attributable to the year-over-year growth in sales to international customers offset by a decrease in sales to customers in the golf industry due to cannibalization by the Service Centers.

Net Sales Adjustments: The Company has entered into agency agreements with certain of its suppliers whereby the Company operates as a sales agent of those suppliers. The suppliers retain title to their merchandise until it is sold by the Company and determine the prices at which LESCO can sell the suppliers’ merchandise. As such, the Company recognizes sales on a net basis and records only its product margin as revenue. Therefore, the $2.1 million of agency sales for 2004 represent the portion of gross revenue that exceeds the Company’s net product margin. Freight revenue, which represents fees charged to customers in sales transactions for shipping and handling, remained relatively flat as a percentage of sales. Customer discounts and rebates declined to 0.7% of gross sales from 0.8% as the Company implemented more stringent qualifications for its customers to obtain rebates.

In 2004 and 2003, our largest single purchased product or raw material was urea, the nitrogen source for blended fertilizers and combination products. Urea can represent from approximately 8% to 10% of our cost of sales. Urea is a second derivative of natural gas and its cost fluctuates with the changing cost of natural gas. Average 2004 urea costs increased approximately 20% over 2003 costs, which unabated would have resulted in an estimated 2.0% deterioration in product margin percentage. However, through price increases and other

In 2004, we continued to optimize efficiencies in our distribution network that was expanded late in 2002. The expansion added fixed costs to our operations to support our expected growth in Service Center units and comparable-sales increases. As a result of growth in Service Center units and comparable-sales increases, we leveraged the fixed costs associated with our distribution operations and reduced our 2004 distribution costs as a percentage of net sales to 8.2% from 9.1% in 2003.

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 $5.6 million predominantly related to new Service Centers’ incremental operating costs of $5.2 million. New Service Centers’ selling expense was $8.0 million in 2004 for the 48 Service Centers opened in 2004 and 2003, while selling expense in 2003 included $2.8 million for the 21 Service Centers opened in 2003.

As a percentage of net sales, merchant discounts expense increased 130 basis points year-over-year. In December 2003, we sold our trade accounts receivable portfolio to GEBCS for $57 million and entered into a private label business credit program agreement with GEBCS. In 2004, we sold an additional $6 million of trade accounts receivable to GEBCS. This arrangement resulted in increased merchant discounts as we pay program fees and discounts to GEBCS. Total merchant discount expense, including GEBCS, for normal payment terms was 1.5% of net sales while promotional discount expense was an additional 0.4% of net sales. Although merchant discount expense increased year-over-year, interest expense, provision for doubtful accounts, the general and administrative costs to service the previous in-house credit program and customer finance revenue were significantly reduced as compared to 2003.

Pre-opening expense increased $0.6 million in 2004 compared to 2003 results. Pre-opening expense remained consistent between years at approximately $29,000 per new Service Center opened, as the Company opened 27 new Service Centers in 2004 and 21 in 2003. Pre-opening expense, which consists primarily of grand opening advertising, payroll, supplies, distribution and storage costs, is expensed as incurred.

General and administrative expense declined by $1.6 million in 2004 to $27.0 million, or 4.8% of net sales, compared to $28.6 million, or 5.5% of net sales, in 2003. The cost savings recognized from tightened expense controls, along with the strategic outsourcing of customer financing to GEBCS in December 2003, offset the increase in expense related to more stringent governance guidelines (Sarbanes-Oxley Section 404) as well as management bonus and employee insurance/benefits.

During the third quarter of 2004, we entered into agreements to relocate our corporate headquarters from our approximately 94,000-square-foot facility in Strongsville, Ohio to an approximately 39,000-square-foot facility in downtown Cleveland, Ohio. Relocation costs incurred during 2004 were $6.9 million, primarily related to tenant and landlord inducements along with broker commissions and legal fees. We reduced our lease commitment for corporate offices by five years as the lease on the Strongsville facility expires in 2015 while the current corporate headquarters lease expires in 2010.

During the third quarter of 2004, the Company incurred losses at its Sebring, FL and Martins Ferry, OH manufacturing facilities due to hurricane activity in Florida and the related rainfall and flooding activity in Ohio. The total damages were $1.2 million, primarily resulting from the loss of bulk urea and sulfur coated urea that was stored at a third-party terminal located adjacent to the Ohio River. Additionally, there was roof and siding damage sustained at the Sebring facility.

In the fourth quarter of 2004, we informed our supplier of methylene urea fertilizer, KPAC, that the Company would no longer operate under the terms of the Supply Agreement with KPAC. The five-year supply agreement between LESCO and KPAC was entered into in November 2002 and required the Company to purchase 8,000 tons of methylene urea fertilizer annually from KPAC at a fixed conversion cost of $500 per ton plus the prevailing commodities market prices, which were approximately $270 per ton in 2004. An estimated expense of $5.2 million, including product markdown costs, was recorded.

Interest expense was dramatically reduced in 2004, which was directly related to the sale of the Company’s accounts receivable portfolio to GEBCS in December 2003. The sale of the portfolio reduced the year-over-year outstanding borrowings on the revolving credit facility and allowed us to eliminate an interest rate swap agreement at the end of 2003 and retire, prior to maturity, our industrial revenue bonds in the fourth quarter of 2004. Our improved cash flow allowed us to maintain lower seasonal borrowing levels and minimized the related interest expense. The effective interest rate of borrowings in 2004 was 6.86% versus 6.21% in 2003 as letter of credit fees are included in interest expense. Excluding letter of credit fees, the 2004 effective rate was 5.26%.

The net loss for 2004 was $5.6 million, or $0.65 per diluted share, compared to a net loss of $5.3 million, or $0.63 per diluted share, for 2003. The 2004 results were reduced by $6.9 million, or $0.79 per diluted share, for costs related to the Company’s headquarters relocation; $5.2 million, or $0.60 per diluted share, for the costs associated with a vendor contract termination including product markdown costs; and $1.2 million, or

In accordance with the provisions of FAS 109, in the fourth quarter of 2003, the Company recorded a charge to establish a valuation allowance for its net deferred tax assets, including amounts related to its net operating loss carryforwards. The Company intends to maintain a full valuation allowance for its net deferred tax assets and net operating loss carryforwards until sufficient positive evidence exists to support a reversal of some portion or the remainder of the allowance. Until such time, except for minor state and local provisions and adjustments to federal tax refunds, the Company expects to have no reported tax provision or benefit, net of valuation allowance adjustments. In 2004, the Company adjusted previously estimated federal tax refunds by $0.3 million and increased its valuation allowance an additional $2.4 million.

In January 2005, the Securities and Exchange Commission issued additional guidance for the reporting of cash flows from the sale of accounts receivable. As such, the cash generated from the sale of our accounts receivable is now reflected in the Operating Activities section of our cash flows statement when, historically, it was reflected in Financing Activities. Below is a reconciliation of GAAP reported cash flows from Operations to a Non-GAAP presentation that excludes the sale of accounts receivable:

“Adjusted cash provided by operating activities” is a non-GAAP financial measure. It should not be considered an alternative to “Cash provided by operating activities” as calculated in accordance with GAAP. We believe the adjustments to “Cash provided by operating activities” are useful because we do not expect to generate significant cash flow from future sales of non-store inventory and sales of accounts receivable and believe investors should be aware of how that will affect our “Cash provided by operating activities” calculated in accordance with GAAP. As a result of selling the supply chain assets and related working capital, the Company received $34.2 million for inventory that resided in the transferred facilities. Additionally, due to the outsourcing to the GEBCS private label credit program in 2003, we have sold a majority of our accounts receivable from the sale of products on a permanent basis and no longer generate significant accounts receivable from our sale of products. As of December 31, 2005, $6.8 million of our accounts receivable relate to sales made to international and domestic customers not included in the private label credit program.

We will merchandise each new Service Center with $150,000 to $200,000 of inventory and a new Stores-on-Wheels with $105,000 of inventory. As such, we anticipate that inventory levels will increase with the opening of new Service Centers, but continued improvements in supply chain efficiencies, along with continued accounts payable leverage, could mitigate the impact of incremental product requirements.

We expect to focus our future capital needs primarily on Service Centers. We intend to open up to 40 units in 2006, relocate another 25 existing sites to new locations with the intent to increase customer traffic and invest in new fixtures for our current base of stores to enhance merchandise adjacencies and improve the in-store shopping experience. We will continue to maintain information systems and other assets that support the operating segments. We currently estimate that ongoing, annual capital needs will range from $3 million to $4 million, which we expect to fund with cash generated from operations.

In conjunction with the sale of its supply chain assets to TCS, the Company amended its $50 million Revolving Credit Facility (the Facility). The Facility matures October 7, 2010 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 1.25%, and a facility fee of 0.25% is payable on the unused portion. Availability under the Facility is determined by a borrowing base formula calculated on eligible inventory. As of December 31, 2005, there was $45.3 million available, based on the borrowing base formula, with unused borrowing capacity of $32.3 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. Letters of credit in the aggregate amount of $13.0 million were outstanding as of December 31, 2005. Letter of credit fees were fixed at 1.0% with an issuance fee fixed at 0.25%.

We believe that the Company’s financial condition continues to be strong. Together, its cash balances, other liquid assets, expected operating cash flows, access to debt and equity capital markets, and borrowing capacity are expected to 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.

We have various contractual obligations that are recorded as liabilities in our consolidated financial statements. Other items, such as certain purchase commitments and other executory contracts are not recognized as liabilities in our consolidated financial statements. For example, the Company is contractually committed to make certain minimum lease payments for the use of property under operating lease agreements.

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 taxes, and accrued liabilities. We base our estimates on historical experience and 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. Actual results may differ from these estimates under different assumptions or conditions.

The Notes to Consolidated Financial Statements and 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.

We recognize revenue when the earnings process is complete, generally at the point-of-sale to a customer or when goods are shipped and title and risk of loss passes to the customer. The Company’s shipping terms are FOB shipping point and title passes to the customer at the time of shipment. 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, which are included in “gross sales,” were $22.8 million, $41.3 million, and $38.9 million for the years ended December 31, 2005, 2004, and 2003, respectively. Additionally, we have agency agreements with vendors for which we recognize sales “net” as an agent. Agency sales are initially recorded at their gross amount and then reduced by the portion of revenue that exceeds the Company’s earned commission. Commissions included in net sales were $0.7 million for the year ended December 31, 2005, $0.5 million for the year ended December 31, 2004, and $0 for the year ended December 31, 2003. Revenues generated in transactions for shipping and handling services are included in ’Net Sales.’ Additionally, the related costs incurred for shipping and handling are included in ’cost of product’ to determine the Company’s ’Gross Profit on Sales’. Certain customers receive discounts or rebates for purchases made from the Company. The discount or rebate is recorded as a reduction to sales in the period in which the sale transaction occurs as there is no expected future benefit to be derived from the discount or rebate.

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 a reduction to inventory 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

Inventories are valued principally at the lower of cost (First In, First Out cost method) or market. Vendor rebates earned on purchases are recorded as a reduction to inventory on hand and recognized when the inventory is sold. The Company maintains an inventory life cycle program that requires the classification of all Stock Keeping Units (“SKUs”) into one of five categories: active, watch, phase out, discontinued and liquidated. SKUs identified as discontinued are progressively marked down to expected net realizable value over specific periods until the costs are marked down to zero. At that point, the products are liquidated and purged from the inventory system. Estimated net realizable value of 20% of cost is based on historical sales of discontinued inventory. At December 31, 2005, a 1% change in net realizable value of current discontinued inventory would affect the reserve by approximately $10,000. We maintain a reserve for inventory shrink on a specific location basis. This reserve is based on historical Company-wide experience of 0.2% of sales until the location obtains two physical inventory audits performed by a third-party inventory control organization. The site-specific reserve rate is then adjusted to reflect the average shrink rate from the two physical inventory counts. Actual shrink at the time of each physical inventory count is charged against the reserve. A change in the rate of inventory shrink of 0.1% of sales would have impacted the reserve for shrink by approximately $210,000 at December 31, 2005.

The Company uses the liability method whereby income taxes are recognized during the fiscal year in which transactions enter into the determination of financial statement income. Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between financial statement and tax bases of assets and liabilities. The Company assesses the recoverability of its deferred tax assets in accordance with the provisions of Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (SFAS 109). In accordance with that standard, the Company recorded a $15.6 million valuation allowance equal to its net deferred tax assets, including amounts related to its net operating loss carryforwards, as of December 31, 2005. The Company intends to maintain a full valuation allowance for its net deferred tax assets until sufficient positive evidence exists to support the reversal of some portion or the remainder of the allowance. Until such time, the Company will have no reported tax provision, net of valuation allowance adjustments. Any future decision to reverse a portion or all of the remaining valuation allowance will be based on consideration of several factors including, but not limited to, the Company’s expectations regarding future taxable income and the Company’s cumulative income or loss in the then most recent three-year period. In the event the Company was to determine, based on the existence of sufficient positive evidence, that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, a reduction of the valuation allowance would increase income in the period such determination was made. See Note 7 of Notes to Consolidated Financial Statements of the Company for additional information regarding income taxes.

Certain accrued liabilities, including employee health insurance and workers’ compensation, are estimated based on historical experience and lag analysis due to the difference between the time the expense is incurred and when the expense is paid. A valuation analysis is performed to estimate the accrual required for property and casualty insurance claims expense. Accrued environmental costs are estimated based on the Company’s previous environmental contamination and remediation experience along with site-specific conditions.

In November 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4” (“SFAS 151”). SFAS 151 amends ARB No. 43, Chapter 4 and seeks to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted materials by requiring those items to be recognized as current period charges. Additionally, SFAS 151 requires that fixed production overheads be allocated to conversion costs based on the normal capacity of the production facilities. SFAS 151 is effective prospectively for inventory costs incurred in fiscal years beginning after June 15, 2005. We do not expect the adoption of SFAS 151 to have a material effect on our financial statements.

In December 2004, the FASB issued Statement 123 (revised 2004), Share-Based Payment (SFAS 123R), which became effective for us on January 1, 2006. SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be valued at fair value on the date of the grant and to be expensed over the applicable vesting period. Pro forma disclosure of the income statement effects of share-based payments is no longer an alternative. In addition, companies must recognize compensation expense related to any stock-based awards that are not fully vested as of the effective date. Compensation expense for the unvested awards will be measured based on the fair value of the awards previously calculated in developing the pro forma disclosures in accordance with the provision of SFAS No. 123. Management believes that the pro forma information provided under “Stock-Based Compensation” in the consolidated financial statements provides a reasonable estimate of the projected impact of adopting SFAS 123R on the Company’s results of operations.

In May 2005, the FASB issued SFAS NO. 154, “Accounting Changes and Error Corrections” (SFAS 154). SFAS 154 is a replacement of Accounting Principles Board Opinion No. 20, “Accounting Changes” and FASB Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements.” SFAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes retrospective application as the required method for reporting a change in accounting principle. SFAS 154 provides guidance for determining whether retrospective application of a change in accounting principle is impracticable and for reporting a change when retrospective application is impracticable. The reporting of a correction of an error by restating previously issued financial statements is also addressed by SFAS 154. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 31, 2005. We have adopted this pronouncement in fiscal year 2006.

The Company is exposed to market risk, principally interest rate risk. Market risk can be measured as the potential negative impact on earnings, cash flows or fair values resulting from a hypothetical change in interest rates over time. Interest paid on the Company’s debt is sensitive to changes in interest rates. The interest rate for the Facility is variable, while the interest component of its operating leases is generally fixed. The

As part of our ongoing business, we are exposed to certain market risks, including fluctuations in interest rates and commodity prices. We have used derivative financial and other instruments, where appropriate, to manage those risks. We do not enter into transactions for trading or speculative purposes. As of December 31, 2005, we do not have contracts outstanding relative to interest rate risk. We do have certain supply contracts that are discussed further under the heading Contractual Obligations, Commitments and Off Balance Sheet Arrangements in MD&A.

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 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 Vice President and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective in ensuring that material information relating to the Company with respect to the period covered by this Annual Report was recorded, processed, summarized and reported on a timely basis.

Our management, including our President and Chief Executive Officer and Vice President, Chief Financial Officer and Treasurer does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. 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. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. 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 may not be detected.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organiza-

tions of the Treadway Commission. Based on our evaluation under the framework in Internal Control — Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2005. Our management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2005 has been audited by KPMG LLP, the independent registered public accounting firm that audited the consolidated financial statements included in this Form 10-K, as stated in their report which is included herein.

We have audited management’s assessment, included in the accompanying Management’s Annual Report on Internal Controls over Financial Reporting, that LESCO, Inc. (the Company) maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

In our opinion, management’s assessment that LESCO, Inc. maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, LESCO, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of LESCO, Inc. and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2005, and our report dated March 16, 2006 expressed an unqualified opinion on those consolidated financial statements.

We have audited the accompanying consolidated balance sheets of LESCO, Inc. and subsidiaries (the Company) as of December 31, 2005 and 2004, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2005. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedule listed in the index at Item 15(a) for each of the years in the three-year period ended December 31, 2005. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of LESCO, Inc. and subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of LESCO, Inc.’s internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 16, 2006 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.

LESCO, Inc. (“LESCO” or the “Company”) is a leading provider of lawn care, landscape, golf course and pest control products to the $6 billion professional green and pest control industries. Products distributed include turf control products, fertilizer, combination fertilizer and control products (combination products), grass seed, pest control products and equipment. The Company currently distributes products through 306 LESCO Service Center stores, 111 Stores-on-Wheels vehicles and other direct sales efforts. As of December 31, 2005, the Company had completed the sale of substantially all of its manufacturing and distribution assets, along with the related working capital, to Turf Care Supply Corp. (TCS). See Note 16 for a discussion of the transaction relating to these assets.

Segment Information: With the Company’s sale of its supply chain assets, it has realigned its reporting segments for which separate information is available as Stores and Direct. Operating results for each of these segments are evaluated regularly by the Chief Executive Officer in deciding how to allocate resources and in assessing performance. The Stores Segment is composed of the assets and related operating results of Service Centers, Stores-on-Wheels (Service Centers and Stores-on-Wheels are collectively referred to as “Stores”) and field management organization. The Direct Segment consists of the direct sales (sales not transacted at Stores), national account customers, including large retailer accounts, and the operations of LESCO sales representatives. The two operating segments are supplemented by Corporate costs incurred for support functions, such as Corporate selling expenses, including marketing costs, general and administrative expense, any charges and all costs from the manufacturing and distribution facilities (supply chain assets), merchant discounts for promotional activities, pre-opening costs for new Service Centers and Stores-on-Wheels, and other expenses that are not allocated to the Stores and Direct Segments.

The Company maintains separate operating statements (Four-Wall P&Ls) for each selling location within the Stores and Direct Segments. These Four-Wall P&Ls include the sales and cost of product and operating expenses necessary to operate the individual selling locations. The Stores and Direct Segments’ operating results reflect the aggregate Four-Wall P&Ls of the selling locations adjusted for costs of zone and regional management, sales commission expense, warehouse and distribution costs and a portion of merchant discounts not charged to the Four-Wall P&Ls. Charges incurred in 2005 for the supply chain transaction, supplier contract termination settlement, accelerated markdowns, stock option repurchase costs, and former executive severance cost and in 2004 for corporate relocation, hurricane/ flood expenses, and supplier contract termination settlement, were not allocated to the segments and are included in Corporate.

Revenue Recognition: The Company recognizes revenue when the earnings process is complete, generally at the point-of-sale to a customer or when goods are shipped (FOB shipping point) and title and risk of loss passes to the customer, less an appropriate provision for returns and net of coupons and other sales incentives. Revenue from certain sales transactions in which the Company effectively acts as an agent or broker is reported on a net or commission basis.

Cash and Cash Equivalents: Cash and cash equivalents consist of cash on hand and highly liquid instruments with original maturities of three months or less. Cash equivalents include accounts receivable from multi-purpose credit programs, such as American Express, Visa and MasterCard, and from the private label business credit program with GE Capital Financial Inc. (Note 3). Cash equivalents are carried at cost, which approximates fair value.

Accounts Receivable: 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 a reduction to the cost of inventory 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 at the lower of cost (First In, First Out cost method) or market. Consignment inventory is considered purchased at time of sale and at the time of sale, cost of product is recognized. Procurement, warehousing and distribution costs to bring the products to market are capitalized to inventory on hand and expensed to cost of product when the inventory is sold. The Company includes its general and administrative procurement costs in inventory. A markdown reserve is provided for markdown of inventory to net realizable value. Shrink reserves are recorded for expected inventory shrink and earned supplier discounts of inventory remaining on hand. Throughout the year, the Company performs annual physical inventories at all of its locations. For periods subsequent to the date of each location’s last physical inventory, a reserve for estimated shrinkage is provided based on various factors including sales volume and the Company’s historical shrink results.

Income Taxes: The Company uses the liability method whereby income taxes are recognized during the fiscal year in which transactions enter into the determination of financial statement income. Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between financial statement and tax bases of assets and liabilities. The Company assesses the recoverability of its deferred tax assets in accordance with the provisions of Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (SFAS 109). In accordance with that standard, the Company recorded a $15.6 million valuation allowance equal to its net deferred tax assets, including amounts related to its net operating loss carryforwards, as of December 31, 2005 and $6.1 million at December 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 should 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. See Note 7 for additional information regarding income taxes.

Property, Plant and Equipment: Property, plant and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful lives of the respective assets. Buildings are depreciated over 15 to 20 years, and machinery, equipment and other depreciable assets are depreciated over three to 12 years. Leasehold improvements are depreciated over the life of the initial lease term, which

typically is five years. Expenditures for maintenance and repairs are charged to expense as incurred. Additions and improvements are capitalized. On October 1, 2005, the Company completed a sale of substantially all of its supply chain assets and entered into a Long-Term Supply Agreement with TCS that requires TCS to manufacture and supply to the Company branded and non-branded consumable products for a period not less than five years. See Note 5 for additional information

Accrued Liabilities: Certain accrued liabilities, including employee health insurance and workers’ compensation, are estimated based on historical experience and lag analysis due to the difference between the time the expense is incurred and when the expense is paid. A valuation analysis is performed to estimate the accrual required for property and casualty insurance claims expense. Accrued environmental costs are estimated based on the Company’s previous environmental contamination and remediation experience along with site-specific conditions.

Advertising: Advertising costs are expensed as incurred. There were no amounts capitalized as of December 31, 2005 and 2004. The Company and its vendors participate in cooperative advertising programs in which the vendors reimburse the Company for a portion of its advertising costs. Advertising expense was $3,226,000, $3,150,000, and $2,567,000 for fiscal years 2005, 2004 and 2003, respectively. Advertising expense is included in selling expense.

Earnings per Share: The Company presents both basic and diluted earnings per share (EPS) amounts. Basic EPS is calculated by dividing net (loss) income by the weighted average number of common shares outstanding during the year. Diluted EPS is based upon the weighted average number of common shares and common share equivalents outstanding during the year utilizing the treasury stock method for stock awards. Common share equivalents are excluded from the EPS computation in periods in which they have an anti-dilutive effect. Stock options for which the exercise price exceeds the average market price over the period have an anti-dilutive effect on EPS and, accordingly, are excluded from the calculation.

Stock Options: The Company uses the intrinsic-value method of accounting for stock option awards granted to employees and does not issue options below market price on the date of grant and, accordingly, does not recognize compensation expense for its stock option awards to employees in the Consolidated Statements of Operations. The following table reflects pro forma net loss and loss per share had the Company elected to adopt the fair value approach of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation:

Inventory Costs: In November 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 151 (SFAS 151), Inventory Costs-An Amendment of ARB No. 43, Chapter 4 “Inventory Pricing”. SFAS 151 amends and clarifies financial accounting and reporting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) under ARB No. 43. This statement is effective for LESCO beginning with its first fiscal quarter in 2006. The adoption of SFAS 151 is not expected to have a material impact on the Company’s results of operations or financial position.

Share-Based Payments: In December 2004, the FASB issued Statement 123 (revised 2004), Share-Based Payment (SFAS 123R), which will be effective for us on January 1, 2006. SFAS 123R requires all share-based payments to employees, including grants of employee stock options, be valued at fair value on the date of the grant and be expensed over the applicable vesting period. Pro forma disclosure of the income statement effects of share-based payments is no longer an alternative. In addition, companies must recognize compensation expense related to any stock-based awards that are not fully vested as of the effective date. Compensation expense for the unvested awards will be measured based on the fair value of the awards previously calculated in developing the pro forma disclosures in accordance with the provisions of SFAS No. 123. Management believes that the pro forma information provided previously under “Stock-Based Compensation” provides a reasonable estimate of the projected impact of adopting SFAS 123R on the Company’s results of operations.

Accounting Changes and Error Corrections: In May 2005, the FASB issued SFAS NO. 154, “Accounting Changes and Error Corrections’ (SFAS 154). SFAS 154 is a replacement of Accounting Principles Board Opinion No. 20, “Accounting Changes” and FASB Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements.” SFAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes retrospective application as the required method for reporting a change in accounting principle. SFAS 154 provides guidance for determining whether retrospective application of a change in accounting principle is impracticable and for reporting a change when retrospective application is impracticable. The reporting of a correction of an error by restating previously issued financial statements is also addressed by SFAS 154. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 31, 2005. We have adopted this pronouncement in fiscal year 2006.

The Company earns product discounts under various supplier rebate programs, which are recorded as accounts receivable and a reduction to the cost of inventory, as inventory valuation reserves, when earned. When the related inventory is sold, the inventory valuation reserves are recognized as reductions to cost of product. The Company obtains merchandise vendor rebates pursuant to two general types of arrangements as follows:

Based on the Company’s purchase and sales history and the relatively short duration of the agreements, the Company is able to reasonably project whether the cumulative level of purchases or sales required for rebates from its vendors will be reached. Therefore, the Company recognizes the rebates ratably over all purchases or sales. The Company does not recognize a rebate if it is uncertain as to whether or not a specific purchase will qualify under its rebate arrangements. If the Company subsequently determines that it will not achieve a rebate threshold, it reverses the recognition of the rebate. The Company defers recognition of income relative to purchases that remain in inventory.

In October 2005, the Company entered into a Long-Term Supply Agreement that requires TCS to manufacture and supply to the Company branded and non-branded consumable products for a period of not less than five years. Pursuant to that agreement, LESCO pays invoiced costs of third-party logistic providers for the shipment of product to the Company’s selling locations and customers and is reimbursed by TCS for such costs based upon a predetermined payment schedule, but not later than the last calendar week in the month subsequent to that in which the invoice was paid by LESCO. An additional provision of the Long-Term Supply Agreement requires TCS to remit payment to agricultural consortiums for the growth and harvest of grass seed while LESCO maintains contractual liability. The Company has recorded a receivable

Concurrently with the sale, the Company and GEBCS entered a private label business credit program agreement (Credit Agreement). Under its Credit Agreement with GEBCS, GEBCS extends commercial credit to qualified customers of LESCO and funds the program sales, less program fees and discounts, within three business days. The Credit Agreement also provides the Company the option of extending deferred payment terms to customers through the payment of incremental promotional discounts. The in-transit funds due from GEBCS as of a balance sheet date 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 risk and losses. The initial term of the Credit Agreement is through December 30, 2008 with automatic three-year renewals unless either party terminates at least six months prior to the end of the expiration of a term.

In the allowance for doubtful accounts, the Company provides for expected losses from all owned receivables and GEBCS-managed recourse accounts. Expected losses are estimated based upon the number of days the accounts are past due, historical loss experience of the Company, historical loss experience of credit portfolios with characteristics similar to the Company’s portfolio and the current business environment.

Inventories are valued at the lower of cost (First In, First Out cost method) or market. Consignment inventory is considered purchased at time of sale and, at the time of sale, cost of product is recognized. Procurement, warehousing and distribution costs to bring the products to market are capitalized to inventory on hand and expensed to cost of product when the inventory is sold. The Company includes its general and administrative procurement costs in inventory. The amount of these costs included in inventory at December 31, was $116,000 and $260,000 for fiscal years 2005 and 2004, respectively, which represented 0.1% and 0.3% of the value of the Company’s total inventory as of the respective balance sheet dates. A markdown reserve is provided for markdown of inventory to net realizable value. Shrink reserves are recorded for expected inventory shrink and earned supplier discounts of inventory remaining on hand.

On October 1, 2005, LESCO completed the sale of substantially all of its supply chain assets and the related raw material and finished goods inventory to TCS. The Company retained its grass seed licenses and, as such, purchases all seed from the growers. The raw seed is sold to TCS for processing, packaging and labeling. Since LESCO is required to purchase its forecasted seed requirements from TCS, the seed that resides at the TCS facilities to fulfill the Company’s forecasted orders must be reflected as LESCO’s inventory with a corresponding amount payable.

The Company maintains 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. The selling price of SKUs identified as discontinued are progressively marked-down over specified periods, until the selling price is marked down to zero. At the time a SKU is identified as discontinued, a markdown valuation reserve is recorded to adjust the inventory cost to expected net realizable value.

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 3 to 12 years. Leasehold improvements are depreciated over the life of the initial lease term, which typically is five years. Expenditures for maintenance and repairs are charged to expense as incurred. Additions and improvements are capitalized.

As a result of the Company’s decision to sell its supply chain assets, which sale was effective October 1, 2005, the Company recorded a $14.1 million loss on sale of its property, plant and equipment located at its manufacturing, distribution and corporate facilities. In addition, as of December 31, 2005, the Company ceased substantially all operations in the four distribution facilities not sold to TCS and wrote down the affected assets to their net realizable value less costs to dispose, resulting in a $0.4 million impairment charge.

During the second quarter of 2004, the Company sold its Avon Lake, Ohio distribution facility for $1.5 million in cash. Based on the remaining net book value of the assets sold, this resulted in a loss on sale of less than $0.1 million. The distribution operations for customer orders previously fulfilled from the Avon Lake facility were transferred to a third party logistics provider based in Columbus, Ohio.

The Company currently retains certain properties related to former operations that are being held for sale. There is approximately $94,000 recorded as an asset for these properties at December 31, 2005. All future costs incurred to prepare the remaining sites for sale, including environmental testing and environmental remediation costs, will be capitalized up to the realizable market value of each respective property. The Company currently estimates that it will cost approximately $1.0 million to prepare its Windsor, NJ property for sale and that its estimated market value is sufficient to recover the preparation costs. Assets held for sale of $274,000 were sold in 2004 incurring a $264,000 loss on sale.

on eligible inventory. As of December 31, 2005, there was $45.3 million available based on the borrowing base formula. Letters of credit, up to a maximum of $20 million, are also available under the Facility and are considered outstanding borrowings when calculating the unused portion of availability. Letters of credit in the aggregate amount of $13.0 million were outstanding resulting in unused borrowing capacity of $32.3 million as of December 31, 2005. Letter of credit fees were fixed at 1.0% with an issuance fee fixed at 0.25%.

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 December 31, 2004 was 5.25%. 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, 2005. The amount of deferred financing charges associated with the Facility included in other assets was $162,000 as of December 31, 2005.

Under the Facility, the Company may distribute cash dividends or redeem common shares worth up to $30 million in the aggregate over the term of the Facility provided that the Company maintains certain covenants. Among these covenants are requirements to maintain at least $5 million of available, undrawn borrowing capacity (and up to $10 million for various periods during the year) along with a certain fixed charge coverage ratio and a net worth requirement.

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 $15.6 million and $6.1 million has been recorded at December 31, 2005 and 2004, respectively, to fully reserve for the Company’s net deferred tax assets.

The Company maintains a defined contribution retirement plan (the Plan) for its employees. The Company matches the contributions of participating employees on the basis of percentages specified in the Plan. Participants have several investment options available including investing in stock of the Company. The Plan does not require participants to invest their contribution or the Company’s matching contribution in the stock of the Company. At December 31, 2005, approximately 17.0% of the Plan’s assets, at market value, were invested in the Company’s stock. Company contributions to the plan were $1,123,000, $1,157,000 and $1,215,000 for 2005, 2004 and 2003, respectively.

Stock Based Compensation: The Company has stock option plans that provide for the issuance of incentive stock options; non-qualified stock options; stock appreciation rights (SARs) either in connection with, or independent of, any option; and restricted and other share awards. The plans provide for the issuance of a maximum of 2,014,168 common shares to employees or directors. At December 31, 2005, there were 769,562 shares reserved for future grants, consisting of 509,088 under the 1992 and 2000 Stock Incentive plans, 165,474 under the 2000 Broad-Based Stock Option Plan and 95,000 under the 1995 Directors’ Stock Option Plan. Options issued pursuant to any of the Company’s plans have exercisable periods ranging from 6 to 10 years at an option price equal to the fair market value on the date the option was granted. The Company has issued in the past, and may issue from time to time in the future, options outside of the Company’s plans at an exercise price equal to fair market value in connection with the employment of key employees. There are 225,000 outstanding stock options that have been issued outside of the plans.

The Company granted 140,220 and 14,780 restricted stock units in 2005 and 2004, respectively, from new issuances. These units fully vest one year from the date of grant. In 2003, LESCO granted 130,000 restricted stock units to certain executives of which 113,649 shares were issued from treasury shares and 16,351 from new issuances. The units vest 100% three years from the grant date and are forfeited if the grantee terminates employment prior to vesting. The Company recorded $1,296,000, $607,000 and $87,000 of compensation expense related to the restricted stock units for 2005, 2004, and 2003, respectively.

For the leases that contain predetermined, fixed escalation clauses, we recognize the related rent expense on a straight-line basis over the life of the lease and record the difference between the amounts charged to operations and amounts paid to “Deferred-other” in our Consolidated Balance Sheets. The balance related to these future escalation clauses at December 31, 2005 and 2004 was approximately $931,000 and $712,000,

During the third quarter of 2004, the Company entered into agreements to relocate its corporate headquarters from its approximately 94,000-square-foot facility in Strongsville, Ohio to an approximately 39,000-square-foot facility in downtown Cleveland, Ohio. The term of the Company’s new lease is five and a half years. Relocation costs were $6.9 million including $4.8 million in tenant and landlord inducements, and $2.1 million in broker commissions, legal fees, letter of credit costs, move costs and long-lived asset write offs. The Company remains liable under the lease if the Assignee fails to perform. The Assignee has secured and must maintain a $4.4 million letter of credit backing its performance under the lease. The Company must pay the Assignee approximately $100,000 annually for the remaining term of the lease to defray the cost of the letter of credit.

There are various pending lawsuits and claims arising out of the conduct of the Company’s business. In the opinion of management, the ultimate outcome of these lawsuits and claims will not have a material adverse effect on the Company’s consolidated financial position or results of operations. The Company presently maintains product liability insurance coverage in amounts and with deductibles that it believes are prudent.

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 source products exclusively 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: $31.7 million in 2006, $34.7 million in 2007 and $37.8 million in 2008. To the extent the 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.

In November 2004, the Company filed a declaratory judgment action to obtain a judicial determination of the amount of its liability for terminating a five-year agreement with KPAC, its methylene urea supplier, (“Supply Agreement”). The Company entered into the Supply Agreement in 2002 as part of an overall transaction by which the supplier purchased certain assets of the Company, including a plant used to produce methylene urea. The Supply Agreement required the Company to purchase, and the supplier to produce, minimum monthly quantities of certain products.

As a result of exiting the supply contract, LESCO recognized a $5.2 million charge in the fourth quarter of 2004 consisting of the cash settlement and forgiveness of debt along with $0.8 million for markdown costs associated with the supplier product that the Company will no longer retain in its merchandise offering and an estimated $0.9 million of other miscellaneous costs of settlement.

On April 29, 2005, the parties participated in a court-ordered mediation with a federal magistrate judge and reached a settlement. In exchange for a complete release from KPAC and its shareholders, the Company paid KPAC $3.3 million in cash and forgave the approximate $1.3 million balance of a note receivable from KPAC resulting in additional expense of $0.5 million in 2005. The suit was dismissed with prejudice in May 2005.

During the fourth quarter of 2005, the Company sold substantially all its manufacturing and distribution facilities along with the related working capital to TCS for $34 million. The supply chain assets sold included all four of LESCO’s blending facilities and the majority of the Company’s warehouse and distribution centers. LESCO recorded a charge of $24.0 million related to the transaction as follows:

F-24 EX-2.B 2 l18240aexv2wb.txt EXHIBIT 2(B) FIRST AMENDMENT TO ASSET PURCHASE AGREEMENT EXHIBIT 2(b) FIRST AMENDMENT TO ASSET PURCHASE AGREEMENT THIS FIRST AMENDMENT TO ASSET PURCHASE AGREEMENT (the "Amendment") is made and entered into as of October 1, 2005, by and between LESCO, Inc., an Ohio corporation ("Seller"), and Turf Care Supply Corp., a Delaware corporation ("Buyer"). RECITALS A. Seller and Buyer are parties to that certain Asset Purchase Agreement dated as of July 26, 2005 (the "APA"). B. Buyer and Seller now desire to amend or modify certain provisions of the APA in certain respects on the terms and conditions set forth below. NOW, THEREFORE, in consideration of the foregoing recitals and of the respective covenants, agreements, representations and warranties herein contained, and intending to be legally bound hereby, the parties hereto hereby agree as follows: 1. Capitalized Terms. All capitalized terms used herein and not defined herein shall have the meanings ascribed to such terms in the APA. 2. Amendments to APA. The APA is hereby modified as follows: (a) Amendment to Section 1.1. The first sentence of Section 1.1 of the APA is hereby modified by inserting the phrase "other than Permitted Liens," after the phrase "free and clear of all Liens,". (b) Amendment of Section 1.4. Section 1.4 of the APA is hereby amended and restated in its entirety to read as follows: Section 1.4 Assumption of Certain Obligations. Subject to the provisions of this Agreement, from and after the Closing Date, Buyer shall, by the Assignment and Assumption Agreement, assume only (i) the liabilities and obligations relating to occurrences arising after the Closing under the leases for Leased Real Property, Personal Property Leases, Contracts and Permits forming part of the Purchased Assets, (ii) all obligations (including under the Employee Benefit Plan described as "Health Plan Upper Ohio Valley/Rx" on Schedule 3.2(i) hereto) to Transferred Employees that relate to occurrences after the Closing Date; and (iii) all accrued vacation, sick pay, paid time off and bonuses owing from Seller to the Transferred Employees (collectively, the "Assumed Liabilities"). (c) Amendment of Section 2.1. Section 2.1 of the APA is hereby amended and restated in its entirety to read as follows: Section 2.1. Consideration. Upon the terms and subject to the conditions contained in this Agreement, in consideration for the Purchased Assets, the Assumed Liabilities and the other covenants and agreements of Seller hereunder, and in full payment therefor, Buyer shall pay to Seller the amount of $34,182,542.75 (i.e., the value of the Inventory as of the Closing Date, as determined in accordance with U.S. generally accepted accounting principles applied consistently with Seller's prior practice ("GAAP")) (the "Purchase Price"). Buyer shall pay the Purchase Price by: (i) paying to Seller at Closing the amount of $15,000,000 by wire transfer of immediately available funds; and (ii) paying to Seller the remaining $19,182,542.75 in twelve (12) equal weekly installments of $1,598,545.23, commencing on October 14, 2005. There will be no finance charge during this payment period. (d) Amendment of Section 4.1. Section 4.1 of the APA is hereby amended and restated in its entirety to read as follows: 4.1 Closing. The closing of the transactions contemplated hereby (the "Closing") will be deemed to be effective as of 12:01 A.M., Eastern Time, on October 1, 2005 (the "Closing Date") (even if the deliveries to be made by Buyer and Seller, respectively, pursuant to this Article IV occur after such date and time). The Closing shall occur at the offices of Baker & Hostetler LLP, 1900 East 9th Street, Suite 3200, Cleveland, Ohio 44114, or such other place or by such other manner as the parties may agree. (e) Replacement of Disclosure Schedules. The following Disclosure Schedules to the APA are replaced in full by the complimentary Disclosure Schedules attached hereto as Attachment A and made a part hereof: Schedule 1.1(e) - Permits Schedule 1.1(f) - Personal Property Leases Schedule 1.1(g) - Contracts Schedule 1.2 - Non-Assignability of Assets Schedule 3.2(e) - Condition and Sufficiency of and Title to Purchased Assets Schedule 3.2(i) - Employee Benefits Plans Schedule 3.2(l) - Insurance Policies Schedule 3.2(n) - Proprietary Rights Schedule 3.2(r) - Employment Matters (f) Modifications to Disclosure Schedules. The following Disclosure Schedules to the APA are modified by the additional Disclosure Schedules attached hereto as Attachment B and made a part hereof: Schedule 5.1 - Employees 2 (g) New Exhibits and Disclosure Schedules. The following Exhibits and Disclosure Schedules to the APA attached hereto as Attachment C are new and are and made a part hereof: Exhibit F - Seller Customer List Schedule 1.1(b) - Equipment Schedule 1.1(c) - Personal Property Schedule 1.1(d) - Inventory 3. Effect of Amendment. Except as expressly amended hereby, the APA shall be and remain in full force and effect. The amendments contained herein are specific and limited to the matters expressly stated herein and shall not constitute a modification, acceptance or waiver of any other provision of or default under the APA or any other document or instrument entered into in connection therewith or a future modification, acceptance or waiver of the provisions set forth therein. On and after the date of this Amendment, each reference in the APA to "this Agreement," "hereunder," "hereof" or words of like import referring to the APA, and in the any other documents to the "Purchase Agreement," "thereof" or words of like import referring to the APA, shall mean and refer to the APA as amended hereby. 4. Governing Law. This Amendment is governed in all respects, including as to its validity, interpretation and effect, by the internal laws of the State of Ohio without regard to the principles of conflicts of laws thereof. 5. Counterparts. This Agreement may be executed simultaneously in multiple counterparts (including by facsimile), each of which will be deemed an original, but all of which taken together constitute one and the same instrument. This Agreement will become binding when one or more counterparts have been executed and delivered by each of the parties hereto. [Signature page follows] 3 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date and year first above written. BUYER: Turf Care Supply Corp. By: /s/ Mary Ann Sigler ------------------------------------ Title: Vice President SELLER: LESCO, Inc. By: /s/ Jeffrey L. Rutherford ------------------------------------ Title: Chief Financial Officer, Treasurer and Secretary [Signature page to First Amendment to Asset Purchase Agreement] ATTACHMENT A REPLACED DISCLOSURE SCHEDULES See attached. ATTACHMENT B MODIFIED DISCLOSURE SCHEDULES See attached. ATTACHMENT C NEW DISCLOSURE SCHEDULES See attached. EX-10.A 3 l18240aexv10wa.txt EXHIBIT 10(A) REVOLVING CREDIT FACILITY EXHIBIT 10(a) EXECUTION VERSION AMENDED AND RESTATED REVOLVING CREDIT AND SECURITY AGREEMENT PNC BANK, NATIONAL ASSOCIATION (AGENT AND LENDER) AND LESCO, INC. LESCO SERVICES, INC. LESCO TECHNOLOGIES, LLC AND AIM LAWN & GARDEN PRODUCTS, INC. (BORROWERS) OCTOBER 7, 2005 TABLE OF CONTENTS

IV. COLLATERAL: GENERAL TERMS................................................ 36 4.1. Security Interest in the Collateral............................. 36 4.2. Perfection of Security Interest................................. 36 4.3. Disposition of Collateral....................................... 37 4.4. Preservation of Collateral...................................... 37 4.5. Ownership of Collateral......................................... 38 4.6. Defense of Agent's and Lenders' Interests....................... 38 4.7. Books and Records............................................... 38 4.8. Financial Disclosure............................................ 39 4.9. Compliance with Laws............................................ 39 4.10. Inspection of Premises.......................................... 39 4.11. Insurance....................................................... 40 4.12. Failure to Pay Insurance........................................ 41 4.13. Payment of Taxes................................................ 41 4.14. Payment of Leasehold Obligations................................ 42 4.15. Receivables..................................................... 42 4.16. Inventory....................................................... 44 4.17. Maintenance of Equipment........................................ 44 4.18. Exculpation of Liability........................................ 45 4.19. Environmental Matters........................................... 45 4.20. Financing Statements............................................ 47 V. REPRESENTATIONS AND WARRANTIES............................................ 47 5.1. Authority....................................................... 47 5.2. Formation and Qualification..................................... 48 5.3. Survival of Representations and Warranties...................... 48 5.4. Tax Returns..................................................... 48 5.5. Financial Statements............................................ 48 5.6. Corporate Name.................................................. 49 5.7. O.S.H.A. and Environmental Compliance........................... 50 5.8. Solvency; No Litigation, Violation, Indebtedness or Default..... 50 5.9. Patents, Trademarks, Copyrights and Licenses.................... 51 5.10. Licenses and Permits............................................ 52 5.11. Default of Indebtedness......................................... 52 5.12. No Default...................................................... 52 5.13. No Burdensome Restrictions...................................... 52 5.14. No Labor Disputes............................................... 52 5.15. Margin Regulations.............................................. 53 5.16. Investment Company Act.......................................... 53 5.17. Disclosure...................................................... 53 5.18. Intentionally Omitted........................................... 53 5.19. Swaps........................................................... 53 5.20. Conflicting Agreements.......................................... 53 5.21. Application of Certain Laws and Regulations..................... 53 5.22. Business and Property of Borrowers.............................. 54 5.23. Section 20 Subsidiaries......................................... 54

-ii- 5.24. Anti-Terrorism Laws............................................. 54 VI. AFFIRMATIVE COVENANTS.................................................... 55 6.1. Payment of Fees................................................. 55 6.2. Conduct of Business and Maintenance of Existence and Assets..... 55 6.3. Violations...................................................... 55 6.4. Government Receivables.......................................... 55 6.5. Intentionally Omitted........................................... 56 6.6. Fixed Charge Coverage Ratio..................................... 56 6.7. [Intentionally Omitted]......................................... 56 6.8. Landlord's Waivers.............................................. 56 6.9. Execution of Supplemental Instruments........................... 56 6.10. Payment of Indebtedness, Including Taxes, Etc................... 56 6.11. Standards of Financial Statements............................... 57 6.12. Inventory Appraisals............................................ 57 6.13. Field Examinations.............................................. 57 6.14. Anti-Terrorism Laws............................................. 57 VII. NEGATIVE COVENANTS...................................................... 57 7.1. Merger, Consolidation, Acquisition and Sale of Assets........... 58 7.2. Creation of Liens............................................... 58 7.3. Guarantees...................................................... 58 7.4. Investments..................................................... 58 7.5. Loans........................................................... 58 7.6. Intentionally Omitted........................................... 58 7.7. Dividends....................................................... 58 7.8. Indebtedness.................................................... 59 7.9. Nature of Business.............................................. 59 7.10. Transactions with Affiliates.................................... 60 7.11. Leases.......................................................... 60 7.12. Subsidiaries.................................................... 60 7.13. Fiscal Year and Accounting Changes.............................. 60 7.14. Pledge of Credit................................................ 60 7.15. Amendment of Articles of Incorporation, By-Laws................. 60 7.16. Compliance with ERISA........................................... 60 7.17. Prepayment of Indebtedness...................................... 61 7.18. Other Agreements................................................ 61 VIII. CONDITIONS PRECEDENT................................................... 61 8.1. Conditions to Initial Advances.................................. 61 8.2. Conditions to Each Advance...................................... 64 IX. INFORMATION AS TO BORROWER............................................... 65 9.1. Disclosure of Material Matters.................................. 65 9.2. Borrowing Base; Schedules....................................... 65

-iii- 9.3. Consummation of Bank Products................................... 66 9.4. Litigation...................................................... 66 9.5. Material Occurrences............................................ 66 9.6. Government Receivables.......................................... 66 9.7. Annual Financial Statements..................................... 66 9.8. Quarterly Financial Statements.................................. 67 9.9. Intentionally Omitted........................................... 67 9.10. Other Reports................................................... 67 9.11. Additional Information.......................................... 67 9.12. Projected Operating Budget...................................... 68 9.13. Variances From Operating Budget................................. 68 9.14. Notice of Suits, Adverse Events................................. 68 9.15. ERISA Notices and Requests...................................... 68 9.16. Additional Documents............................................ 69 X. EVENTS OF DEFAULT......................................................... 69 XI. LENDERS' RIGHTS AND REMEDIES AFTER DEFAULT............................... 72 11.1. Rights and Remedies............................................. 72 11.2. Agent's Discretion.............................................. 73 11.3. Setoff.......................................................... 73 11.4. Rights and Remedies not Exclusive............................... 73 11.5. Allocation of Payments After Event of Default................... 73 XII. WAIVERS AND JUDICIAL PROCEEDINGS........................................ 74 12.1. Waiver of Notice................................................ 74 12.2. Delay........................................................... 74 12.3. Jury Waiver..................................................... 74 XIII. EFFECTIVE DATE AND TERMINATION......................................... 75 13.1. Term............................................................ 75 13.2. Termination..................................................... 75 XIV. REGARDING AGENT......................................................... 76 14.1. Appointment, Intercreditor Agreement............................ 76 14.2. Nature of Duties................................................ 76 14.3. Lack of Reliance on Agent and Resignation....................... 77 14.4. Certain Rights of Agent......................................... 77 14.5. Reliance........................................................ 77 14.6. Notice of Default............................................... 78 14.7. Indemnification................................................. 78 14.8. Agent in its Individual Capacity................................ 78 14.9. Delivery of Documents........................................... 78 14.10. Borrowers' Undertaking to Agent................................. 79 14.11. No Reliance on Agent's Customer Identification Program.......... 79

-iv- XV. BORROWING AGENCY......................................................... 79 15.1. Borrowing Agency Provisions..................................... 79 15.2. Waiver of Subrogation........................................... 80 XVI. MISCELLANEOUS........................................................... 80 16.1. Governing Law................................................... 80 16.2. Entire Understanding............................................ 81 16.3. Successors and Assigns; Participations; New Lenders............. 83 16.4. Application of Payments, Overadvances for GE Capital Proceeds... 84 16.5. Indemnity....................................................... 85 16.6. Notice.......................................................... 85 16.7. Survival........................................................ 87 16.8. Severability.................................................... 88 16.9. Expenses........................................................ 88 16.10. Injunctive Relief............................................... 88 16.11. Consequential Damages........................................... 88 16.12. Captions........................................................ 88 16.13. Counterparts; Telecopied Signatures............................. 89 16.14. Construction.................................................... 89 16.15. Confidentiality; Sharing Information............................ 89 16.16. Publicity....................................................... 90

-v- AMENDED AND RESTATED REVOLVING CREDIT AND SECURITY AGREEMENT Amended and Restated Revolving Credit and Security Agreement (this "Agreement"), dated as of October 7, 2005, among LESCO, INC., a corporation organized under the laws of the State of Ohio ("LESCO"), LESCO SERVICES, INC., a corporation organized under the laws of the State of Ohio ("LSI"), LESCO TECHNOLOGIES, LLC, a limited liability company organized under the laws of the State of Nevada ("Technologies"), and AIM LAWN & GARDEN PRODUCTS, INC., a corporation organized under the laws of the State of Ohio ("AIM") (each a "Borrower" and collectively "Borrowers"), PNC BANK, NATIONAL ASSOCIATION, and the FINANCIAL INSTITUTIONS WHICH MAY HEREAFTER BECOME A PARTY HERETO (collectively, the "Lenders" and individually a "Lender"), and PNC BANK, NATIONAL ASSOCIATION ("PNC"), as agent for Lenders (PNC, in such capacity, the "Agent"). IN CONSIDERATION of the mutual covenants and undertakings herein contained, Borrowers, Lenders and Agent hereby agree as follows: I. DEFINITIONS. 1.1. Accounting Terms. As used in this Agreement, the Note, or any certificate, report or other document made or delivered pursuant to this Agreement, accounting terms not defined in Section 1.2 or elsewhere in this Agreement and accounting terms partly defined in Section 1.2 to the extent not defined, shall have the respective meanings given to them under GAAP; provided, however, whenever such accounting terms are used for the purposes of determining compliance with financial covenants in this Agreement, such accounting terms shall be defined in accordance with GAAP as applied in preparation of the audited financial statements of Borrowers for the fiscal year ended December 31, 2004. 1.2. General Terms. For purposes of this Agreement the following terms shall have the following meanings: "Accountants" shall have the meaning set forth in Section 9.7 hereof. "Accounts Sales Agreement" shall mean that certain Portfolio Purchase and Sale Agreement dated as of December 16, 2003 by and among Borrowers and GE Capital pursuant to which GE Capital is purchasing certain Receivables of LESCO. "ACH Transactions" shall mean any cash management or related services including the automated clearing house transfer of funds by the Agent for the account of any Borrower pursuant to agreement or overdrafts. "Advances" shall mean and include the Revolving Advances and Letters of Credit and GE Proceeds Advances. "Affiliate" of any Person shall mean (a) any Person which, directly or indirectly, is in control of, is controlled by, or is under common control with such Person, or (b) any Person who is a director or officer (i) of such Person, (ii) of any Subsidiary of such Person or (iii) of any Person described in clause (a) above. For purposes of this definition, control of a Person shall mean the power, direct or indirect, (x) to vote 5% or more of the securities having ordinary voting power for the election of directors of such Person, or (y) to direct or cause the direction of the management and policies of such Person whether by contract or otherwise. "Agent" shall have the meaning set forth in the preamble to this Agreement and shall include its successors and assigns. "Alternate Base Rate" shall mean, for any day, a rate per annum equal to the higher of (i) the Base Rate in effect on such day and (ii) the Federal Funds Open Rate in effect on such day plus 1/2 of 1%. "Anti-Terrorism Laws" shall mean any Applicable Law relating to terrorism or money laundering, including Executive Order No. 13224, the USA Patriot Act, the Laws comprising or implementing the Bank Secrecy Act, and the Laws administered by the United States Treasury Department's Office of Foreign Asset Control (as any of the foregoing Laws may from time to time be amended, renewed, extended, or replaced). "Applicable Law" shall mean all laws, rules and regulations applicable to the person, conduct, transaction, covenant, Other Document or contract in question, including all applicable common law and equitable principles; all provisions of all applicable state, federal and foreign constitutions, statutes, rules, regulations and orders of any Governmental Body, and all orders, judgments and decrees of all courts and arbitrators. "Assignment of Account" shall mean the existing pledge by LESCO of the BlackRock Account, together with all amendments, supplements, modifications, substitutions and replacements thereto and thereof. "Authority" shall have the meaning set forth in Section 4.19(d). "Bank Products" shall mean any one or more of the following types of services or facilities extended to any Borrower by the Agent or any Lender, or any Affiliate of the Agent or any Lender in reliance on the Agent's or such Lender's agreement, respectively, to indemnify such Affiliate: (a) credit cards, (b) ACH Transactions, (c) Interest Rate Protection Agreements, and (d) foreign exchange contracts. "Bank Products Reserves" shall mean all reserves which the Agent from time to time establishes in its sole discretion for the Bank Products then provided or outstanding. "Base Rate" shall mean the base commercial lending rate of PNC as publicly announced to be in effect from time to time, such rate to be adjusted automatically, without notice, on the effective date of any change in such rate. This rate of interest is determined from 2 time to time by PNC as a means of pricing some loans to its customers and is neither tied to any external rate of interest or index nor does it necessarily reflect the lowest rate of interest actually charged by PNC to any particular class or category of customers of PNC. "Blocked Accounts" shall have the meaning set forth in Section 4.15(h). "Blocked Person" shall have the meaning assigned to such term in Section 5.24. "Borrower" or "Borrowers" shall have the meaning set forth in the preamble to this Agreement and shall extend to all permitted successors and assigns of such Persons. "Borrowing Base Certificate" shall mean a certificate duly executed by an officer of Borrowing Agent appropriately completed and in substantially the form of Exhibit A hereto. "Borrowers on a consolidated basis" shall mean LESCO, LSI, Technologies and AIM. "Borrowers' Account" shall have the meaning set forth in Section 2.8. "Borrowing Agent" shall mean LESCO. "Business Day" shall mean any day other than Saturday or Sunday or a legal holiday on which commercial banks are authorized or required by law to be closed for business in East Brunswick, New Jersey and, if the applicable Business Day relates to any Eurodollar Rate Loans, such day must also be a day on which dealings are carried on in the London interbank market. "Cash on Deposit" shall mean the aggregate amount of permitted investments under Section 7.4 and cash balances in LESCO's deposit accounts to the extent that such permitted investments and cash deposits (i) are assigned to the Agent to secure the Obligations pursuant to the Assignment of Account or other agreement acceptable to the Agent, and (ii) are subject to a first priority security interest in favor of the Agent. "Cash on Deposit Advance Rate" shall have the meaning set forth in Section 2.1(a)(y)(ii) hereof. "CERCLA" shall mean the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C. Sections 9601 et seq. "Change of Control" shall mean (a) the occurrence of any event (whether in one or more transactions) which results in a transfer of control of any Borrower to a Person who is not an Original Owner or (b) any merger or consolidation of or with any Borrower or sale of all or substantially all of the property or assets of any Borrower. For purposes of this definition, "control of Borrower" shall mean the power, direct or indirect (x) to vote 50% or more of the securities having ordinary voting power for the election of directors of any Borrower or (y) to direct or cause the direction of the management and policies of any Borrower by contract or otherwise. 3 "Change of Ownership" shall mean (a) 50% or more of the common stock or other ownership interests of any Borrower is no longer owned or controlled by (including for the purposes of the calculation of percentage ownership, any shares of common stock or other ownership interests into which any capital stock or other ownership interests of any Borrower held by any of the Original Owners is convertible or for which any such shares of the capital stock or other ownership interests of any Borrower or of any other Person may be exchanged and any shares of common stock or other ownership interests issuable to such Original Owners upon exercise of any warrants, options or similar rights which may at the time of calculation be held by such Original Owners) a Person who is an Original Owner or (b) any merger, consolidation or sale of substantially all of the property or assets of any Borrower. "Charges" shall mean all taxes, charges, fees, imposts, levies or other assessments, including, without limitation, all net income, gross income, gross receipts, sales, use, ad valorem, value added, transfer, franchise, profits, inventory, capital stock, license, withholding, payroll, employment, social security, unemployment, excise, severance, stamp, occupation and property taxes, custom duties, fees, assessments, liens, claims and charges of any kind whatsoever, together with any interest and any penalties, additions to tax or additional amounts, imposed by any taxing or other authority, domestic or foreign (including, without limitation, the Pension Benefit Guaranty Corporation or any environmental agency or superfund), upon the Collateral, or any of the Borrowers. "Closing Date" shall mean October 7, 2005, or such other date as may be agreed to by the parties hereto. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time and the regulations promulgated thereunder. "Collateral" shall mean and include: (a) all Receivables; (b) all Equipment; (c) all General Intangibles; (d) all Inventory; (e) all Investment Property, including, without limitation, Account No. 25994 at BlackRock Provident Institutional Funds in the name of "PNC Bank National Association, Pledgee f/b/o Lesco Inc.", the "BlackRock Account"; (f) all of each Borrower's right, title and interest in and to (i) its respective goods and other property including, but not limited to, all merchandise returned or rejected by Customers, relating to or securing any of the Receivables; (ii) all of each Borrower's rights as a consignor, a consignee, an unpaid vendor, mechanic, artisan, or other lienor, including stoppage in transit, setoff, detinue, replevin, reclamation and repurchase; (iii) all additional amounts due to any Borrower from any Customer relating to the Receivables; (iv) other property, including warranty claims, relating to any goods securing this Agreement; (v) all of each Borrower's 4 contract rights, rights of payment which have been earned under a contract right, instruments (including promissory notes), documents, chattel paper (including electronic chattel paper), warehouse receipts, deposit accounts, letters of credit, and money; (vi) all commercial tort claims (whether now existing or hereafter arising); (vii) if and when obtained by any Borrower, all real and personal property of third parties in which such Borrower has been granted a lien or security interest as security for the payment or enforcement of Receivables; and (viii) any other goods, personal property or real property now owned or hereafter acquired in which any Borrower has expressly granted a security interest or may in the future grant a security interest to Agent hereunder, or in any amendment or supplement hereto or thereto, or under any other agreement between Agent and any Borrower; (g) all of each Borrower's ledger sheets, ledger cards, files, correspondence, records, books of account, business papers, computers, computer software (owned by any Borrower or in which it has an interest), computer programs, tapes, disks and documents relating to (a), (b), (c), (d), (e) or (f) of this Paragraph; and (h) all proceeds and products of (a), (b), (c), (d), (e), (f) and (g) in whatever form, including, but not limited to: cash, deposit accounts (whether or not comprised solely of proceeds), certificates of deposit, insurance proceeds (including hazard, flood and credit insurance), negotiable instruments and other instruments for the payment of money, chattel paper, security agreements, documents, eminent domain proceeds, condemnation proceeds and tort claim proceeds. "Commitment Percentage" of any Lender shall mean the percentage set forth below such Lender's name on the signature page hereof as same may be adjusted upon any assignment by a Lender pursuant to Section 16.3(b) hereof. "Commitment Transfer Supplement" shall mean a document in the form of Exhibit 16.3 hereto, properly completed and otherwise in form and substance satisfactory to Agent by which the Purchasing Lender purchases and assumes a portion of the obligation of Lenders to make Advances under this Agreement. "Consents" shall mean all filings and all licenses, permits, consents, approvals, authorizations, qualifications and orders of governmental authorities and other third parties, domestic or foreign, necessary to carry on any Borrower's business, including, without limitation, any Consents required under all applicable federal, state or other applicable law. "Controlled Group" shall mean all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with any Borrower, are treated as a single employer under Section 414 of the Code. "Customer" shall mean and include the account debtor with respect to any Receivable and/or the prospective purchaser of goods, services or both with respect to any contract or contract right, and/or any party who enters into or proposes to enter into any contract or other arrangement with any Borrower, pursuant to which such Borrower is to deliver any personal property or perform any services. 5 "Default" shall mean an event which, with the giving of notice or passage of time or both, would constitute an Event of Default. "Default Rate" shall have the meaning set forth in Section 3.1 hereof. "Defaulting Lender" shall have the meaning set forth in Section 2.22(a) hereof. "Depository Accounts" shall have the meaning set forth in Section 4.15(h) hereof. "Disputanta Sales Agreement" shall mean that certain Asset Purchase Agreement, dated October 24, 2002, between the Disputanta Purchaser as purchaser and LESCO as seller. "Disputanta Note" shall mean that certain promissory note, dated November 4, 2002, made by the Disputanta Purchaser in favor of LESCO in the stated principal amount of $1,850,000. "Disputanta Purchaser" shall mean KPAC Holdings, Inc., a Virginia corporation. "Documents" shall have the meaning set forth in Section 8.1(c) hereof. "Dollar" and the sign "$" shall mean lawful money of the United States of America. "Domestic Rate Loan" shall mean any Advance that bears interest based upon the Alternate Base Rate. "Earnings Before Interest and Taxes" shall mean for any period the sum of (i) net income (or loss) of Borrowers on a consolidated basis for such period, plus (ii) all interest expense of Borrowers on a consolidated basis for such period, plus (iii) all charges against income of Borrowers on a consolidated basis for such period for federal, state and local taxes. "EBITDA" shall mean for any period the sum of (i) Earnings Before Interest and Taxes for such period plus (ii) depreciation expenses for such period, plus (iii) amortization expenses for such period; provided however, the effect of the following items shall be excluded from the calculation of EBITDA to the extent that such items are included in EBITDA in the first instance: (a) acceleration of expenses in connection with the Borrowers' restructuring effected in January, 2002, (b) nonrecurring fees charged by the Agent and the Lenders under this Agreement, (c) charges taken in the fourth fiscal quarter of 2004 in an amount not in excess of $5,200,000 related to termination of LESCO's purchase of Novex product pursuant to the Disputanta Sales Agreement between LESCO and the Disputanta Purchaser (including charges taken for the termination payment made by LESCO to the Disputanta Purchaser, reductions in the value of Novex Inventory, write-off of the Disputanta Note, and related legal expenses), and (d) charges in the amount of $35,000,000 taken in the fourth fiscal quarter of 2005 with respect to the sale of the assets to the TCS Sales Agreement. "Eligible Inventory" shall mean and include Inventory excluding work in process, with respect to each Borrower valued at the lower of cost (average cost method) or market value, which is not, in Agent's reasonable opinion, obsolete, slow moving or unmerchantable and 6 which Agent, in its sole reasonable discretion, shall not deem ineligible Inventory, based on such considerations as Agent may from time to time deem appropriate including, without limitation, whether the Inventory is subject to a perfected, first priority security interest in favor of Agent and whether the Inventory conforms to all standards imposed by any governmental agency, division or department thereof which has regulatory authority over such goods or the use or sale thereof. Any Inventory located on a leased premises for which the Agent has not received a satisfactory landlord's or warehouseman's agreement within ninety (90) days after the Closing Date shall be excluded from Eligible Inventory unless such Inventory is subject to a reserve in an amount established by the Agent in it sole reasonable discretion (but in the case of leased premises, in no event more than three months of rental payments for such premises). Eligible Inventory shall exclude all Inventory in-transit; provided however, (i) Stores-on-Wheels Inventory which meets the other criteria set forth above and for which title has passed to a Borrower and which is insured to the full value thereof shall be included in Eligible Inventory, and (ii) Inventory in transit by common carrier from one of the Borrowers' locations set forth on Schedule 4.5 to another of the Borrower's locations set forth on Schedule 4.5 and which is insured to the full value thereof shall be included in Eligible Inventory, subject to applicable reserves established by the Agent with respect to unpaid freight charges related to such in-transit Inventory. "Environmental Complaint" shall have the meaning set forth in Section 4.19(d) hereof. "Environmental Laws" shall mean all federal, state and local environmental, land use, zoning, health, chemical use, safety and sanitation laws, statutes, ordinances and codes relating to the protection of the environment and/or governing the use, storage, treatment, generation, transportation, processing, handling, production or disposal of Hazardous Substances and the rules, regulations, policies, published guidelines, written interpretations, decisions, orders and directives of federal, state and local governmental agencies and authorities with respect thereto. "Equipment" shall mean and include as to each Borrower all of such Borrower's goods (other than Inventory) whether now owned or hereafter acquired and wherever located including, without limitation, all equipment, machinery, apparatus, motor vehicles, fittings, furniture, furnishings, fixtures, parts, accessories and all replacements and substitutions therefor or accessions thereto. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time and the rules and regulations promulgated thereunder. "Eurodollar Rate" shall mean for any Eurodollar Rate Loan for the then current Interest Period relating thereto the interest rate per annum determined by PNC by dividing (the resulting quotient rounded upwards, if necessary, to the nearest 1/100th of 1% per annum) (a) the rate of interest determined by PNC in accordance with its usual procedures (which determination shall be conclusive absent manifest error) to be the average of the London interbank offered rates for U.S. Dollars quoted by the British Bankers' Association as set forth on Moneyline Telerate (or appropriate successor or, if British Banker's Association or its successor ceases to provide such quotes, a comparable replacement determined by Agent) display page 3750 (or such other 7 display page on Moneyline Telerate Service as may replace display page 3750) two (2) Business Days prior to the first day of such Interest Period for an amount comparable to such Eurodollar Rate Loan and having a borrowing date and a maturity comparable to such Interest Period by (b) a number equal to 1.00 minus the Reserve Percentage. The Eurodollar Rate may also be expressed by the following formula: Average of London interbank offered rates quoted by BBA as shown on Eurodollar Rate = Moneyline Telerate display page 3750 or appropriate successor ------------------------------------ 1.00 - Reserve Percentage "Eurodollar Rate Loan" shall mean an Advance at any time that bears interest based on the Eurodollar Rate. "Event of Default" shall mean the occurrence of any of the events set forth in Article X hereof. "Executive Order No. 13224" shall mean the Executive Order No. 13224 on Terrorist Financing, effective September 24, 2001, as the same has been, or shall hereafter be, renewed, extended, amended or replaced. "Existing Loan Agreement" shall mean that certain Revolving Credit and Security Agreement dated as of December 30, 2003, as amended, among the Borrowers, PNC Bank, National Association, as administrative agent, and the other lenders for which PNC Bank serves as administrative agent. "Federal Funds Effective Rate" for any day shall mean the rate per annum (based on a year of 360 days and actual days elapsed and rounded upward to the nearest 1/100 of 1%) announced by the Federal Reserve Bank of New York (or any successor) on such day as being the weighted average of the rates on overnight federal funds transactions arranged by federal funds brokers on the previous trading day, as computed and announced by such Federal Reserve Bank (or any successor) in substantially the same manner as such Federal Reserve Bank computes and announces the weighted average it refers to as the "Federal Funds Effective Rate" as of the date of this Agreement; provided, if such Federal Reserve Bank (or its successor) does not announce such rate on any day, the "Federal Funds Effective Rate" for such day shall be the Federal Funds Effective Rate for the last day on which such rate was announced. "Federal Funds Open Rate" shall mean the rate per annum determined by the Agent in accordance with its usual procedures (which determination shall be conclusive absent manifest error) to be the open rate for federal funds transactions as of the opening of business for federal funds transactions among members of the Federal Reserve System arranged by federal funds brokers on such day, as quoted by Garvin Guybutler, any successor entity thereto, or any other broker selected by the Bank, as set forth on the applicable Telerate display page; provided, however; that if such day is not a Business Day, the Federal Funds Open Rate for such day shall be the Open Rate on the immediately preceding Business Day, or if no such rate shall be quoted by a Federal funds broker at such time, such other rate as determined by the Agent in accordance with its usual procedures. 8 "Fee Letter" shall mean the fee letter, dated October 7, 2005, among Borrowers and PNC. "Fixed Charge Coverage Ratio" shall mean and include, with respect to any fiscal period, the ratio of (a) EBITDA minus Non-Financed Capital Expenditures, minus income taxes expensed on a consolidated basis (but excluding any non-recurring tax adjustments related to any of the exclusions set forth in items (a) or (b) in the definition of "EBITDA" herein), all the foregoing during such period to (b) Fixed Charges during such period. "Fixed Charges" shall mean the sum of consolidated interest expense of the Borrowers on a consolidated basis, Senior Debt Payments, principal on other Indebtedness for borrowed money, and payments under capitalized leases, the foregoing all as determined in conformity with GAAP. "Formula Amount" shall have the meaning set forth in Section 2.1(a). "GAAP" shall mean generally accepted accounting principles in the United States of America in effect from time to time. "GE Capital" shall mean GE Capital Financial Inc., a Utah industrial loan corporation. "GE Capital Proceeds" shall mean proceeds of any of the Borrowers' accounts receivable purchased by GE Capital pursuant to the Account Sales Agreement or payments due under the GE Program Agreement from customers of any of the Borrowers. "GE Proceeds Advance" shall have the meaning set forth in Section 16.4(b). "General Intangibles" shall mean and include as to each Borrower all of such Borrower's general intangibles, whether now owned or hereafter acquired including, without limitation, all payment intangibles, choses in action, causes of action, corporate or other business records, inventions, designs, patents, patent applications, equipment formulations, manufacturing procedures, quality control procedures, trademarks, service marks, trade secrets, goodwill, copyrights, design rights, software, computer information, source codes, codes, records and dates, registrations, licenses, franchises, customer lists, tax refunds, tax refund claims, computer programs, all claims under guaranties, security interests or other security held by or granted to such Borrower to secure payment of any of the Receivables by a Customer (other than to the extent covered by Receivables) all rights of indemnification and all other intangible property of every kind and nature (other than Receivables). "GE Program Agreement" shall mean that certain Private Label Business Credit Program Agreement, dated as of December 16, 2003, by and among Borrowers and GE Capital. "Governmental Body" shall mean any nation or government, any state or other political subdivision thereof or any entity exercising the legislative, judicial, regulatory or administrative functions of or pertaining to a government. "Hazardous Discharge" shall have the meaning set forth in Section 4.19(d) hereof. 9 "Hazardous Substance" shall mean, without limitation, any flammable explosives, radon, radioactive materials, asbestos, urea formaldehyde foam insulation, polychlorinated biphenyls, petroleum and petroleum products, methane, hazardous materials, Hazardous Wastes, hazardous or Toxic Substances or related materials as defined in CERCLA, the Hazardous Materials Transportation Act, as amended (49 U.S.C. Sections 1801, et seq.), RCRA, or any other applicable Environmental Law and in the regulations adopted pursuant thereto. "Hazardous Wastes" shall mean all wastes subject to regulation under CERCLA, RCRA or applicable state law, and any other applicable Federal and state laws now in force or hereafter enacted relating to hazardous waste disposal. "Indebtedness" of a Person at a particular date shall mean all obligations of such Person which in accordance with GAAP would be classified upon a balance sheet as liabilities (except capital stock and surplus earned or otherwise) and in any event, without limitation by reason of enumeration, shall include all indebtedness, debt and other similar monetary obligations of such Person whether direct or guaranteed, and all premiums, if any, due at the required prepayment dates of such indebtedness, and all indebtedness secured by a Lien on assets owned by such Person, whether or not such indebtedness actually shall have been created, assumed or incurred by such Person. Any indebtedness of such Person resulting from the acquisition by such Person of any assets subject to any Lien shall be deemed, for the purposes hereof, to be the equivalent of the creation, assumption and incurring of the indebtedness secured thereby, whether or not actually so created, assumed or incurred. "Ineligible Security" shall mean any security which may not be underwritten or dealt in by member banks of the Federal Reserve System under Section 16 of the Banking Act of 1933 (12 U.S.C. Section 24, Seventh), as amended. "Intercreditor Agreement" shall mean that certain Intercreditor Agreement dated as of December 30, 2003, between GE Capital and the Agent, together with that certain Consent and Agreement executed by each Borrower for the benefit of the Agent and GE Capital, as the foregoing may be amended, modified, extended or restated from time to time. "Interest Period" shall mean the period provided for any Eurodollar Rate Loan pursuant to Section 2.2(b). "Interest Rate Protection Agreements" shall mean documentation for interest rate swaps in a standard International Swap Dealer Association Agreement or such other form as is acceptable to the Agent which provide for the method of calculating the reimbursable amount of the provider's credit exposure in a reasonable and customary basis. "Inventory" shall mean and include as to each Borrower all of such Borrower's now owned or hereafter acquired goods, merchandise and other personal property, wherever located, to be furnished under any consignment arrangement, contract of service or held for sale or lease, all raw materials, work in process, finished goods and materials and supplies of any kind, nature or description which are or might be used or consumed in such Borrower's business or used in selling or furnishing such goods, merchandise and other personal property, and all documents of title or other documents representing them. 10 "Inventory Advance Rate" shall have the meaning set forth in Section 2.1(a)(y)(i) hereof. "Investment Property" shall mean and include as to each Borrower, all of such Borrower's now owned or hereafter acquired securities (whether certificated or uncertificated), securities entitlements, securities accounts, commodities contracts and commodities accounts. "Issuer" shall mean any Person who issues a Letter of Credit and/or accepts a draft pursuant to the terms hereof. "Leasehold Interests" shall mean all of each Borrower's right, title and interest in and to the leasehold interests identified on Schedule 4.19 hereto. "Lender" and "Lenders" shall have the meaning ascribed to such term in the preamble to this Agreement and shall include each Person which becomes a transferee, successor or assign of any Lender. "Letter of Credit Fees" shall have the meaning set forth in Section 3.2. "Letters of Credit" shall have the meaning set forth in Section 2.9. "Lien" shall mean any mortgage, deed of trust, pledge, hypothecation, assignment, security interest, lien (whether statutory or otherwise), Charge, claim or encumbrance, or preference, priority or other security agreement or preferential arrangement held or asserted in respect of any asset of any kind or nature whatsoever including, without limitation, any conditional sale or other title retention agreement, any lease having substantially the same economic effect as any of the foregoing, and the filing of, or agreement to give, any financing statement under the Uniform Commercial Code or comparable law of any jurisdiction. "Material Adverse Effect" shall mean a material adverse effect on (a) the condition, operations, assets, business or prospects of the Borrowers, taken as a whole, (b) the Borrowers' ability to pay the Obligations in accordance with the terms thereof, (c) the value of the Collateral, or Agent's Liens on the Collateral or the priority of any such Lien or (d) the practical realization of the benefits of Agent's and each Lender's rights and remedies under this Agreement and the Other Documents. "Maximum Face Amount" shall mean, with respect to any outstanding Letter of Credit, the face amount of such Letter of Credit including all automatic increases provided for in such Letter of Credit, whether or not any such automatic increase has become effective. "Maximum Revolving Advance Amount" shall mean $50,000,000. "Monthly Advances" shall have the meaning set forth in Section 3.1 hereof. "Multiemployer Plan" shall mean a "multiemployer plan" as defined in Sections 3(37) and 4001(a)(3) of ERISA. 11 "Net Orderly Liquidation Value" shall mean with regard to any Inventory, the net proceeds that could be expected from an orderly liquidation sale of such Inventory based upon an appraisal of the Borrowers' Inventory conducted by an appraisal firm selected by the Agent, which appraisal of the net proceeds would be calculated after all expenses, professionally managed, with the seller obligated to sell over a defined period assuming that (a) the Borrowers' facilities are in limited operation, utilizing select current employees of the Borrowers, for the purpose of liquidating the Inventory, (b) the Inventory would be disposed of on a piecemeal basis or through appropriate groupings, under a scenario whereby the purchasers are buying "as is, where is" for cash or cash equivalent, (c) the terms are sold on a Free On Board ("FOB") warehouse basis, and (d) taking into consideration current economic trends, condition, location and marketability. "Non-Financed Capital Expenditures" shall mean capital expenditures of the Borrowers which are not financed by any third party lender but shall include capital expenditures which are financed with Revolving Advances. "Note" shall mean the Revolving Credit Note. "Obligations" shall mean and include any and all loans, advances, debts, liabilities, obligations, covenants and duties owing by Borrowers to Lenders or Agent or any Affiliate of Agent or any Lender of any kind or nature, present or future (including, without limitation, any interest accruing thereon after maturity, or after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding relating to any Borrower, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding), whether or not evidenced by any note, guaranty or other instrument, whether arising under any agreement, instrument or document, (including, without limitation, this Agreement and the Other Documents) whether or not for the payment of money, whether arising by reason of an extension of credit, opening of a letter of credit, loan, equipment lease or guarantee, under any interest or currency swap, future, option or other similar agreement (including the Interest Rate Protection Agreement) entered into with the Agent or any Lender or any of their respective Affiliates, or in any other manner, whether arising out of overdrafts or deposit or other accounts or electronic funds transfers (whether through automated clearing houses or otherwise) or out of the Agent's or any Lender's or any of their respective Affiliate's non-receipt of or inability to collect funds or otherwise not being made whole in connection with depository transfer check or other similar arrangements, whether direct or indirect (including those acquired by assignment or participation), absolute or contingent, joint or several, due or to become due, now existing or hereafter arising, contractual or tortious, liquidated or unliquidated, regardless of how such indebtedness or liabilities arise or by what agreement or instrument they may be evidenced or whether evidenced by any agreement or instrument, including, but not limited to, any and all of any Borrower's Indebtedness and/or liabilities under this Agreement, the Other Documents or under any other agreement between Agent or Lenders or any of their respective Affiliates and any Borrower and any amendments, extensions, renewals or increases and all costs and expenses of Agent and any Lender or any of their respective Affiliates incurred in the documentation, negotiation, modification, enforcement, collection or otherwise in connection with any of the foregoing, including but not limited to reasonable attorneys' fees and expenses and all obligations of any Borrower to Agent or Lenders to perform acts or refrain from taking any action. 12 "Original Owners" shall mean the shareholders of LESCO as of the Closing Date. "Other Documents" shall mean the Note, the Assignment of Account, the Patent, Trademark and Copyright Security Agreement and any and all other agreements, instruments and documents, including, without limitation, guaranties, pledges, powers of attorney, consents, and all other writings heretofore, now or hereafter executed by any Borrower and/or delivered to Agent or any Lender in respect of the transactions contemplated by this "Parent" of any Person shall mean a corporation or other entity owning, directly or indirectly at least 50% of the shares of stock or other ownership interests having ordinary voting power to elect a majority of the directors of the Person, or other Persons performing similar functions for any such Person. "Participant" shall mean each Person who shall be granted the right by any Lender to participate in any of the Advances and who shall have entered into a participation agreement in form and substance satisfactory to such Lender. "Patent, Trademark and Copyright Security Agreement" shall mean the Patent, Trademark and Copyright Security Agreement executed and delivered by each of the Borrowers to the Agent for the benefit of the Lenders. "Payment Office" shall mean initially Two Tower Center Boulevard, Eighth Floor, East Brunswick, New Jersey 08816; thereafter, such other office of Agent, if any, which it may designate by notice to Borrowing Agent and to each Lender to be the Payment Office. "PBGC" shall mean the Pension Benefit Guaranty Corporation. "Permitted Encumbrances" shall mean (a) Liens in favor of Agent for the benefit of Agent and Lenders; (b) Liens for taxes, assessments or other governmental charges not delinquent or being contested in good faith and by appropriate proceedings and with respect to which proper reserves have been taken by Borrowers; provided, that, the Lien shall have no effect on the priority of the Liens in favor of Agent or the value of the assets in which Agent has such a Lien and a stay of enforcement of any such Lien shall be in effect; (c) matters of record disclosed on the title insurance commitments obtained pursuant to Section 8.1(r), (d) Liens disclosed in the financial statements or notes thereto referred to in Section 5.5, the existence of which Agent has consented to in writing; (e) deposits or pledges to secure obligations under worker's compensation, social security or similar laws, or under unemployment insurance; (f) deposits or pledges to secure bids, tenders, contracts (other than contracts for the payment of money), leases, statutory obligations, surety and appeal bonds and other obligations of like nature arising in the ordinary course of any Borrower's business and an escrow in an amount not in excess of $3,650,000 to support LESCO's obligations under the Strongsville Assignment Agreement which will be used to reimburse The Glidden Company for certain obligations of LESCO; (g) judgment Liens that have been stayed or bonded and mechanics', workers', materialmen's or other like Liens arising in the ordinary course of any Borrower's business with respect to obligations which are not due or which are being contested in good faith by the applicable Borrower; (h) Liens placed upon fixed assets hereafter acquired to secure a portion of the purchase price thereof, provided that (x) any such lien shall not encumber any other property 13 of the Borrowers and (y) the aggregate amount of Indebtedness secured by such Liens incurred as a result of such purchases during any fiscal year shall not exceed the amount provided for in Section 7.6; (i) Liens which individually or in the aggregate do not encumber Collateral having a value in excess of $500,000; (j) Liens on assets of LESCO in favor of TCS granted under the TCS Supply Agreement to secure the obligations of LESCO under the TCS Supply Agreement, provided such Liens are subject to the terms of the Subordination Agreement, and (l) Liens disclosed on Schedule 1.2(p). "Person" shall mean any individual, sole proprietorship, partnership, corporation, business trust, joint stock company, trust, unincorporated organization, association, limited liability company, institution, public benefit corporation, joint venture, entity or government (whether Federal, state, county, city, municipal or otherwise, including any instrumentality, division, agency, body or department thereof). "Plan" shall mean any employee benefit plan within the meaning of Section 3(3) of ERISA, maintained for employees of Borrowers or any member of the Controlled Group or any such Plan to which any Borrower or any member of the Controlled Group is required to contribute on behalf of any of its employees. "Pro Forma Balance Sheet" shall have the meaning set forth in Section 5.5(a) hereof. "Pro Forma Financial Statements" shall have the meaning set forth in Section 5.5(b) hereof. "Projections" shall have the meaning set forth in Section 5.5(b) hereof. "Purchasing Lender" shall have the meaning set forth in Section 16.3 hereof. "RCRA" shall mean the Resource Conservation and Recovery Act, 42 U.S.C. Sections 6901 et seq., as amended. "Real Property" shall mean all of each Borrower's right, title and interest in and to owned premises and premises leased pursuant to a ground lease, all the foregoing as identified on Schedule 4.19 hereto. "Receivables" shall mean and include, as to each Borrower, all of such Borrower's accounts, contract rights, instruments (including those evidencing indebtedness owed to Borrowers by their Affiliates), documents, chattel paper (including electronic chattel paper), general intangibles relating to accounts, drafts and acceptances, credit card receivables, and all other forms of obligations owing to such Borrower arising out of or in connection with the sale or lease of Inventory or the rendition of services, all supporting obligations, guarantees and other security therefor, whether secured or unsecured, now existing or hereafter created, and whether or not specifically sold or assigned to Agent hereunder. "Release" shall have the meaning set forth in Section 5.7(c)(i) hereof. 14 "Reportable Event" shall mean a reportable event described in Section 4043(b) of ERISA or the regulations promulgated thereunder. "Required Lenders" shall mean Lenders holding at least fifty-one percent (51%) of the Advances and, if no Advances are outstanding, shall mean Lenders holding at least fifty-one percent (51%) of the Commitment Percentages; provided however, if there are two or less Lenders at any given time, then "Required Lenders" shall mean all the Lenders. "Reserve Percentage" shall mean the maximum effective percentage in effect on any day as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the reserve requirements (including, without limitation, supplemental, marginal and emergency reserve requirements) with respect to eurocurrency funding. "Revolving Advances" shall mean Advances made other than Letters of Credit. "Revolving Credit Note" shall mean, collectively, the promissory notes referred to in Section 2.1(a) hereof. "Revolving Interest Rate" shall mean an interest rate per annum equal to (a) the sum of the Alternate Base Rate minus one half of one percent (0.50%) with respect to Domestic Rate Loans, and (b) the sum of the Eurodollar Rate plus one and one-fourth percent (1.25%) with respect to Eurodollar Rate Loans. "Section 20 Subsidiary" shall mean the Subsidiary of the bank holding company controlling PNC, which Subsidiary has been granted authority by the Federal Reserve Board to underwrite and deal in certain Ineligible Securities. "Senior Debt Payments" shall mean and include all cash actually expended by Borrowers to make (a) interest payments on any Advances hereunder, plus, (b) payments for all fees, commissions and charges set forth herein and with respect to any Advances, plus (c) capitalized lease payments, plus (d) payments with respect to any other Indebtedness for borrowed money, plus (e) to the extent not included in EBITDA, recurring fees paid to GE Capital with respect to the Accounts Sales Agreement and/or the GE Program Agreement; provided, Senior Debt Payments shall not include nonrecurring fees charged by the Agent and the Lenders under this Agreement or by GE Capital under the Accounts Sales Agreement and/or the GE Program Agreement which are payable on or before the Closing Date. "Settlement Date" shall mean the Closing Date and thereafter Wednesday of each week unless such day is not a Business Day in which case it shall be the next succeeding Business Day. "Stores-on-Wheels Inventory" shall mean Inventory which is located on motor vehicles owned or leased by a Borrower and from which such Borrower sells such Inventory to its Customers in the ordinary course of business. "Strongsville Assignment Agreement" shall mean that certain Assignment and Assumption of Lease Agreement among LSI, as assignor, The Glidden Company, as assignee, 15 and LESCO pursuant to which LSI shall transfer its rights under the Strongsville Lease to The Glidden Company. "Strongsville Lease Agreement" shall mean that certain Lease Agreement dated June 13, 2000 between Lescar Company, as landlord, and LESCO, as tenant, with respect to LESCO's lease of the real property and improvements located at 15885 Sprague Road, Strongsville, Cuyahoga County, Ohio. "Subordination Agreement" shall mean that certain Subordination Agreement between TCS and the Agent with respect to the subordination of the liens of TCS in the assets of LESCO to the Liens of the Agent in the assets of LESCO, in substantially the form of Exhibit 8.1(r). "Subsidiary" shall mean a corporation or other entity of whose shares of stock or other ownership interests having ordinary voting power (other than stock or other ownership interests having such power only by reason of the happening of a contingency) to elect a majority of the directors of such corporation, or other Persons performing similar functions for such entity, are owned, directly or indirectly, by such Person. "TCS" shall mean Turf Care Supply Corp., a Delaware corporation. "TCS Sales Agreement" shall mean that certain Asset Purchase Agreement dated as of July 26, 2005, as amended, between LESCO, as seller, and TCS, as buyer. "TCS Supply Agreement" shall mean that certain Long-Term Supply Agreement effective as of October 1, 2005, between TCS, as supplier, and LESCO. "Term" shall have the meaning set forth in Section 13.1 hereof. "Termination Event" shall mean (i) a Reportable Event with respect to any Plan or Multiemployer Plan; (ii) the withdrawal of any Borrower or any member of the Controlled Group from a Plan or Multiemployer Plan during a plan year in which such entity was a "substantial employer" as defined in Section 4001(a)(2) of ERISA; (iii) the providing of notice of intent to terminate a Plan in a distress termination described in Section 4041(c) of ERISA; (iv) the institution by the PBGC of proceedings to terminate a Plan or Multiemployer Plan; (v) any event or condition (a) which might constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan or Multiemployer Plan, or (b) that may result in termination of a Multiemployer Plan pursuant to Section 4041A of ERISA; or (vi) the partial or complete withdrawal within the meaning of Sections 4203 and 4205 of ERISA, of any Borrower or any member of the Controlled Group from a Multiemployer Plan. "Toxic Substance" shall mean and include any material present on the Real Property or the Leasehold Interests which has been shown to have significant adverse effect on human health or which is subject to regulation under the Toxic Substances Control Act (TSCA), 15 U.S.C. Sections 2601 et seq., applicable state law, or any other applicable Federal or state laws now in force or hereafter enacted relating to toxic substances. "Toxic Substance" includes but is not limited to asbestos, polychlorinated biphenyls (PCBs) and lead-based paints. 16 "Transactions" shall have the meaning set forth in Section 5.5 hereof. "Transferee" shall have the meaning set forth in Section 16.3(b) hereof. "Undrawn Availability" at a particular date shall mean an amount equal to (a) the lesser of (i) the Formula Amount plus outstanding Letters of Credit or (ii) the Maximum Revolving Advance Amount, minus (b) the sum of (i) the outstanding amount of Advances plus (ii) all amounts due and owing to Borrowers' trade creditors which are outstanding beyond sixty (60) days from the due date, plus (iii) fees and expenses for which Borrowers are liable but which have not been paid or charged to Borrowers' Account. "USA Patriot Act" shall mean the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, Public Law 107-56, as the same has been, or shall hereafter be, renewed, extended, amended or replaced. "Week" shall mean the time period commencing with the opening of business on a Wednesday and ending on the end of business the following Tuesday. 1.3. Uniform Commercial Code Terms. All terms used herein and defined in the Uniform Commercial Code as adopted in the State of Ohio from time to time shall have the meaning given therein unless otherwise defined herein. To the extent the definition of any category or type of Collateral is expanded by any amendment, modification or revision to the Uniform Commercial Code, such expanded definition will apply automatically as of the date of such amendment, modification or revision. 1.4. Certain Matters of Construction. The terms "herein", "hereof" and "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular section, paragraph or subdivision. Any pronoun used shall be deemed to cover all genders. Wherever appropriate in the context, terms used herein in the singular also include the plural and vice versa. All references to statutes and related regulations shall include any amendments of same and any successor statutes and regulations. Unless otherwise provided, all references to any instruments or agreements to which Agent is a party, including, without limitation, references to any of the Other Documents, shall include any and all modifications or amendments thereto and any and all extensions or renewals thereof. II. ADVANCES, PAYMENTS. 2.1. (a) Revolving Advances. Subject to the terms and conditions set forth in this Agreement, each Lender, severally and not jointly, will make Revolving Advances to Borrowers in aggregate amounts outstanding at any time equal to such Lender's Commitment Percentage of the lesser of (x) the Maximum 17 Revolving Advance Amount less the aggregate amount of outstanding Letters of Credit and GE Proceeds Advances or (y) an amount equal to the sum of: (i) up to the lesser of (A) 70%, subject to the provisions of Section 2.1(c) hereof ("Inventory Advance Rate"), of the value of Eligible Inventory, or (B) 85% of the Net Orderly Liquidation Value of the Inventory at any one time; plus (ii) one hundred percent (100%), subject to the provisions of Section 2.1(c) hereof ("Cash on Deposit Advance Rate"), of Cash on Deposit in excess of $5,000,000 (the Inventory Advance Rate and the Cash on Deposit Advance Rate shall be referred to collectively, as the "Advance Rates"), minus (iii) the amount by which the availability for Revolving Advances based upon Stores-on-Wheels Inventory under item (i) above exceeds $10,000,000; minus (iv) the aggregate amount of outstanding Letters of Credit and GE Proceeds Advances, minus (v) the Bank Products Reserves and such other reserves as Agent may reasonably deem proper and necessary from time to time. The amount derived from (a) the sum of Section 2.1(a)(y)(i) and (ii) minus the sum of (b) Sections 2.1 (a)(y)(iii), (iv) and (v) at any time and from time to time shall be referred to as the "Formula Amount". The Revolving Advances shall be evidenced by one or more secured promissory notes (collectively, the "Revolving Credit Note") substantially in the form attached hereto as Exhibit 2.1(a). (b) Intentionally Omitted. (c) Discretionary Rights. Until such time as a current appraisal is conducted on the Borrowers' Inventory and reviewed to the satisfaction of the Agent, the Inventory Advance Rate shall be set at 60%. Subject to Section 16.2, the Advance Rates may be increased or decreased by Agent at any time and from time to time in the exercise of its reasonable discretion. Each Borrower consents to any such increases or decreases and acknowledges that decreasing the Advance Rates or increasing the reserves may limit or restrict Advances requested by Borrowing Agent. 2.2. Procedure for Borrowing Advances. (a) Borrowing Agent on behalf of any Borrower may notify Agent prior to 11:00 a.m. on a Business Day of a Borrower's request to incur, on that day, a Revolving Advance hereunder. Should any amount required to be paid as interest hereunder, or as fees or other charges under this Agreement or any Other Document, or with respect to any other Obligation, become due, same shall be deemed a request for a Revolving Advance as of the date such payment is due, in the amount required to pay in full such interest, fee, charge or Obligation 18 under this Agreement or any other agreement with Agent or Lenders, and such request shall be irrevocable. (b) Notwithstanding the provisions of (a) above, in the event any Borrower desires to obtain a Eurodollar Rate Loan, Borrowing Agent shall give Agent at least three (3) Business Days' prior written notice, specifying (i) the date of the proposed borrowing (which shall be a Business Day), (ii) the type of borrowing and the amount on the date of such Advance to be borrowed, which amount shall be in a minimum amount of $1,000,000 and in integral multiples of $500,000 thereafter, and (iii) the duration of the first Interest Period therefor. Interest Periods for Eurodollar Rate Loans shall be for one, two or three months; provided, if an Interest Period would end on a day that is not a Business Day, it shall end on the next succeeding Business Day unless such day falls in the next succeeding calendar month in which case the Interest Period shall end on the next preceding Business Day. No Eurodollar Rate Loan shall be made available to Borrower during the continuance of a Default or an Event of Default. (c) Each Interest Period of a Eurodollar Rate Loan shall commence on the date such Eurodollar Rate Loan is made and shall end on such date as Borrowing Agent may elect as set forth in subsection (b)(iii) above provided that the exact length of each Interest Period shall be determined in accordance with the practice of the interbank market for offshore Dollar deposits and no Interest Period shall end after the last day of the Term. Borrowing Agent shall elect the initial Interest Period applicable to a Eurodollar Rate Loan by its notice of borrowing given to Agent pursuant to Section 2.2(b) or by its notice of conversion given to Agent pursuant to Section 2.2(d), as the case may be. Borrowing Agent shall elect the duration of each succeeding Interest Period by giving irrevocable written notice to Agent of such duration not less than three (3) Business Days prior to the last day of the then current Interest Period applicable to such Eurodollar Rate Loan. If Agent does not receive timely notice of the Interest Period elected by Borrowing Agent, Borrowers shall be deemed to have elected to convert to a Domestic Rate Loan subject to Section 2.2(d) hereinbelow. (d) Provided that no Event of Default shall have occurred and be continuing, any Borrower may, on the last Business Day of the then current Interest Period applicable to any outstanding Eurodollar Rate Loan, or on any Business Day with respect to Domestic Rate Loans, convert any such loan into a loan of another type in the same aggregate principal amount provided that any conversion of a Eurodollar Rate Loan shall be made only on the last Business Day of the then current Interest Period applicable to such Eurodollar Rate Loan. If a Borrower desires to convert a loan, Borrowing Agent shall give Agent not less than three (3) Business Days' prior written notice to convert from a Domestic Rate Loan to a Eurodollar Rate Loan or one (1) Business Day's prior written notice to convert from a Eurodollar Rate Loan to a Domestic Rate Loan, specifying the date of such conversion, the loans to be converted and if the conversion is from a Domestic Rate Loan to any other type of loan, the duration of the first Interest Period therefor. After giving effect to each such conversion, there shall not be outstanding more than five (5) Eurodollar Rate Loans, in the aggregate. (e) Intentionally Omitted. 19 (f) Each Borrower shall indemnify Agent and Lenders and hold Agent and Lenders harmless from and against any and all losses or expenses that Agent and Lenders may sustain or incur as a consequence of any prepayment, conversion of or any default by any Borrower in the payment of the principal of or interest on any Eurodollar Rate Loan or failure by any Borrower to complete a borrowing of, a prepayment of or conversion of or to a Eurodollar Rate Loan after notice thereof has been given, including, but not limited to, any interest payable by Agent or Lenders to lenders of funds obtained by it in order to make or maintain its Eurodollar Rate Loans hereunder. A certificate as to any additional amounts payable pursuant to the foregoing sentence submitted by Agent or any Lender to Borrowing Agent shall be conclusive absent manifest error. (g) Notwithstanding any other provision hereof, if any applicable law, treaty, regulation or directive, or any change therein or in the interpretation or application thereof, shall make it unlawful for any Lender (for purposes of this subsection (g), the term "Lender" shall include any Lender and the office or branch where any Lender or any corporation or bank controlling such Lender makes or maintains any Eurodollar Rate Loans) to make or maintain its Eurodollar Rate Loans, the obligation of Lenders to make Eurodollar Rate Loans hereunder shall forthwith be cancelled and Borrowers shall, if any affected Eurodollar Rate Loans are then outstanding, promptly upon request from Agent, either pay all such affected Eurodollar Rate Loans or convert such affected Eurodollar Rate Loans into loans of another type. If any such payment or conversion of any Eurodollar Rate Loan is made on a day that is not the last day of the Interest Period applicable to such Eurodollar Rate Loan, Borrowers shall pay Agent, upon Agent's request, such amount or amounts as may be necessary to compensate Lenders for any loss or expense sustained or incurred by Lenders in respect of such Eurodollar Rate Loan as a result of such payment or conversion, including (but not limited to) any interest or other amounts payable by Lenders to lenders of funds obtained by Lenders in order to make or maintain such Eurodollar Rate Loan. A certificate as to any additional amounts payable pursuant to the foregoing sentence submitted by Lenders to Borrowing Agent shall be conclusive absent manifest error. 2.3. Disbursement of Advance Proceeds. All Advances shall be disbursed from whichever office or other place Agent may designate from time to time and, together with any and all other Obligations of Borrowers to Agent or Lenders, shall be charged to Borrowers' Account on Agent's books. During the Term, Borrowers may use the Revolving Advances by borrowing, prepaying and reborrowing, all in accordance with the terms and conditions hereof. The proceeds of each Revolving Advance requested by Borrowers or deemed to have been requested by Borrowers under Section 2.2(a) hereof shall, with respect to requested Revolving Advances to the extent Lenders make such Revolving Advances, be made available to the applicable Borrower on the day so requested by way of credit to such Borrower's operating account at PNC, or such other bank as Borrowing Agent may designate following notification to Agent, in immediately available federal funds or other immediately available funds or, with respect to Revolving Advances deemed to have been requested by any Borrower, be disbursed to Agent to be applied to the outstanding Obligations giving rise to such deemed request. 20 2.4. Intentionally Omitted. 2.5. Maximum Advances. The aggregate balance of Revolving Advances outstanding at any time shall not exceed the lesser of (a) Maximum Revolving Advance Amount less outstanding Letters of Credit, or (b) the Formula Amount. 2.6. Repayment of Advances. (a) The Revolving Advances shall be due and payable in full on the last day of the Term subject to earlier prepayment as herein provided. (b) Each Borrower recognizes that the amounts evidenced by checks, notes, drafts or any other items of payment relating to and/or proceeds of Collateral may not be collectible by Agent on the date received. In consideration of Agent's agreement to conditionally credit Borrowers' Account as of the Business Day on which Agent receives those items of payment, each Borrower agrees that, in computing the charges under this Agreement, all items of payment shall be deemed applied by Agent on account of the Obligations one (1) Business Day after the Business Day Agent receives such payments via wire transfer or electronic depository check. Agent is not, however, required to credit Borrowers' Account for the amount of any item of payment which is unsatisfactory to Agent in the Agent's reasonable discretion, and Agent may charge Borrowers' Account for the amount of any item of payment which is returned to Agent unpaid. (c) All payments of principal, interest and other amounts payable hereunder, or under any of the Other Documents shall be made to Agent at the Payment Office not later than 1:00 P.M. (New York Time) on the due date therefor in lawful money of the United States of America in federal funds or other funds immediately available to Agent. Agent shall have the right to effectuate payment on any and all Obligations due and owing hereunder by charging Borrowers' Account or by making Advances as provided in Section 2.2 hereof. (d) Borrowers shall pay principal, interest, and all other amounts payable hereunder, or under any related agreement, without any deduction whatsoever, including, but not limited to, any deduction for any setoff or counterclaim. 2.7. Repayment of Excess Advances. The aggregate balance of Advances outstanding at any time in excess of the maximum amount of Advances permitted hereunder shall be immediately due and payable without the necessity of any demand, at the Payment Office, whether or not a Default or Event of Default has occurred. 2.8. Statement of Account. Agent shall maintain, in accordance with its customary procedures, a loan account ("Borrowers' Account") in the name of Borrowers in which shall be recorded the date and amount of each Advance made by Agent and the date and amount of each payment in respect 21 thereof; provided, however, the failure by Agent to record the date and amount of any Advance shall not adversely affect Agent or any Lender. Each month, Agent shall send to Borrowing Agent a statement showing the accounting for the Advances made, payments made or credited in respect thereof, and other transactions between Agent and Borrowers, during such month. The monthly statements shall be deemed correct and binding upon Borrowers in the absence of manifest error and shall constitute an account stated between Lenders and Borrowers unless Agent receives a written statement of Borrowers' specific exceptions thereto within thirty (30) days after such statement is received by Borrowing Agent. The records of Agent with respect to the loan account shall be conclusive evidence absent manifest error of the amounts of Advances and other charges thereto and of payments applicable thereto. 2.9. Letters of Credit. Subject to the terms and conditions hereof and upon prior request by Borrowing Agent to Agent by 10:00 a.m. on the date which is five (5) Business Days prior to the proposed issuance thereof, Agent shall issue or cause the issuance of Letters of Credit ("Letters of Credit") on behalf of any Borrower; provided, however, that Agent will not be required to issue or cause to be issued any Letters of Credit to the extent that the face amount of such Letters of Credit would then cause the sum of (i) the outstanding Revolving Advances plus (ii) outstanding Letters of Credit and GE Proceeds Advances to exceed the lesser of (x) the Maximum Revolving Advance Amount or (y) the Formula Amount. The maximum amount of outstanding Letters of Credit shall not exceed $20,000,000 in the aggregate at any time. All disbursements or payments related to Letters of Credit shall be deemed to be Domestic Rate Loans consisting of Revolving Advances and shall bear interest at the Revolving Interest Rate for Domestic Rate Loans; Letters of Credit that have not been drawn upon shall not bear interest. The term "Letters of Credit" shall include the Letters of Credit set forth on Schedule 2.9, each of which shall be deemed to be issued pursuant to this Agreement as of the date hereof. 2.10. Issuance of Letters of Credit. (a) Borrowing Agent, on behalf of Borrowers, may request Agent to issue or cause the issuance of a Letter of Credit by delivering to Agent at the Payment Office, Agent's form of Letter of Credit Application (the "Letter of Credit Application") completed to the satisfaction of Agent; and, such other certificates, documents and other papers and information as Agent may reasonably request. Borrowing Agent, on behalf of Borrowers, also has the right to give instructions and make agreements with respect to any application, any applicable letter of credit and security agreement, any applicable letter of credit reimbursement agreement and/or any other applicable agreement, any letter of credit and the disposition of documents, disposition of any unutilized funds, and to agree with Agent upon any amendment, extension or renewal of any Letter of Credit. (b) Each Letter of Credit shall, among other things, (i) provide for the payment of sight drafts, other written demands for payment, or acceptances of usance drafts when presented for honor thereunder in accordance with the terms thereof and when accompanied by the documents described therein and (ii) have an expiry date not later than twelve (12) months after such Letter of Credit's date of issuance and in no event later than the last day of the Term. Each standby Letter of Credit shall be subject either to the Uniform 22 Customs and Practice for Documentary Credits (1993 Revision), International Chamber of Commerce Publication No. 500, and any amendments or revision thereof adhered to by the Issuer ("UCP 500") or the International Standby Practices (ISP98-International Chamber of Commerce Publication Number 590) (the "ISP98 Rules"), as determined by Agent, and each trade Letter of Credit shall be subject to UCP 500. (c) Agent shall use its reasonable efforts to notify Lenders of the request by Borrowing Agent for a Letter of Credit hereunder. 2.11. Requirements For Issuance of Letters of Credit. Borrowing Agent shall authorize and direct any Issuer to name the applicable Borrower as the "Applicant" or "Account Party" of each Letter of Credit. If Agent is not the Issuer of any Letter of Credit, Borrowing Agent shall authorize and direct the Issuer to deliver to Agent all instruments, documents, and other writings and property received by the Issuer pursuant to the Letter of Credit and to accept and rely upon Agent's instructions and agreements with respect to all matters arising in connection with the Letter of Credit, the application therefor. 2.12. Disbursements, Reimbursement. (a) Immediately upon the issuance of each Letter of Credit, each Lender shall be deemed to, and hereby irrevocably and unconditionally agrees to, purchase from Agent a participation in such Letter of Credit and each drawing thereunder in an amount equal to such Lender's Commitment Percentage of the Maximum Face Amount of such Letter of Credit and the amount of such drawing, respectively. (b) In the event of any request for a drawing under a Letter of Credit by the beneficiary or transferee thereof, Agent will promptly notify Borrowing Agent. Provided that Borrowing Agent shall have received such notice, the Borrowers shall reimburse (such obligation to reimburse Agent shall sometimes be referred to as a "Reimbursement Obligation") Agent prior to 12:00 Noon, New York time on each date that an amount is paid by Agent under any Letter of Credit (each such date, a "Drawing Date") in an amount equal to the amount so paid by Agent. In the event Borrowers fail to reimburse Agent for the full amount of any drawing under any Letter of Credit by 12:00 Noon, New York time, on the Drawing Date, Agent will promptly notify each Lender thereof, and Borrowers shall be deemed to have requested that a Domestic Rate Loan be made by the Lenders to be disbursed on the Drawing Date under such Letter of Credit, subject to the amount of the unutilized portion of the lesser of Maximum Revolving Advance Amount or the Formula Amount and subject to Section 8.2 hereof. Any notice given by Agent pursuant to this Section 2.12(b) may be oral if immediately confirmed in writing; provided that the lack of such an immediate confirmation shall not affect the conclusiveness or binding effect of such notice. (c) Each Lender shall upon any notice pursuant to Section 2.12(b) make available to Agent an amount in immediately available funds equal to its Commitment Percentage of the amount of the drawing, whereupon the participating Lenders shall (subject to Section 2.12(d)) each be deemed to have made a Domestic Rate Loan to Borrowers in that amount. If any Lender so notified fails to make available to Agent the amount of such Lender's 23 Commitment Percentage of such amount by no later than 2:00 p.m., New York time on the Drawing Date, then interest shall accrue on such Lender's obligation to make such payment, from the Drawing Date to the date on which such Lender makes such payment (i) at a rate per annum equal to the Federal Funds Open Rate during the first three days following the Drawing Date and (ii) at a rate per annum equal to the rate applicable to Domestic Rate Loans on and after the fourth day following the Drawing Date. Agent will promptly give notice of the occurrence of the Drawing Date, but failure of Agent to give any such notice on the Drawing Date or in sufficient time to enable any Lender to effect such payment on such date shall not relieve such Lender from its obligation under this Section 2.12(c), provided that such Lender shall not be obligated to pay interest as provided in Section 2.12(c) (i) and (ii) until and commencing from the date of receipt of notice from Agent of a drawing. (d) With respect to any unreimbursed drawing that is not converted into a Domestic Rate Loan to Borrowers in whole or in part as contemplated by Section 2.12(b), because of Borrowers' failure to satisfy the conditions set forth in Section 8.2 (other than any notice requirements) or for any other reason, Borrowers shall be deemed to have incurred from Agent a borrowing (each a "Letter of Credit Borrowing") in the amount of such drawing. Such Letter of Credit Borrowing shall be due and payable on demand (together with interest) and shall bear interest at the rate per annum applicable to a Domestic Rate Loan. Each Lender's payment to Agent pursuant to Section 2.12(c) shall be deemed to be a payment in respect of its participation in such Letter of Credit Borrowing and shall constitute a "Participation Advance" from such Lender in satisfaction of its Participation Commitment under this Section 2.12. (e) Each Lender's Participation Commitment shall continue until the last to occur of any of the following events: (x) Agent ceases to be obligated to issue or cause to be issued Letters of Credit hereunder; (y) no Letter of Credit issued or created hereunder remains outstanding and uncancelled and (z) all Persons (other than the Borrowers) have been fully reimbursed for all payments made under or relating to Letters of Credit. 2.13. Repayment of Participation Advances. (a) Upon (and only upon) receipt by Agent for its account of immediately available funds from Borrowers (i) in reimbursement of any payment made by the Agent under the Letter of Credit with respect to which any Lender has made a Participation Advance to Agent, or (ii) in payment of interest on such a payment made by Agent under such a Letter of Credit, Agent will pay to each Lender, in the same funds as those received by Agent, the amount of such Lender's Commitment Percentage of such funds, except Agent shall retain the amount of the Commitment Percentage of such funds of any Lender that did not make a Participation Advance in respect of such payment by Agent. (b) If Agent is required at any time to return to any Borrower, or to a trustee, receiver, liquidator, custodian, or any official in any insolvency proceeding, any portion of the payments made by Borrowers to Agent pursuant to Section 2.13(a) in reimbursement of a payment made under the Letter of Credit or interest or fee thereon, each Lender shall, on demand of Agent, forthwith return to Agent the amount of its Commitment Percentage of any amounts so returned by Agent plus interest at the Federal Funds Effective Rate. 24 2.14. Documentation. Each Borrower agrees to be bound by the terms of the Letter of Credit Application and, absent manifest error, by Agent's interpretations of any Letter of Credit issued on behalf of such Borrower and by Agent's written regulations and customary practices relating to letters of credit, though Agent's interpretations may be different from such Borrower's own. In the event of a conflict between the Letter of Credit Application and this Agreement, this Agreement shall govern. It is understood and agreed that, except in the case of gross negligence or willful misconduct (as determined by a court of competent jurisdiction in a final non-appealable judgment), Agent shall not be liable for any error, negligence and/or mistakes, whether of omission or commission, in following the Borrowing Agent's or any Borrower's instructions or those contained in the Letters of Credit or any modifications, amendments or supplements thereto. 2.15. Determination to Honor Drawing Request. In determining whether to honor any request for drawing under any Letter of Credit by the beneficiary thereof, Agent shall be responsible only to determine that the documents and certificates required to be delivered under such Letter of Credit have been delivered and that they comply on their face with the requirements of such Letter of Credit and that any other drawing condition appearing on the face of such Letter of Credit has been satisfied in the manner so set forth. 2.16. Nature of Participation and Reimbursement Obligations. Each Lender's obligation in accordance with this Agreement to make the Revolving Advances or Participation Advances as a result of a drawing under a Letter of Credit, and the obligations of Borrowers to reimburse Agent upon a draw under a Letter of Credit, shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of this Section 2.16 under all circumstances, including the following circumstances: (a) any set-off, counterclaim, recoupment, defense or other right which such Lender may have against Agent, any Borrower or any other Person for any reason whatsoever; (b) the failure of any Borrower or any other Person to comply, in connection with a Letter of Credit Borrowing, with the conditions set forth in this Agreement for the making of a Revolving Advance, it being acknowledged that such conditions are not required for the making of a Letter of Credit Borrowing and the obligation of the Lenders to make Participation Advances under Section 2.12; (c) any lack of validity or enforceability of any Letter of Credit; (d) any claim of breach of warranty that might be made by Borrower or any Lender against the beneficiary of a Letter of Credit, or the existence of any claim, set-off, recoupment, counterclaim, crossclaim, defense or other right which any Borrower or any Lender may have at any time against a beneficiary, any successor beneficiary or any transferee of any Letter of Credit or the proceeds thereof (or any Persons for whom any such transferee may be acting), Agent or any Lender or any other Person, whether in connection with this Agreement, 25 the transactions contemplated herein or any unrelated transaction (including any underlying transaction between any Borrower or any Subsidiaries of such Borrower and the beneficiary for which any Letter of Credit was procured); (e) the lack of power or authority of any signer of (or any defect in or forgery of any signature or endorsement on) or the form of or lack of validity, sufficiency, accuracy, enforceability or genuineness of any draft, demand, instrument, certificate or other document presented under or in connection with any Letter of Credit, or any fraud or alleged fraud in connection with any Letter of Credit, or the transport of any property or provisions of services relating to a Letter of Credit, in each case even if Agent or any of Agent's Affiliates has been notified thereof; (f) payment by Agent under any Letter of Credit against presentation of a demand, draft or certificate or other document which does not comply with the terms of such Letter of Credit; (g) the solvency of, or any acts or omissions by, any beneficiary of any Letter of Credit, or any other Person having a role in any transaction or obligation relating to a Letter of Credit, or the existence, nature, quality, quantity, condition, value or other characteristic of any property or services relating to a Letter of Credit; (h) any failure by the Agent or any of Agent's Affiliates to issue any Letter of Credit in the form requested by Borrowing Agent, unless the Agent has received written notice from Borrowing Agent of such failure within three (3) Business Days after the Agent shall have furnished Borrowing Agent a copy of such Letter of Credit and such error is material and no drawing has been made thereon prior to receipt of such notice; (i) any Material Adverse Effect on any Borrower; (j) any breach of this Agreement or any Other Document by any party thereto; (k) the occurrence or continuance of an insolvency proceeding with respect to any Borrower; (l) the fact that a Default or Event of Default shall have occurred and be continuing; (m) the fact that the Term shall have expired or this Agreement or the Obligations hereunder shall have been terminated; and (n) any other circumstance or happening whatsoever, whether or not similar to any of the foregoing. 2.17. Indemnity. In addition to amounts payable as provided in Section 16.5, each Borrower hereby agrees to protect, indemnify, pay and save harmless Agent and any of Agent's Affiliates that have issued 26 a Letter of Credit from and against any and all claims, demands, liabilities, damages, taxes, penalties, interest, judgments, losses, costs, charges and expenses (including reasonable fees, expenses and disbursements of counsel and allocated costs of internal counsel) which the Agent or any of Agent's Affiliates may incur or be subject to as a consequence, direct or indirect, of the issuance of any Letter of Credit, other than as a result of (A) the gross negligence or willful misconduct of the Agent as determined by a final and non-appealable judgment of a court of competent jurisdiction or (b) the wrongful dishonor by the Agent or any of Agent's Affiliates of a proper demand for payment made under any Letter of Credit, except if such dishonor resulted from any act or omission, whether rightful or wrongful, of any present or future de jure or de facto Governmental Body (all such acts or omissions herein called "Governmental Acts"). 2.18. Liability for Acts and Omissions. As between Borrowers and Agent and Lenders, each Borrower assumes all risks of the acts and omissions of, or misuse of the Letters of Credit by, the respective beneficiaries of such Letters of Credit. In furtherance and not in limitation of the respective foregoing, Agent shall not be responsible for: (i) the form, validity, sufficiency, accuracy, genuineness or legal effect of any document submitted by any party in connection with the application for an issuance of any such Letter of Credit, even if it should in fact prove to be in any or all respects invalid, insufficient, inaccurate, fraudulent or forged (even if Agent shall have been notified thereof); (ii) the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign any such Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, which may prove to be invalid or ineffective for any reason; (iii) the failure of the beneficiary of any such Letter of Credit, or any other party to which such Letter of Credit may be transferred, to comply fully with any conditions required in order to draw upon such Letter of Credit or any other claim of any Borrower against any beneficiary of such Letter of Credit, or any such transferee, or any dispute between or among any Borrower and any beneficiary of any Letter of Credit or any such transferee; (iv) errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, cable, telegraph, telex or otherwise, whether or not they be in cipher; (v) errors in interpretation of technical terms; (vi) any loss or delay in the transmission or otherwise of any document required in order to make a drawing under any such Letter of Credit or of the proceeds thereof; (vii) the misapplication by the beneficiary of any such Letter of Credit of the proceeds of any drawing under such Letter of Credit; or (viii) any consequences arising from causes beyond the control of Agent, including any governmental acts, and none of the above shall affect or impair, or prevent the vesting of, any of Agent's rights or powers hereunder. Nothing in the preceding sentence shall relieve Agent from liability for Agent's gross negligence or willful misconduct (as determined by a court of competent jurisdiction in a final non-appealable judgment) in connection with actions or omissions described in such clauses (i) through (viii) of such sentence. In no event shall Agent or Agent's Affiliates be liable to any Borrower for any indirect, consequential, incidental, punitive, exemplary or special damages or expenses (including without limitation attorneys' fees), or for any damages resulting from any change in the value of any property relating to a Letter of Credit. Without limiting the generality of the foregoing, Agent and each of its Affiliates (i) may rely on any oral or other communication believed in good faith by Agent or such Affiliate to have been authorized or given by or on behalf of the applicant for a Letter of Credit, (ii) may honor any presentation if the documents presented appear on their face substantially to comply 27 with the terms and conditions of the relevant Letter of Credit; (iii) may honor a previously dishonored presentation under a Letter of Credit, whether such dishonor was pursuant to a court order, to settle or compromise any claim of wrongful dishonor, or otherwise, and shall be entitled to reimbursement to the same extent as if such presentation had initially been honored, together with any interest paid by Agent or its Affiliates; (iv) may honor any drawing that is payable upon presentation of a statement advising negotiation or payment, upon receipt of such statement (even if such statement indicates that a draft or other document is being delivered separately), and shall not be liable for any failure of any such draft or other document to arrive, or to conform in any way with the relevant Letter of Credit; (v) may pay any paying or negotiating bank claiming that it rightfully honored under the laws or practices of the place where such bank is located; and (vi) may settle or adjust any claim or demand made on Agent or its Affiliate in any way related to any order issued at the applicant's request to an air carrier, a letter of guarantee or of indemnity issued to a carrier or any similar document (each an "Order") and honor any drawing in connection with any Letter of Credit that is the subject of such Order, notwithstanding that any drafts or other documents presented in connection with such Letter of Credit fail to conform in any way with such Letter of Credit. Nothing in the preceding sentence shall relieve Agent from liability for Agent's gross negligence or willful misconduct (as determined by a court of competent jurisdiction in a final non-appealable judgment) in connection with actions or omissions described in such clauses (i) through (vii) of such sentence. In no event shall Agent or Agent's Affiliates be liable to any Borrower for any indirect, consequential, incidental, punitive, exemplary or special damages or expenses (including without limitation attorneys' fees), or for any damages resulting from any change in the value of any property relating to a Letter of Credit. In furtherance and extension and not in limitation of the specific provisions set forth above, any action taken or omitted by Agent under or in connection with the Letters of Credit issued by it or any documents and certificates delivered thereunder, if taken or omitted in good faith and without gross negligence or willful misconduct (as determined by a court of competent jurisdiction in a final non-appealable judgment), shall not put Agent under any resulting liability to any Borrower or any Lender. 2.19. Additional Payments. Any sums expended by Agent or any Lender due to any Borrower's failure to perform or comply with its obligations under this Agreement or any Other Document including, without limitation, any Borrower's obligations under Sections 4.2, 4.4, 4.12, 4.13, 4.14 and 6.1 hereof, may be charged to Borrowers' Account as a Revolving Advance and added to the Obligations. 2.20. Manner of Borrowing and Payment. (a) Each borrowing of Revolving Advances shall be advanced according to the applicable Commitment Percentages of Lenders. (b) Each payment (including each prepayment) by Borrowers on account of the principal of and interest on the Revolving Advances, shall be applied to the Revolving Advances pro rata according to the applicable Commitment Percentages of Lenders. Except as expressly provided herein, all payments (including prepayments) to be made by any Borrower on 28 account of principal, interest and fees shall be made without set off or counterclaim and shall be made to Agent on behalf of the Lenders to the Payment Office, in each case on or prior to 1:00 P.M., New York time, in Dollars and in immediately available funds. (c) (i) Notwithstanding anything to the contrary contained in Sections 2.13(a) and (b) hereof, commencing with the first Business Day following the Closing Date, each borrowing of Revolving Advances shall be advanced by Agent and each payment by any Borrower on account of Revolving Advances shall be applied first to those Revolving Advances advanced by Agent. On or before 1:00 P.M., New York time, on each Settlement Date commencing with the first Settlement Date following the Closing Date, Agent and Lenders shall make certain payments as follows: (I) if the aggregate amount of new Revolving Advances made by Agent during the preceding Week (if any) exceeds the aggregate amount of repayments applied to outstanding Revolving Advances during such preceding Week, then each Lender shall provide Agent with funds in an amount equal to its applicable Commitment Percentage of the difference between (w) such Revolving Advances and (x) such repayments and (II) if the aggregate amount of repayments applied to outstanding Revolving Advances during such Week exceeds the aggregate amount of new Revolving Advances made during such Week, then Agent shall provide each Lender with funds in an amount equal to its applicable Commitment Percentage of the difference between (y) such repayments and (z) such Revolving Advances. (ii) Each Lender shall be entitled to earn interest at the applicable Revolving Interest Rate on outstanding Advances which it has funded. (iii) Promptly following each Settlement Date, Agent shall submit to each Lender a certificate with respect to payments received and Advances made during the Week immediately preceding such Settlement Date. Such certificate of Agent shall be conclusive in the absence of manifest error. (d) If any Lender or Participant (a "benefited Lender") shall at any time receive any payment of all or part of its Advances, or interest thereon, or receive any Collateral in respect thereof (whether voluntarily or involuntarily or by set-off) in a greater proportion than any such payment to and Collateral received by any other Lender, if any, in respect of such other Lender's Advances, or interest thereon, and such greater proportionate payment or receipt of Collateral is not expressly permitted hereunder, such benefited Lender shall purchase for cash from the other Lenders a participation in such portion of each such other Lender's Advances, or shall provide such other Lender with the benefits of any such Collateral, or the proceeds thereof, as shall be necessary to cause such benefited Lender to share the excess payment or benefits of such Collateral or proceeds ratably with each of the other Lenders; provided, however, that if all or any portion of such excess payment or benefits is thereafter recovered from such benefited Lender, such purchase shall be rescinded, and the purchase price and benefits returned, to the extent of such recovery, but without interest. Each Lender so purchasing a portion of another Lender's Advances may exercise all rights of payment (including, without limitation, rights of set-off) with respect to such portion as fully as if such Lender were the direct holder of such portion. (e) Unless Agent shall have been notified by telephone, confirmed in writing, by any Lender that such Lender will not make the amount which would constitute its applicable 29 Commitment Percentage of the Advances available to Agent, Agent may (but shall not be obligated to) assume that such Lender shall make such amount available to Agent on the next Settlement Date and, in reliance upon such assumption, make available to Borrowers a corresponding amount. Agent will promptly notify Borrowers of its receipt of any such notice from a Lender. If such amount is made available to Agent on a date after such next Settlement Date, such Lender shall pay to Agent on demand an amount equal to the product of (i) the daily average Federal Funds Effective Rate (computed on the basis of a year of 360 days) during such period as quoted by Agent, times (ii) such amount, times (iii) the number of days from and including such Settlement Date to the date on which such amount becomes immediately available to Agent. A certificate of Agent submitted to any Lender with respect to any amounts owing under this paragraph (e) shall be conclusive, in the absence of manifest error. If such amount is not in fact made available to Agent by such Lender within three (3) Business Days after such Settlement Date, Agent shall be entitled to recover such an amount, with interest thereon at the rate per annum then applicable to such Revolving Advances hereunder, on demand from Borrowers; provided, however, that Agent's right to such recovery shall not prejudice or otherwise adversely affect Borrowers' rights (if any) against such Lender. 2.21. Use of Proceeds. Borrowers shall apply the proceeds of Advances to provide for their working capital needs, to pay fees and expenses relating to this transaction and the transactions contemplated by the Accounts Sales Agreement, for capital expenditures and for general corporate purposes of the Borrowers. 2.22. Defaulting Lender. (a) Notwithstanding anything to the contrary contained herein, in the event any Lender (x) has refused (which refusal constitutes a breach by such Lender of its obligations under this Agreement) to make available its portion of any Advance or (y) notifies either Agent or Borrowing Agent that it does not intend to make available its portion of any Advance (if the actual refusal would constitute a breach by such Lender of its obligations under this Agreement) (each, a "Lender Default"), all rights and obligations hereunder of such Lender (a "Defaulting Lender") as to which a Lender Default is in effect and of the other parties hereto shall be modified to the extent of the express provisions of this Section 2.22 while such Lender Default remains in effect. (b) Advances shall be incurred pro rata from Lenders (the "Non-Defaulting Lenders") which are not Defaulting Lenders based on their respective Commitment Percentages, and no Commitment Percentage of any Lender or any pro rata share of any Advances required to be advanced by any Lender shall be increased as a result of such Lender Default. Amounts received in respect of principal of any type of Advances shall be applied to reduce the applicable Advances of each Lender pro rata based on the aggregate of the outstanding Advances of that type of all Lenders at the time of such application; provided, that, such amount shall not be applied to any Advances of a Defaulting Lender at any time when, and to the extent that, the aggregate amount of Advances of any Non-Defaulting Lender exceeds such Non-Defaulting Lender's Commitment Percentage of all Advances then outstanding. 30 (c) A Defaulting Lender shall not be entitled to give instructions to Agent or to approve, disapprove, consent to or vote on any matters relating to this Agreement and the Other Documents. All amendments, waivers and other modifications of this Agreement and the Other Documents may be made without regard to a Defaulting Lender and, for purposes of the definition of "Required Lenders", a Defaulting Lender shall be deemed not to be a Lender and not to have Advances outstanding. (d) Other than as expressly set forth in this Section 2.22, the rights and obligations of a Defaulting Lender (including the obligation to indemnify Agent) and the other parties hereto shall remain unchanged. Nothing in this Section 2.22 shall be deemed to release any Defaulting Lender from its obligations under this Agreement and the Other Documents, shall alter such obligations, shall operate as a waiver of any default by such Defaulting Lender hereunder, or shall prejudice any rights which any Borrower, Agent or any Lender may have against any Defaulting Lender as a result of any default by such Defaulting Lender hereunder. (e) In the event a Defaulting Lender retroactively cures to the satisfaction of Agent the breach which caused a Lender to become a Defaulting Lender, such Defaulting Lender shall no longer be a Defaulting Lender and shall be treated as a Lender under this Agreement. III. INTEREST AND FEES. 3.1. Interest. Interest on Revolving Advances shall be payable in arrears on the first day of each month with respect to Domestic Rate Loans and, with respect to Eurodollar Rate Loans, at the end of each Interest Period. Interest charges shall be computed on the actual principal amount of Advances outstanding during the month (the "Monthly Advances") at a rate per annum equal to the applicable Revolving Interest Rate. Whenever, subsequent to the date of this Agreement, the Alternate Base Rate is increased or decreased, the applicable Revolving Interest Rate for Domestic Rate Loans shall be similarly changed without notice or demand of any kind by an amount equal to the amount of such change in the Alternate Base Rate during the time such change or changes remain in effect. The Eurodollar Rate shall be adjusted with respect to Eurodollar Rate Loans without notice or demand of any kind on the effective date of any change in the Reserve Percentage as of such effective date. Upon and after the occurrence of an Event of Default, and during the continuation thereof, the Obligations shall bear interest at the applicable Revolving Interest Rate plus two percent (2%) per annum (the "Default Rate"). 3.2. Letter of Credit Fees. (a) Borrowers shall pay (x) to Agent, for the benefit of Lenders, fees for each Letter of Credit for the period from and excluding the date of issuance of same to and including the date of expiration or termination, equal to the average daily face amount of each outstanding Letter of Credit multiplied by one percent (1.00%), such fees to be calculated on the basis of a 360-day year for the actual number of days elapsed and to be payable quarterly in arrears on the first day of each January, April, July, and October and on the last day of the Term and (y) to the Issuer, for its own account, fees for each Letter of Credit for the period from and excluding the date of issuance of same to and including the date of expiration or termination, equal to the 31 average daily face amount of each outstanding Letter of Credit multiplied by one fourth of one percent (0.25%), such fees to be calculated on the basis of a 360-day year for the actual number of days elapsed and to be payable quarterly in arrears on the first day of each January, April, July, and October and on the last day of the Term , and (z) to the Issuer, for its own account any and all fees and expenses as agreed upon by the Issuer and the Borrowing Agent in connection with any Letter of Credit, including, without limitation, in connection with the opening, amendment or renewal of any such Letter of Credit and any acceptances created thereunder and shall reimburse Agent for any and all fees and expenses, if any, paid by Agent to the Issuer (all of the foregoing fees, the "Letter of Credit Fees"). All such charges shall be deemed earned in full on the date when the same are due and payable hereunder and shall not be subject to rebate or proration upon the termination of this Agreement for any reason. Any such charge in effect at the time of a particular transaction shall be the charge for that transaction, notwithstanding any subsequent change in the Issuer's prevailing charges for that type of transaction. All Letter of Credit Fees payable hereunder shall be deemed earned in full on the date when the same are due and payable hereunder and shall not be subject to rebate or proration upon the termination of this Agreement for any reason. Upon request of the Agent following the occurrence of an Event of Default, Borrowers will cause cash to be deposited and maintained in an account with Agent, as cash collateral, in an amount equal to one hundred and five percent (105%) of the outstanding Letters of Credit, and each Borrower hereby irrevocably authorizes Agent, in its discretion, on such Borrower's behalf and in such Borrower's name, to open such an account and to make and maintain deposits therein, or in an account opened by such Borrower, in the amounts required to be made by such Borrower, out of the proceeds of Receivables or other Collateral or out of any other funds of such Borrower coming into any Lender's possession at any time. Agent will invest such cash collateral (less applicable reserves) in such short-term money-market items as to which Agent and such Borrower mutually agree and the net return on such investments shall be credited to such account and constitute additional cash collateral. No Borrower may withdraw amounts credited to any such account except upon payment and performance in full of all Obligations and termination of this Agreement. 3.3. Facility Fee. If, for any month during the Term, the average daily unpaid balance of the sum of the Revolving Advances plus Letters of Credit outstanding for each day of such month does not equal the Maximum Revolving Advance Amount, then Borrowers shall pay to Agent for the ratable benefit of Lenders a fee at a rate equal to one fourth of one percent (0.25%) per annum on the amount by which the Maximum Revolving Advance Amount exceeds such average daily unpaid balance of Revolving Advances plus Letters of Credit outstanding. Such fee shall be payable to Agent quarterly in arrears on each January 1, April 1, July 1 and October 1. 3.4. Intentionally Omitted. 3.5. Computation of Interest and Fees. Interest and fees hereunder shall be computed on the basis of a year of 365 or 366 days, as the case may be, and for the actual number of days elapsed. If any payment to be made 32 hereunder becomes due and payable on a day other than a Business Day, the due date thereof shall be extended to the next succeeding Business Day and interest thereon shall be payable at the applicable Revolving Interest Rate during such extension. 3.6. Maximum Charges. In no event whatsoever shall interest and other charges charged hereunder exceed the highest rate permissible under law. In the event interest and other charges as computed hereunder would otherwise exceed the highest rate permitted under law, such excess amount shall be first applied to any unpaid principal balance owed by Borrowers, and if the then remaining excess amount is greater than the previously unpaid principal balance, Lenders shall promptly refund such excess amount to Borrowers and the provisions hereof shall be deemed amended to provide for such permissible rate. 3.7. Increased Costs. In the event that any applicable law, treaty or governmental regulation, or any change therein or in the interpretation or application thereof, or compliance by any Lender (for purposes of this Section 3.7, the term "Lender" shall include Agent or any Lender and any corporation or bank controlling Agent or any Lender) and the office or branch where Agent or any Lender (as so defined) makes or maintains any Eurodollar Rate Loans with any request or directive (whether or not having the force of law) from any central bank or other financial, monetary or other authority, shall: (a) subject Agent or any Lender to any tax of any kind whatsoever with respect to this Agreement or any Other Document or change the basis of taxation of payments to Agent or any Lender of principal, fees, interest or any other amount payable hereunder or under any Other Documents (except for changes in the rate of tax on the overall net income of Agent or any Lender by the jurisdiction in which it maintains its principal office); (b) impose, modify or hold applicable any reserve, special deposit, assessment or similar requirement against assets held by, or deposits in or for the account of, advances or loans by, or other credit extended by, any office of Agent or any Lender, including (without limitation) pursuant to Regulation D of the Board of Governors of the Federal Reserve System; or (c) impose on Agent or any Lender or the London interbank Eurodollar market any other condition with respect to this Agreement or any Other Document; and the result of any of the foregoing is to increase the cost to Agent or any Lender of making, renewing or maintaining its Advances hereunder by an amount that Agent or such Lender deems to be material or to reduce the amount of any payment (whether of principal, interest or otherwise) in respect of any of the Advances by an amount that Agent or such Lender reasonably deems to be material, then, in any case Borrowers shall promptly pay Agent or such Lender, upon its demand, such additional amount as will compensate Agent or such Lender for such additional cost or such reduction, as the case may be, provided that the foregoing shall not apply to increased costs which are reflected in the Eurodollar Rate. Agent or such Lender shall certify 33 the amount of such additional cost or reduced amount to Borrowers, and such certification shall be conclusive absent manifest error. 3.8. Basis For Determining Interest Rate Inadequate or Unfair. In the event that Agent or any Lender shall have reasonably determined that: (a) reasonable means do not exist for ascertaining the Eurodollar Rate for any Interest Period; (b) Dollar deposits in the relevant amount and for the relevant maturity are not available in the London interbank Eurodollar market, with respect to an outstanding Eurodollar Rate Loan, a proposed Eurodollar Rate Loan, or a proposed conversion of a Domestic Rate Loan into a Eurodollar Rate Loan, then Agent shall give Borrowing Agent prompt written, telephonic or telegraphic notice of such determination. If such notice is given, (i) any such requested Eurodollar Rate Loan shall be made as a Domestic Rate Loan, unless Borrowing Agent shall notify Agent no later than 10:00 a.m. (New York City time) two (2) Business Days prior to the date of such proposed borrowing, that its request for such borrowing shall be cancelled or made as an unaffected type of Eurodollar Rate Loan, (ii) any Domestic Rate Loan or Eurodollar Rate Loan which was to have been converted to an affected type of Eurodollar Rate Loan shall be continued as or converted into a Domestic Rate Loan, or, if Borrowing Agent shall notify Agent, no later than 10:00 a.m. (New York City time) two (2) Business Days prior to the proposed conversion, shall be maintained as an unaffected type of Eurodollar Rate Loan, and (iii) any outstanding affected Eurodollar Rate Loans shall be converted into a Domestic Rate Loan, or, if Borrowing Agent shall notify Agent, no later than 10:00 a.m. (New York City time) two (2) Business Days prior to the last Business Day of the then current Interest Period applicable to such affected Eurodollar Rate Loan, shall be converted into an unaffected type of Eurodollar Rate Loan, on the last Business Day of the then current Interest Period for such affected Eurodollar Rate Loans. Until such notice has been withdrawn, Lenders shall have no obligation to make an affected type of Eurodollar Rate Loan or maintain outstanding affected Eurodollar Rate Loans and no Borrower shall have the right to convert a Domestic Rate Loan or an unaffected type of Eurodollar Rate Loan into an affected type of Eurodollar Rate Loan. 3.9. Capital Adequacy. (a) In the event that Agent or any Lender shall have determined that any applicable law, rule, regulation or guideline regarding capital adequacy, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by Agent or any Lender (for purposes of this Section 3.9, the term "Lender" shall include Agent or any Lender and any corporation or bank controlling Agent or any Lender) and the office or branch where Agent or any Lender (as so defined) makes or maintains any Eurodollar Rate Loans with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on Agent or any Lender's capital as a consequence 34 of its obligations hereunder to a level below that which Agent or such Lender could have achieved but for such adoption, change or compliance (taking into consideration Agent's and each Lender's policies with respect to capital adequacy) by an amount deemed by Agent or any Lender to be material, then, from time to time, Borrowers shall pay upon demand to Agent or such Lender such additional amount or amounts as will compensate Agent or such Lender for such reduction. In determining such amount or amounts, Agent or such Lender may use any reasonable averaging or attribution methods. The protection of this Section 3.9 shall be available to Agent and each Lender regardless of any possible contention of invalidity or inapplicability with respect to the applicable law, regulation or condition. (b) A certificate of Agent or such Lender setting forth such amount or amounts as shall be necessary to compensate Agent or such Lender with respect to Section 3.9(a) hereof when delivered to Borrowers shall be conclusive absent manifest error. 3.10. Gross Up for Taxes. If any Borrower shall be required by Applicable Law to withhold or deduct any taxes from or in respect of any sum payable under this Agreement or any of the Other Documents, (a) the sum payable to Agent or such Lender shall be increased as may be necessary so that, after making all required withholding or deductions, Agent or such Lender (as the case may be) receives an amount equal to the sum it would have received had no such withholding or deductions been made, (b) such Borrower shall make such withholding or deductions, and (c) such Borrower shall pay the full amount withheld or deducted to the relevant taxation authority or other authority in accordance with Applicable Law. 3.11. Withholding Tax Exemption. Each Lender or assignee or participant of a Lender that is not incorporated under the Laws of the United States of America or a state thereof (and, upon the written request of Agent, each other Lender or assignee or participant of a Lender) agrees that it will deliver to each Borrower and Agent two (2) duly completed appropriate valid Withholding Certificates (as defined under Section 1.1441-1(c)(16) of the Income Tax Regulations (the "Regulations")) certifying its status (i.e. U.S. or foreign person) and, if appropriate, making a claim of reduced, or exemption from, U.S. withholding tax on the basis of an income tax treaty or an exemption provided by the Code. The term "Withholding Certificate" means a Form W-9; a Form W-8BEN; a Form W-8ECI; a Form W-8IMY and the related statements and certifications as required under Section 1.1441-1(e)(2) and/or (3) of the Regulations; a statement described in Section 1.871-14(c)(2)(v) of the Regulations; or any other certificates under the Code or Regulations that certify or establish the status of a payee or beneficial owner as a U.S. or foreign person. Each Lender, assignee or participant required to deliver to each Borrower and Agent a Withholding Certificate pursuant to the preceding sentence shall deliver such valid Withholding Certificate as follows: (A) each Lender which is a party hereto on the Closing Date shall deliver such valid Withholding Certificate at least five (5) Business Days prior to the first date on which any interest or fees are payable by any Borrower hereunder for the account of such Lender; (B) each assignee or participant shall deliver such valid Withholding Certificate at least five (5) Business Days before the effective date of such assignment or participation (unless Agent in its sole reasonable discretion shall permit such assignee or participant to deliver such valid Withholding 35 Certificate less than five (5) Business Days before such date in which case it shall be due on the date specified by Agent). Each Lender, assignee or participant which so delivers a valid Withholding Certificate further undertakes to deliver to each Borrower and Agent two (2) additional copies of such Withholding Certificate (or a successor form) on or before the date that such Withholding Certificate expires or becomes obsolete or after the occurrence of any event requiring a change in the most recent Withholding Certificate so delivered by it, and such amendments thereto or extensions or renewals thereof as may be reasonably requested by any Borrower or Agent. Notwithstanding the submission of a Withholding Certificate claiming a reduced rate of or exemption from U.S. withholding tax, Agent shall be entitled to withhold United States federal income taxes at the full 30% withholding rate if in its reasonable judgment it is required to do so under the due diligence requirements imposed upon a withholding agent under Section 1.1441-7(b) of the Regulations. Further, Agent is indemnified under Section 1.1461-1(e) of the Regulations against any claims and demands of any Lender or assignee or participant of a Lender for the amount of any tax it deducts and withholds in accordance with regulations under Section 1441 of the Code. Each Bank or assignee or participant of a Bank that is not incorporated under the Laws of the United States of America or a state thereof (and is not excepted from the certification requirement contained in Section 313 of the USA Patriot Act and the applicable regulations because it is both (i) an affiliate of a depository institution or foreign bank that maintains a physical presence in the United states or foreign county, and (ii) subject to supervision by a banking authority regulating such affiliated depository institution or foreign bank) shall deliver to the Agent the certification, or, if applicable, recertification, certifying that such Bank is not a "shell" and certifying to other matters as required by Section 313 of the USA Patriot Act and the applicable regulations: (1) within 10 days after the Closing Date, and (2) as such other times as are required under the USA Patriot Act. IV. COLLATERAL: GENERAL TERMS. 4.1. Security Interest in the Collateral. To secure the prompt payment and performance to Agent and each Lender of the Obligations, each Borrower hereby assigns, pledges and grants to Agent for its benefit and for the ratable benefit of each Lender a continuing security interest in and to all of its Collateral, whether now owned or existing or hereafter acquired or arising and wheresoever located. Each Borrower shall mark its books and records as may be necessary or appropriate to evidence, protect and perfect Agent's security interest and shall cause its financial statements to reflect such security interest. Each Borrower shall promptly provide Agent with written notice of all commercial tort claims, such notice to contain the case title together with the applicable court and a brief description of the claim(s). Upon delivery of each such notice, such Borrower shall be deemed to hereby grant to Agent a security interest and lien in and to such commercial tort claims and all proceeds thereof. 4.2. Perfection of Security Interest. Each Borrower shall take all action that may be necessary or desirable, or that Agent may request, so as at all times to maintain the validity, perfection, enforceability and priority of 36 Agent's security interest in the Collateral or to enable Agent to protect, exercise or enforce its rights hereunder and in the Collateral, including, but not limited to, (i) immediately discharging all Liens other than Permitted Encumbrances, (ii) obtaining landlords' or mortgagees' lien waivers, (iii) delivering to Agent, endorsed or accompanied by such instruments of assignment as Agent may specify, and stamping or marking, in such manner as Agent may specify, any and all chattel paper, instruments, letters of credits and advices thereof and documents evidencing or forming a part of the Collateral, (iv) entering into warehousing, lockbox and other custodial arrangements satisfactory to Agent, and (v) executing and delivering financing statements, control agreements, instruments of pledge, mortgages, notices and assignments, in each case in form and substance satisfactory to Agent, relating to the creation, validity, perfection, maintenance or continuation of Agent's security interest under the Uniform Commercial Code or other applicable law. Agent is hereby authorized to file financing statements without the signature of any Borrower in accordance with the Uniform Commercial Code as adopted in the State of Ohio from time to time. By its signature hereto, each Borrower hereby authorizes Agent to file against such Borrower, one or more financing, continuation, or amendment statements pursuant to the Uniform Commercial Code in form and substance satisfactory to Agent (which statements may have a description of collateral which is broader than that set forth herein). All charges, expenses and fees Agent may incur in doing any of the foregoing, and any local taxes relating thereto, shall be charged to Borrowers' Account as a Revolving Advance of a Domestic Rate Loan and added to the Obligations, or, at Agent's option, shall be paid to Agent for the ratable benefit of Lenders immediately upon demand. 4.3. Disposition of Collateral. Each Borrower will safeguard and protect all Collateral for Agent's general account and make no disposition thereof whether by sale, lease or otherwise except (a) the sale of Inventory in the ordinary course of business, (b) the sale of Receivables in accordance with the terms of the Accounts Sales Agreement, (c) the transfer of assets in accordance with the terms of the TCS Sales Agreement, and (d) the disposition or transfer for cash or cash equivalents of obsolete and worn-out Equipment in the ordinary course of business during any fiscal year having an aggregate fair market value of not more than $1,000,000. 4.4. Preservation of Collateral. In addition to the rights and remedies set forth in Section 11.1 hereof, Agent: (a) may at any time take such steps as Agent deems necessary to protect Agent's interest in and to preserve the Collateral, including the hiring of such security guards or the placing of other security protection measures as Agent may deem appropriate; (b) may employ and maintain at any of any Borrower's premises a custodian who shall have full authority to do all acts necessary to protect Agent's interests in the Collateral; (c) may lease warehouse facilities to which Agent may move all or part of the Collateral; (d) may use any Borrower's owned or leased lifts, hoists, trucks and other facilities or equipment for handling or removing the Collateral; and (e) shall have, and is hereby granted, a right of ingress and egress to the places where the Collateral is located, and may proceed over and through any of Borrower's owned or leased property. Each Borrower shall cooperate fully with all of Agent's efforts to preserve the Collateral and will take such actions to preserve the Collateral as Agent may direct. All of Agent's expenses of preserving the Collateral, including any expenses relating to the bonding of a custodian, shall be charged to 37 Borrowers' Account as a Revolving Advance of a Domestic Rate Loan and added to the Obligations. 4.5. Ownership of Collateral. With respect to the Collateral, at the time the Collateral becomes subject to Agent's security interest: (a) each Borrower shall be the sole owner of and fully authorized and able to sell, transfer, pledge and/or grant a first priority security interest in each and every item of the its respective Collateral to Agent; and, except for Permitted Encumbrances the Collateral shall be free and clear of all Liens and encumbrances whatsoever; (b) each document and agreement executed by each Borrower or delivered to Agent or any Lender in connection with this Agreement shall be true and correct in all respects; (c) all signatures and endorsements of each Borrower that appear on such documents and agreements shall be genuine and each Borrower shall have full capacity to execute same; and (d) each Borrower's Equipment and Inventory shall be located at or in transit to the locations set forth on Schedule 4.5 and shall not be removed from such location(s) without the prior written consent of Agent except with respect to (i) the sale of Inventory in the ordinary course of business, (ii) transfers of Equipment and Inventory between such locations, and (iii) disposition of Equipment to the extent permitted in Section 4.3 hereof. 4.6. Defense of Agent's and Lenders' Interests. Until (a) payment and performance in full of all of the Obligations and (b) termination of this Agreement, Agent's interests in the Collateral shall continue in full force and effect. During such period no Borrower shall, without Agent's prior written consent, pledge, sell (except Inventory in the ordinary course of business and Equipment to the extent permitted in Section 4.3 hereof), assign, transfer, create or suffer to exist a Lien upon or encumber or allow or suffer to be encumbered in any way except for Permitted Encumbrances, any part of the Collateral. Each Borrower shall defend Agent's interests in the Collateral against any and all Persons whatsoever. At any time following demand by Agent for payment of all Obligations pursuant to Section 11.1, Agent shall have the right to take possession of the indicia of the Collateral and the Collateral in whatever physical form contained, including without limitation: labels, stationery, documents, instruments and advertising materials. If Agent exercises this right to take possession of the Collateral, Borrowers shall, upon demand, assemble it in the best manner possible and make it available to Agent at a place reasonably convenient to Agent. In addition, with respect to all Collateral, Agent and Lenders shall be entitled to all of the rights and remedies set forth herein and further provided by the Uniform Commercial Code or other applicable law. Each Borrower shall, and Agent may, at its option, instruct all suppliers, carriers, forwarders, warehousers or others receiving or holding cash, checks, Inventory, documents or instruments in which Agent holds a security interest to deliver same to Agent and/or subject to Agent's order and if they shall come into any Borrower's possession, they, and each of them, shall be held by such Borrower in trust as Agent's trustee, and such Borrower will immediately deliver them to Agent in their original form together with any necessary endorsement. 4.7. Books and Records. Each Borrower shall (a) keep proper books of record and account in which full, true and correct entries will be made of all dealings or transactions of or in relation to its business and 38 affairs; (b) set up on its books accruals with respect to all taxes, assessments, charges, levies and claims; and (c) on a reasonably current basis set up on its books, from its earnings, allowances against doubtful Receivables, advances and investments and all other proper accruals (including without limitation by reason of enumeration, accruals for premiums, if any, due on required payments and accruals for depreciation, obsolescence, or amortization of properties), which should be set aside from such earnings in connection with its business. All determinations pursuant to this subsection shall be made in accordance with, or as required by, GAAP consistently applied in the opinion of such independent public accountant as shall then be regularly engaged by Borrowers. 4.8. Financial Disclosure. Each Borrower hereby irrevocably authorizes and directs all accountants and auditors employed by such Borrower at any time during the Term to exhibit and deliver to Agent and each Lender copies of any of any Borrower's financial statements, trial balances or other accounting records of any sort in the accountant's or auditor's possession, and to disclose to Agent and each Lender any information such accountants may have concerning such Borrower's financial status and business operations. Each Borrower hereby authorizes all federal, state and municipal authorities to furnish to Agent and each Lender copies of reports or examinations relating to such Borrower, whether made by such Borrower or otherwise; however, Agent and each Lender will attempt to obtain such information or materials directly from such Borrower prior to obtaining such information or materials from such accountants or such authorities. 4.9. Compliance with Laws. Each Borrower shall comply in all material respects with all acts, rules, regulations and orders of any legislative, administrative or judicial body or official applicable to its respective Collateral or any part thereof or to the operation of such Borrower's business the non-compliance with which could reasonably be expected to have a Material Adverse Effect. Each Borrower may, however, contest or dispute any acts, rules, regulations, orders and directions of those bodies or officials in any reasonable manner, provided that any related Lien is inchoate or stayed and sufficient reserves are established to the reasonable satisfaction of Agent to protect Agent's Lien on or security interest in the Collateral. The Collateral at all times shall be maintained in accordance with the requirements of all insurance carriers which provide insurance with respect to the Collateral so that such insurance shall remain in full force and effect. 4.10. Inspection of Premises. At all reasonable times Agent and each Lender shall have full access to and the right to audit, check, inspect and make abstracts and copies from each Borrower's books, records, audits, correspondence and all other papers relating to the Collateral and the operation of each Borrower's business. Agent, any Lender and their agents may enter upon any of each Borrower's premises at any time during business hours and at any other reasonable time, and from time to time, for the purpose of inspecting the Collateral and any and all records pertaining thereto and the operation of such Borrower's business. 39 4.11. Insurance. Each Borrower shall bear the full risk of any loss of any nature whatsoever with respect to the Collateral. At each Borrower's own cost and expense in amounts and with carriers acceptable to Agent, each Borrower shall (a) keep all its insurable properties and properties in which each Borrower has an interest insured against the hazards of fire, flood, sprinkler leakage, those hazards covered by extended coverage insurance and such other hazards, and for such amounts, as is customary in the case of companies engaged in businesses similar to such Borrower's including, without limitation, business interruption insurance; (b) maintain a bond in such amounts as is customary in the case of companies engaged in businesses similar to such Borrower insuring against larceny, embezzlement or other criminal misappropriation of insured's officers and employees who may either singly or jointly with others at any time have access to the assets or funds of such Borrower either directly or through authority to draw upon such funds or to direct generally the disposition of such assets; (c) maintain public and product liability insurance against claims for personal injury, death or property damage suffered by others; (d) maintain all such worker's compensation or similar insurance as may be required under the laws of any state or jurisdiction in which such Borrower is engaged in business; (e) furnish Agent with (i) copies of all policies and evidence of the maintenance of such policies by the renewal thereof at least thirty (30) days before any expiration date, and (ii) appropriate loss payable endorsements in form and substance satisfactory to Agent, naming Agent as a co-insured and loss payee as its interests may appear with respect to all insurance coverage referred to in clauses (a), and (c) above, and providing (A) that all proceeds thereunder shall be payable to Agent, (B) no such insurance shall be affected by any act or neglect of the insured or owner of the property described in such policy, and (C) that such policy and loss payable clauses may not be cancelled, amended or terminated unless at least thirty (30) days' prior written notice is given to Agent. In the event of any loss thereunder, the carriers named therein hereby are directed by Agent and the applicable Borrower to make payment for such loss to Agent and not to such Borrower and Agent jointly. If any insurance losses are paid by check, draft or other instrument payable to any Borrower and Agent jointly, Agent may endorse such Borrower's name thereon and do such other things as Agent may deem advisable to reduce the same to cash. Agent is hereby authorized to adjust and compromise claims under insurance coverage referred to in clauses (a) and (b) above. All loss recoveries received by Agent upon any such insurance may be applied to the Obligations, in such order as Agent in its sole discretion shall determine. Any surplus shall be paid by Agent to Borrowers or applied as may be otherwise required by law. Any deficiency thereon shall be paid by Borrowers to Agent, on demand. Anything hereinabove to the contrary notwithstanding, and subject to the fulfillment of the conditions set forth below, Agent shall remit to Borrowers insurance proceeds received by Agent during any calendar year under insurance policies procured and maintained by Borrowers which insure Borrowers' insurable properties to the extent such insurance proceeds do not exceed $1,000,000 in the aggregate during such calendar year or $500,000 per occurrence. In the event the amount of insurance proceeds received by Agent for any occurrence exceeds $500,000, then Agent shall not be obligated to remit the insurance proceeds to Borrowers unless Borrowers shall provide Agent with evidence reasonably satisfactory to Agent that the insurance proceeds will be used by Borrowers to repair, replace or restore the insured property which was the subject of the insurable loss. In the event Borrowers have previously received (or, after giving effect to any proposed remittance by Agent to Borrowers would receive) insurance proceeds which equal or exceed $1,000,000 in the aggregate during any calendar year, then Agent may, in its sole 40 discretion, either remit the insurance proceeds to Borrowers upon Borrowers providing Agent with evidence reasonably satisfactory to Agent that the insurance proceeds will be used by Borrowers to repair, replace or restore the insured property which was the subject of the insurable loss, or apply the proceeds to the Obligations, as aforesaid. The agreement of Agent to remit insurance proceeds in the manner above provided shall be subject in each instance to satisfaction of each of the following conditions: (x) No Event of Default or Default shall then have occurred, and (y) Borrowers shall use such insurance proceeds to repair, replace or restore the insurable property which was the subject of the insurable loss and for no other purpose. 4.12. Failure to Pay Insurance. If any Borrower fails to obtain insurance as hereinabove provided, or to keep the same in force, Agent, if Agent so elects, may obtain such insurance and pay the premium therefor on behalf of such Borrower, and charge Borrowers' Account therefor as a Revolving Advance of a Domestic Rate Loan and such expenses so paid shall be part of the Obligations. 4.13. Payment of Taxes. Each Borrower will pay, when due, all taxes, assessments and other Charges lawfully levied or assessed upon such Borrower or any of the Collateral including, without limitation, real and personal property taxes, assessments and charges and all franchise, income, employment, social security benefits, withholding, and sales taxes, except to the extent that such Borrower is contesting or disputing such taxes, assessments or Charges in good faith, by protest, administrative or judicial appeal or similar proceedings all conducted in an expeditious manner, provided that any related tax lien is stayed and sufficient reserves are established to the reasonable satisfaction of the Agent to protect the security interest and Liens on the Collateral in favor of the Agent for the benefit of the Lenders. If any tax by any governmental authority is or may be imposed on or as a result of any transaction between any Borrower and Agent or any Lender which Agent or any Lender may be required to withhold or pay or if any taxes, assessments, or other Charges remain unpaid after the date fixed for their payment, or if any claim shall be made which, in Agent's or any Lender's reasonable opinion, may possibly create a valid Lien on the Collateral, Agent may without notice to Borrowers pay the taxes, assessments or other Charges and each Borrower hereby indemnifies and holds Agent and each Lender harmless in respect thereof. Agent will not pay any taxes, assessments or Charges to the extent that any Borrower has contested or disputed those taxes, assessments or Charges in good faith, by expeditious protest, administrative or judicial appeal or similar proceeding provided that any related tax lien is stayed and sufficient reserves are established to the reasonable satisfaction of Agent to protect Agent's security interest in or Lien on the Collateral. The amount of any payment by Agent under this Section 4.13 shall be charged to Borrowers' Account as a Revolving Advance of a Domestic Rate Loan and added to the Obligations and, until Borrowers shall furnish Agent with an indemnity therefor (or supply Agent with evidence satisfactory to Agent that due provision for the payment thereof has been made), Agent may hold without interest any balance standing to Borrowers' credit and Agent shall retain its security interest in any and all Collateral held by Agent. 41 4.14. Payment of Leasehold Obligations. Each Borrower shall at all times pay, when and as due, its rental obligations under all leases under which it is a tenant, and shall otherwise comply, in all material respects, with all other terms of such leases and keep them in full force and effect and, at Agent's request will provide evidence of having done so, except to the extent that such Borrower is contesting or disputing a rental obligation or other lease term in good faith in an expeditious manner, provided that sufficient reserves are established to the reasonable satisfaction of the Agent to protect the security interest and Liens on the Collateral in favor of the Agent for the benefit of the Lenders. 4.15. Receivables. (a) Nature of Receivables. Each of the Receivables shall be a bona fide and valid account representing a bona fide indebtedness incurred by the Customer therein named, for a fixed sum as set forth in the invoice relating thereto (provided immaterial or unintentional invoice errors shall not be deemed to be a breach hereof) with respect to an absolute sale or lease and delivery of goods upon stated terms of a Borrower, or work, labor or services theretofore rendered by a Borrower as of the date each Receivable is created. Same shall be due and owing in accordance with the applicable Borrower's standard terms of sale without dispute, setoff or counterclaim except as may be stated on the accounts receivable schedules delivered by Borrowers to Agent. (b) Solvency of Customers. Each Customer, to the best of each Borrower's knowledge, as of the date each Receivable is created, is and will be solvent and able to pay all Receivables on which the Customer is obligated in full when due or with respect to such Customers of any Borrower who are not solvent such Borrower has set up on its books and in its financial records bad debt reserves adequate to cover such Receivables. (c) Locations of Borrower. Each Borrower's chief executive office is located at the addresses set forth on Schedule 4.15(c) hereto. Until written notice is given to Agent by Borrowing Agent of any other office at which any Borrower keeps its records pertaining to Receivables, all such records shall be kept at such executive office. (d) Collection of Receivables. Until any Borrower's authority to do so is terminated by Agent (which notice Agent may give at any time following the occurrence of an Event of Default or a Default or when Agent in its sole discretion deems it to be in Lenders' best interest to do so), each Borrower will, at such Borrower's sole cost and expense, but on Agent's behalf and for Agent's account, collect as Agent's property and in trust for Agent all amounts received on Receivables, and shall not commingle such collections with any Borrower's funds or use the same except to pay Obligations. Subject to Section 4.15(h) hereof and the terms of the Intercreditor Agreement, each Borrower shall, upon request, deliver to Agent, or deposit in the Blocked Account, in original form and on the date of receipt thereof, all checks, drafts, notes, money orders, acceptances, cash and other evidences of Indebtedness. (e) Notification of Assignment of Receivables. At any time following the occurrence of an Event of Default or a Default and subject to the terms of the Intercreditor Agreement, Agent shall have the right to send notice of the assignment of, and Agent's security 42 interest in, the Receivables to any and all Customers or any third party holding or otherwise concerned with any of the Collateral. Following such notice and subject to the terms of the Intercreditor Agreement, Agent shall have the sole right to collect the Receivables, take possession of the Collateral, or both. Agent's actual collection expenses, including, but not limited to, stationery and postage, telephone and telegraph, secretarial and clerical expenses and the salaries of any collection personnel used for collection, may be charged to Borrowers' Account and added to the Obligations. (f) Power of Agent to Act on Borrowers' Behalf. Subject to the terms of the Intercreditor Agreement, Agent shall have the right to receive, endorse, assign and/or deliver in the name of Agent or any Borrower any and all checks, drafts and other instruments for the payment of money relating to the Receivables, and each Borrower hereby waives notice of presentment, protest and non-payment of any instrument so endorsed. Each Borrower hereby constitutes Agent or Agent's designee as such Borrower's attorney with power (i) to endorse such Borrower's name upon any notes, acceptances, checks, drafts, money orders or other evidences of payment or Collateral; (ii) to sign such Borrower's name on any invoice or bill of lading relating to any of the Receivables, drafts against Customers, assignments and verifications of Receivables; (iii) to send verifications of Receivables to any Customer; (iv) to sign such Borrower's name on all financing statements or any other documents or instruments deemed necessary or appropriate by Agent to preserve, protect, or perfect Agent's interest in the Collateral and to file same; (v) to demand payment of the Receivables; (vi) to enforce payment of the Receivables by legal proceedings or otherwise; (vii) to exercise all of Borrowers' rights and remedies with respect to the collection of the Receivables and any other Collateral; (viii) to settle, adjust, compromise, extend or renew the Receivables; (ix) to settle, adjust or compromise any legal proceedings brought to collect Receivables; (x) to prepare, file and sign such Borrower's name on a proof of claim in bankruptcy or similar document against any Customer; (xi) to prepare, file and sign such Borrower's name on any notice of Lien, assignment or satisfaction of Lien or similar document in connection with the Receivables; and (xii) to do all other acts and things necessary to carry out this Agreement. All acts of said attorney or designee are hereby ratified and approved, and said attorney or designee shall not be liable for any acts of omission or commission nor for any error of judgment or mistake of fact or of law, unless done maliciously or with gross (not mere) negligence; this power being coupled with an interest is irrevocable while any of the Obligations remain unpaid. Agent shall have the right at any time following the occurrence of an Event of Default or Default, to change the address for delivery of mail addressed to any Borrower to such address as Agent may designate and to receive, open and dispose of all mail addressed to any Borrower. (g) No Liability. Neither Agent nor any Lender shall, under any circumstances or in any event whatsoever, have any liability for any error or omission or delay of any kind occurring in the settlement, collection or payment of any of the Receivables or any instrument received in payment thereof, or for any damage resulting therefrom. Following the occurrence of an Event of Default or Default Agent may, without notice or consent from any Borrower, sue upon or otherwise collect, extend the time of payment of, compromise or settle for cash, credit or upon any terms any of the Receivables or any other securities, instruments or insurance applicable thereto and/or release any obligor thereof. Agent is authorized and empowered to accept following the occurrence of an Event of Default or Default the return of the 43 goods represented by any of the Receivables, without notice to or consent by any Borrower, all without discharging or in any way affecting any Borrower's liability hereunder. (h) Establishment of a Lockbox Account, Dominion Account. Subject to the terms of the Intercreditor Agreement, all proceeds of Collateral shall, at the direction of Agent, be deposited by Borrowers into a lockbox account, dominion account or such other "blocked account" ("Blocked Accounts") as Agent may require pursuant to an arrangement with such bank as may be selected by Borrowers and be acceptable to Agent. Prior to the occurrence of an Event of Default, proceeds of sales of inventory which are collected at the service center locations of the Borrowers shall not be required to be deposited into the Blocked Accounts until each such service has collected $5,000 since the time of its last deposit to the Blocked Accounts; provided however, in the event that the aggregate collected funds at all service center locations exceed $500,000 at any one time, Borrowers shall upon the request of the Agent cause such funds in excess of $500,000 to be transferred to the Blocked Accounts. Borrowers shall issue to any such bank, an irrevocable letter of instruction directing said bank to transfer such funds so deposited to Agent, either to any account maintained by Agent at said bank or by wire transfer to appropriate account(s) of Agent. All funds deposited in such Blocked Account shall immediately become the property of Agent and Borrowers shall obtain the agreement by such bank to waive any offset rights against the funds so deposited. Neither Agent nor any Lender assumes any responsibility for such blocked account arrangement, including without limitation, any claim of accord and satisfaction or release with respect to deposits accepted by any bank thereunder. Alternatively, Agent may establish depository accounts ("Depository Accounts") in the name of Agent at a bank or banks for the deposit of such funds and Borrowers shall deposit all proceeds of Collateral or cause same to be deposited, in kind, in such Depository Accounts of Agent in lieu of depositing same to the Blocked Accounts. Notwithstanding the foregoing, the requirements of this Section 4.15(h) shall not be applicable until such time after the Closing Date as: (i) Undrawn Availability is less than $10,000,000 on any date, or (ii) an Event of Default has occurred. (i) Adjustments. Subsequent the occurrence of an Event of Default, no Borrower will, without Agent's consent, compromise or adjust any Receivables (or extend the time for payment thereof) or accept any returns of merchandise or grant any additional discounts, allowances or credits thereon except for those compromises, adjustments, returns, discounts, credits and allowances as have been heretofore customary in the business of such Borrower. 4.16. Inventory. To the extent Inventory held for sale or lease has been produced by any Borrower, it has been and will be produced by such Borrower in accordance with the Federal Fair Labor Standards Act of 1938, as amended, and all rules, regulations and orders thereunder. 4.17. Maintenance of Equipment. The Equipment shall be maintained in good operating condition and repair (reasonable wear and tear excepted) and all necessary replacements of and repairs thereto shall be made so that the value and operating efficiency of the Equipment shall be maintained and preserved. 44 Borrower shall use and operate the Equipment in material compliance with all Applicable Law. Each Borrower shall have the right to sell Equipment to the extent set forth in Section 4.3 hereof. 4.18. Exculpation of Liability. Nothing herein contained shall be construed to constitute Agent or any Lender as any Borrower's agent for any purpose whatsoever, nor shall Agent or any Lender be responsible or liable for any shortage, discrepancy, damage, loss or destruction of any part of the Collateral wherever the same may be located and regardless of the cause thereof. Neither Agent nor any Lender, whether by anything herein or in any assignment or otherwise, assume any of any Borrower's obligations under any contract or agreement assigned to Agent or such Lender, and neither Agent nor any Lender shall be responsible in any way for the performance by any Borrower of any of the terms and conditions thereof. 4.19. Environmental Matters. (a) Borrowers shall ensure that the Real Property and Leasehold Interests are in material compliance with all Environmental Laws and they shall not place or permit to be placed any Hazardous Substances on any Real Property or Leasehold Interests except as permitted by applicable law or appropriate governmental authorities. (b) LESCO has established and shall maintain its "Environmental Safety Compliance Policy" to assure and monitor continued compliance with all applicable Environmental Laws. (c) Borrowers shall (i) employ in connection with the use of the Real Property and Leasehold Interests appropriate technology necessary to maintain material compliance with any applicable Environmental Laws and (ii) dispose of any and all Hazardous Waste generated at the Real Property and Leasehold Interests only at facilities, and transport with carriers, that maintain valid permits under RCRA and any other applicable Environmental Laws. Borrowers shall use their best efforts to obtain certificates of disposal, such as hazardous waste manifest receipts, from all treatment, transport, storage or disposal facilities or operators employed by Borrowers in connection with the transport or disposal of any Hazardous Waste generated at the Real Property or Leasehold Interests. (d) In the event any Borrower obtains, gives or receives notice of any Release or threat of Release of reportable quantities of any Hazardous Substances at the Real Property or Leasehold Interests (any such event being hereinafter referred to as a "Hazardous Discharge") or receives any notice of violation, request for information or notification that it is potentially responsible for investigation or cleanup of environmental conditions at the Real Property or Leasehold Interests, demand letter or complaint, order, citation, or other written notice with regard to any Hazardous Discharge or violation of Environmental Laws affecting the Real Property, Leasehold Interests or any Borrower's interest therein (any of the foregoing is referred to herein as an "Environmental Complaint") from any Person, including any state agency responsible in whole or in part for environmental matters in the state in which the Real Property or Leasehold Interests are located or the United States Environmental Protection Agency (any such person or entity hereinafter the "Authority"), then Borrowing Agent shall, within five (5) 45 Business Days, give written notice of same to Agent detailing facts and circumstances of which any Borrower is aware giving rise to the Hazardous Discharge or Environmental Complaint. Notwithstanding the foregoing, notice shall not be required to be given with respect to demands, complaints or notices of private (non-governmental) parties which are not material. Such information is to be provided to allow Agent to protect its security interest in the Collateral located on the Real Property and is not intended to create nor shall it create any obligation upon Agent or any Lender with respect thereto. Borrowers shall promptly forward to Agent copies of all documents and reports concerning a Hazardous Discharge at the Real Property or Leasehold Interests that any Borrower is required to file under any Environmental Laws. Such information is to be provided solely to allow Agent to protect Agent's security interest in the Collateral located on the Real Property and is not intended to create nor shall it create any obligation upon Agent or any Lender with respect thereto. (e) Borrowers shall promptly forward to Agent copies of any written request for information, notification of potential liability, demand letter relating to potential responsibility with respect to the investigation or cleanup of Hazardous Substances at any other site owned, operated or used by any Borrower to dispose of Hazardous Substances and shall continue to forward copies of correspondence between any Borrower and the Authority regarding such claims to Agent until the claim is settled. (f) Borrowers shall timely respond to any Hazardous Discharge or Environmental Complaint and take all necessary action in order to safeguard the health of any Person and to avoid subjecting the Collateral to any Lien. If any Borrower shall fail to respond promptly to any Hazardous Discharge or Environmental Complaint or any Borrower shall fail to comply with any of the requirements of any applicable Environmental Laws in any material respect, Agent on behalf of Lenders may, but without the obligation to do so, for the sole purpose of protecting Agent's interest in Collateral: (A) give such notices or (B) enter onto the Real Property or Leasehold Interests (or authorize third parties to enter onto such Real Property or Leasehold Interests) and take such actions as Agent (or such third parties as directed by Agent) reasonably deem necessary to clean up, remove, mitigate or otherwise deal with any such Hazardous Discharge or Environmental Complaint. All reasonable costs and expenses incurred by Agent and Lenders (or such third parties) in the exercise of any such rights, including any sums paid in connection with any judicial or administrative investigation or proceedings, fines and penalties, together with interest thereon from the date expended at the Default Rate for Domestic Rate Loans constituting Revolving Advances shall be paid upon demand by Borrowers, and until paid shall be added to and become a part of the Obligations secured by the Liens created by the terms of this Agreement or any other agreement between Agent, any Lender and any Borrower. (g) Upon the written request of Agent in Agent's reasonable discretion, Borrowers shall provide Agent, at Borrowers' expense, with an environmental site assessment or environmental audit report prepared by an environmental consultant acceptable to the Agent in its reasonable discretion, to assess the existence of a Hazardous Discharge and the potential costs in connection with abatement, cleanup and removal of any Hazardous Substances found on, under, at or within the Real Property or Leasehold Interests. Any report or investigation of such 46 Hazardous Discharge proposed and in a form acceptable to an appropriate Authority that is charged to oversee the clean-up of such Hazardous Discharge shall be acceptable to Agent. If such estimates, individually or in the aggregate, exceed $450,000, Agent shall have the right to require Borrowers to post a bond, letter of credit or other security reasonably satisfactory to Agent to secure payment of these costs and expenses. (h) Borrowers shall defend and indemnify Agent and Lenders and hold Agent, Lenders and their respective employees, agents, directors and officers harmless from and against all loss, liability, damage and expense, claims, costs, fines and penalties, including reasonable attorney's fees, suffered or incurred by Agent or Lenders under or on account of any Environmental Laws, including, without limitation, the assertion of any Lien thereunder, with respect to any Hazardous Discharge, the presence of any Hazardous Substances affecting the Real Property, whether or not the same originates or emerges from the Real Property or any contiguous real estate, except to the extent such loss, liability, damage and expense is attributable to any Hazardous Discharge resulting from actions on the part of Agent or any Lender. Borrowers' obligations under this Section 4.19 shall arise upon the discovery of the presence of any Hazardous Substances at the Real Property, whether or not any federal, state, or local environmental agency has taken or threatened any action in connection with the presence of any Hazardous Substances. Borrowers' obligation and the indemnifications hereunder shall survive the termination of this Agreement. (i) For purposes of Section 4.19 and 5.7, all references to Real Property shall be deemed to include all of Borrowers' right, title and interest in and to its owned and leased premises. 4.20. Financing Statements. Except as respects the financing statements filed by Agent and the financing statements described on Schedule 1.2(p), no financing statement covering any of the Collateral or any proceeds thereof is on file in any public office. V. REPRESENTATIONS AND WARRANTIES. Each Borrower represents and warrants as follows: 5.1. Authority. Each Borrower has full power, authority and legal right to enter into this Agreement and the Other Documents and to perform all its respective Obligations hereunder and thereunder. This Agreement and the Other Documents constitute the legal, valid and binding obligation of such Borrower enforceable against such Borrower in accordance with their terms, except as such enforceability may be limited by any applicable bankruptcy, insolvency, moratorium or similar laws affecting creditors' rights generally. The execution, delivery and performance of this Agreement and of the Other Documents (a) are within such Borrower's corporate or limited liability company powers, have been duly authorized, are not in contravention of law or the terms of such Borrower's by-laws, certificate of incorporation or other applicable documents relating to such Borrower's formation or to the conduct of such Borrower's business or of any 47 material agreement or undertaking to which such Borrower is a party or by which such Borrower is bound, and (b) will not conflict with nor result in any breach in any of the provisions of or constitute a default under or result in the creation of any Lien except Permitted Encumbrances upon any asset of such Borrower under the provisions of any agreement, charter document, instrument, by-law, or other instrument to which such Borrower is a party or by which it or its property may be bound. 5.2. Formation and Qualification. (a) Each Borrower is duly incorporated or organized and in good standing or full force and effect under the laws of the state listed on Schedule 5.2(a) and is qualified to do business and is in good standing or in full force and effect in the states listed on Schedule 5.2(a) which constitute all states in which qualification and good standing or full force and effect are necessary for such Borrower to conduct its business and own its property and where the failure to so qualify could reasonably be expected to have a Material Adverse Effect. Each Borrower has delivered to Agent true and complete copies of its articles of incorporation and by-laws or operating agreement and will promptly notify Agent of any amendment or changes thereto. (b) The only Subsidiaries of each Borrower are listed on Schedule 5.2(b). 5.3. Survival of Representations and Warranties. All representations and warranties of such Borrower contained in this Agreement and the Other Documents shall be true at the time of such Borrower's execution of this Agreement and the Other Documents, and shall survive the execution, delivery and acceptance thereof by the parties thereto and the closing of the transactions described therein or related thereto. 5.4. Tax Returns. Each Borrower's federal tax identification number is set forth on Schedule 5.4. Each Borrower has filed all federal, state and local tax returns and other reports each is required by law to file and has paid all taxes, assessments, fees and other governmental charges that are due and payable, except to the extent that such Borrower is contesting or disputing such taxes, assessments or Charges in good faith, by protest, administrative or judicial appeal or similar proceedings all conducted in an expeditious manner, provided that any related tax lien is stayed and sufficient reserves are established to the reasonable satisfaction of the Agent to protect the security interest and Liens on the Collateral in favor of the Agent for the benefit of the Lenders. Federal, state and local income tax returns of each Borrower have been examined and reported upon by the appropriate taxing authority or closed by applicable statute and satisfied for all fiscal years prior to and including the fiscal year ending December 31, 2002. The provision for taxes on the books of each Borrower are adequate for all years not closed by applicable statutes, and for its current fiscal year, and no Borrower has any knowledge of any deficiency or additional assessment in connection therewith not provided for on its books. 5.5. Financial Statements. (a) The pro forma balance sheet of Borrowers on a consolidated basis, which is based on financial statements for the seven (7) months ended July, 2005, taking into account 48 pro forma adjustments related to the consummation of the transactions contemplated under this Agreement and under the TCS Sales Agreement and the TCS Supply Agreement, (the "Pro Forma Balance Sheet") furnished to Agent on the Closing Date reflects the consummation of the TCS Sales Agreement and the other transactions contemplated under this Agreement (the "Transactions") and is accurate, complete and correct and fairly reflects the financial condition of Borrowers on a consolidated basis as of the Closing Date after giving effect to the Transactions, and has been prepared in accordance with GAAP, consistently applied. The Pro Forma Balance Sheet has been certified as accurate, complete and correct in all material respects by the Vice President and Chief Financial Officer of LESCO. All financial statements referred to in this subsection 5.5(a), including the related schedules and notes thereto, have been prepared, in accordance with GAAP, except as may be disclosed in such financial statements. (b) The five year cash flow projections of the Borrowers on a consolidated basis for the fiscal years ended December 31, 2005, 2006, 2007, 2008 and 2009, and their projected balance sheets as of the Closing Date, copies of which are annexed hereto as Exhibit 5.5(b) (the "Projections") were prepared under the supervision of the Chief Financial Officer of LESCO, are based on underlying assumptions which provide a reasonable basis for the projections contained therein and reflect Borrowers' judgment based on present circumstances of the most likely set of conditions and course of action for the projected period, all the foregoing subject to the forward looking cautionary language and risk factors set forth in LESCO's periodic statements filed from time to time with the Securities and Exchange Commission. The cash flow Projections together with the Pro Forma Balance Sheet, are referred to as the "Pro Forma Financial Statements". (c) The consolidated and consolidating balance sheets of the Borrowers, their Subsidiaries and such other Persons described therein (including the accounts of all Subsidiaries for the respective periods during which a subsidiary relationship existed) as of December 31, 2004 and the related statements of income, changes in stockholder's equity, and changes in cash flow for the period ended on such date, the consolidated balance sheet and consolidated statements being accompanied by reports thereon containing opinions without qualification by independent certified public accountants, copies of which have been delivered to Agent, have been prepared in accordance with GAAP, consistently applied (except for changes in application in which such accountants concur and present fairly the financial position of the Borrowers at such date and the results of their operations for such period. Since December 31, 2004, there has been no change in the condition, financial or otherwise, of Borrowers as shown on the consolidated balance sheet as of such date and, other than in connection with the consummation of the transactions contemplated by the TCS Sales Agreement, no change in the aggregate value of machinery, equipment and Real Property owned by Borrowers, except changes in the ordinary course of business, none of which individually or in the aggregate has been materially adverse. 5.6. Corporate Name. Except as set forth on Schedule 5.6, no Borrower (a) has been known by any other corporate name in the past five years, (b) sells Inventory under any other name, and (c) has been the surviving corporation of a merger or consolidation or acquired all or substantially all of the assets of any Person during the preceding five (5) years. 49 5.7. O.S.H.A. and Environmental Compliance. (a) Each Borrower has duly complied with, and its facilities, business, assets, property, Leasehold Interests and Equipment are in compliance in all material respects with, the provisions of the Federal Occupational Safety and Health Act (29 U.S.C. Section 651, et seq.) and all applicable Environmental Laws; except as set forth on Schedule 5.7, there are no material outstanding citations, notices or orders of non-compliance issued to any Borrower or relating to its business, assets, property, Leasehold Interests or Equipment under any such laws, rules or regulations. (b) Each Borrower has been issued all material required federal, state and local licenses, certificates or permits relating to all applicable Environmental Laws. (c) (i) There are no visible signs of material releases, spills, discharges, leaks or disposal (collectively referred to as "Releases") of Hazardous Substances at, upon, under or within any Real Property or Leasehold Interests; (ii) during its ownership or lease of the Real Property and Leasehold Interests, no underground storage tanks or polychlorinated biphenyls were placed on the Real Property and Leasehold Interests, and to the Borrowers' knowledge there are no underground storage tanks or polychlorinated biphenyls on the Real Property or Leasehold Interests which were placed on the Real Property of Leasehold Improvements prior to the Borrower's purchase or lease of Real Property or Leasehold Interests; (iii) during its ownership or lease of the Real Property and Leasehold Interests, neither the Real Property nor any Leasehold Interests has ever been used as a treatment, storage or disposal facility of Hazardous Waste, and to the Borrowers knowledge, neither the Real Property nor any Leasehold Interests has ever been used as a treatment, storage or disposal facility of Hazardous Waste prior to the Borrower's purchase or lease of the Real Property or Leasehold Interests; and (iv) no Hazardous Substances are present on the Real Property or Leasehold Interests, excepting (i) such quantities as are handled in accordance with all applicable manufacturer's instructions and governmental regulations and in proper storage containers and as are necessary for the operation of the commercial business of any Borrower, and (ii) Hazardous Substances placed on the Real Property and Leasehold Interests prior to the Borrowers' purchase or lease of the Real Property and Leasehold Interests, of which the Borrower has no knowledge of the presence of such Hazardous Substances. 5.8. Solvency; No Litigation, Violation, Indebtedness or Default. (a) Borrowers are solvent, able to pay their debts as they mature, have capital sufficient to carry on their business and all businesses in which they are about to engage, and (i) as of the Closing Date, the fair present saleable value of their assets, calculated on a going concern basis, is in excess of the amount of their liabilities and (ii) subsequent to the Closing Date, the fair saleable value of their assets (calculated on a going concern basis) will be in excess of the amount of their liabilities. (b) Except as disclosed in Schedule 5.8(b), no Borrower has (i) any pending or threatened litigation, arbitration, actions or proceedings which involve the possibility of having a Material Adverse Effect, and (ii) any liabilities nor indebtedness for borrowed money other than the Obligations. 50 (c) No Borrower is in violation of any applicable statute, regulation or ordinance in any respect which could reasonably be expected to have a Material Adverse Effect, nor is any Borrower in material violation of any order of any court, governmental authority or arbitration board or tribunal. (d) No Borrower nor any member of the Controlled Group maintains or contributes to any Plan other than those listed on Schedule 5.8(d) hereto. Except as set forth in Schedule 5.8(d), (i) no Plan has incurred any "accumulated funding deficiency", as defined in Section 302(a)(2) of ERISA and Section 412(a) of the Code, whether or not waived, and each Borrower and each member of the Controlled Group has met all applicable minimum funding requirements under Section 302 of ERISA in respect of each Plan, (ii) each Plan which is intended to be a qualified plan under Section 401(a) of the Code as currently in effect has been determined by the Internal Revenue Service to be qualified under Section 401(a) of the Code and the trust related thereto is exempt from federal income tax under Section 501(a) of the Code, (iii) no Borrower nor any member of the Controlled Group has incurred any liability to the PBGC other than for the payment of premiums, and there are no premium payments which have become due which are unpaid, (iv) no Plan has been terminated by the plan administrator thereof nor by the PBGC, and there is no occurrence which would cause the PBGC to institute proceedings under Title IV of ERISA to terminate any Plan, (v) at this time, the current value of the assets of each Plan exceeds the present value of the accrued benefits and other liabilities of such Plan and no Borrower nor any member of the Controlled Group knows of any facts or circumstances which would materially change the value of such assets and accrued benefits and other liabilities, (vi) no Borrower nor any member of the Controlled Group has materially breached any of the responsibilities, obligations or duties imposed on it by ERISA with respect to any Plan, (vii) no Borrower nor any member of a Controlled Group has incurred any liability for any excise tax arising under Section 4972 or 4980B of the Code, and no fact exists which could give rise to any such liability, (viii) no Borrower nor any member of the Controlled Group nor any fiduciary of, nor any trustee to, any Plan, has engaged in a "prohibited transaction" described in Section 406 of the ERISA or Section 4975 of the Code for which an exemption is not available nor taken any action which would constitute or result in a Termination Event with respect to any such Plan which is subject to ERISA, (ix) each Borrower and each member of the Controlled Group has made all contributions due and payable with respect to each Plan, (x) there exists no event described in Section 4043(b) of ERISA, for which the thirty (30) day notice period contained in 29 CFR Section 2615.3 has not been waived, (xi) no Borrower nor any member of the Controlled Group has any fiduciary responsibility for investments with respect to any plan existing for the benefit of persons other than employees or former employees of any Borrower and any member of the Controlled Group, and (xii) no Borrower nor any member of the Controlled Group has withdrawn, completely or partially, from any Multiemployer Plan so as to incur liability under the Multiemployer Pension Plan Amendments Act of 1980. 5.9. Patents, Trademarks, Copyrights and Licenses. All registered patents, patent applications, trademarks, trademark applications, service marks, service mark applications, copyrights, copyright and copyright applications and all material design rights, tradenames, assumed names, trade secrets and licenses owned or utilized by any Borrower are set forth on Schedule 5.9 are valid and have been duly registered or filed with all appropriate governmental authorities or are valid by reason of common law rights and 51 constitute all of the material intellectual property rights which are necessary for the operation of its business; there is no material objection to or pending challenge to the validity of any such patent, trademark, copyright, design right, tradename, trade secret or license and no Borrower is aware of any grounds for any challenge, except as set forth in Schedule 5.9 hereto. Each patent, patent application, patent license, trademark, trademark application, trademark license, service mark, service mark application, service mark license, design right, copyright, copyright application and copyright license owned or held by any Borrower and all trade secrets used by any Borrower consist of original material or property developed by such Borrower or was lawfully acquired by such Borrower from the proper and lawful owner thereof. Each of such items has been maintained so as to preserve the value thereof from the date of creation or acquisition thereof. With respect to all material software used by any Borrower, such Borrower possesses a license to use or is in possession of all source and object codes related to each such piece of software or is the beneficiary of a source code escrow agreement, each such source code escrow agreement being listed on Schedule 5.9 hereto. 5.10. Licenses and Permits. Except as set forth in Schedule 5.10, each Borrower (a) is in material compliance with and (b) has procured and is now in possession of, all material licenses or permits required by any applicable federal, state or local law or regulation for the operation of its business in each jurisdiction wherein it is now conducting or proposes to conduct business and where the failure to procure such licenses or permits could have a Material Adverse Effect. 5.11. Default of Indebtedness. No Borrower is in default in the payment of the principal of or interest on any Indebtedness or under any instrument or agreement under or subject to which any Indebtedness has been issued and no event has occurred under the provisions of any such instrument or agreement which with or without the lapse of time or the giving of notice, or both, constitutes or would constitute an event of default thereunder. 5.12. No Default. No Borrower is in default in the payment or performance of any of its contractual obligations and no Default has occurred. 5.13. No Burdensome Restrictions. No Borrower is party to any contract or agreement the performance of which could have a Material Adverse Effect. No Borrower has agreed or consented to cause or permit in the future (upon the happening of a contingency or otherwise) any of its property, whether now owned or hereafter acquired, to be subject to a Lien which is not a Permitted Encumbrance. 5.14. No Labor Disputes. No Borrower is involved in any labor dispute; there are no strikes or walkouts or union organization of any Borrower's employees threatened or in existence and no labor contract is scheduled to expire during the Term other than as set forth on Schedule 5.14 hereto. 52 5.15. Margin Regulations. No Borrower is engaged, nor will it engage, principally or as one of its important activities, in the business of extending credit for the purpose of "purchasing" or "carrying" any "margin stock" within the respective meanings of each of the quoted terms under Regulation U of the Board of Governors of the Federal Reserve System as now and from time to time hereafter in effect. No part of the proceeds of any Advance will be used for "purchasing" or "carrying" "margin stock" as defined in Regulation U of such Board of Governors. 5.16. Investment Company Act. No Borrower is an "investment company" registered or required to be registered under the Investment Company Act of 1940, as amended, nor is it controlled by such a company. 5.17. Disclosure. No representation or warranty made by any Borrower in this Agreement or in any financial statement, report, certificate or any other document furnished in connection herewith or therewith contains any untrue statement of a material fact or omits to state any material fact necessary to make the statements herein or therein not misleading. There is no fact known to Borrowers or which reasonably should be known to Borrowers which Borrowers have not disclosed to Agent in writing with respect to the transactions contemplated by this Agreement which could reasonably be expected to have a Material Adverse Effect. 5.18. Intentionally Omitted. 5.19. Swaps. Except for the Interest Rate Protection Agreement set forth on Schedule 5.19, no Borrower is a party to, nor will it be a party to, any swap agreement whereby such Borrower has agreed or will agree to swap interest rates or currencies unless the same provides that damages upon termination following an event of default thereunder are payable on an unlimited "two-way basis" without regard to fault on the part of either party. 5.20. Conflicting Agreements. No provision of any mortgage, indenture, contract, agreement, judgment, decree or order binding on any Borrower or affecting the Collateral conflicts with, or requires any Consent which has not already been obtained to, or would in any way prevent the execution, delivery or performance of, the terms of this Agreement or the Other Documents. 5.21. Application of Certain Laws and Regulations. No Borrower is subject to any statute, rule or regulation which regulates the incurrence of any Indebtedness, including without limitation, statutes or regulations relative to common or interstate carriers or to the sale of electricity, gas, steam, water, telephone, telegraph or other public utility services. 53 5.22. Business and Property of Borrowers. Upon and after the Closing Date, Borrowers do not propose to engage in any business other than the manufacture, sale and distribution of consumable goods and hard goods used on golf courses and lawns and activities necessary to conduct the foregoing. On the Closing Date, each Borrower will own all the property and possess all of the material rights and Consents necessary for the conduct of the business of such Borrower. 5.23. Section 20 Subsidiaries. Borrowers do not intend to use and shall not use any portion of the proceeds of the Advances, directly or indirectly, to purchase during the underwriting period, or for 30 days thereafter, Ineligible Securities being underwritten by a Section 20 Subsidiary. 5.24. Anti-Terrorism Laws. (a) General. None of the Borrowers nor or any Affiliate of any Borrower, is in violation of any Anti-Terrorism Law or engages in or conspires to engage in any transaction that evades or avoids, or has the purpose of evading or avoiding, or attempts to violate, any of the prohibitions set forth in any Anti-Terrorism Law. (b) Executive Order No. 13224. None of the Borrowers nor any Affiliate thereof, or any of their respective agents acting or benefiting in any capacity in connection with the Advances, Letters of Credit or other transactions hereunder, is any of the following (each a "Blocked Person"); (i) a Person that is listed in the annex to, or is otherwise subject to the provisions of, the Executive Order No. 13224; (ii) a Person owned or controlled by, or acting for or on behalf of, any Person that is listed in the annex to, or is otherwise subject to the provisions of, the Executive Order No. 13224; (iii) a Person or entity with which any Lender is prohibited from dealing or otherwise engaging in any transaction by any Anti-Terrorism Law; (iv) a Person or entity that commits, threatens or conspires to commit or supports "terrorism" as defined in the Executive Order No. 13224; (v) a Person or entity that is named as a "specially designated national" on the most current list published by the U.S. Treasury Department Office of Foreign Asset Control at its official website or any replacement website or other replacement official publication of such list; or (vi) a Person or entity who is affiliated or associated with a Person or entity listed above. 54 No Borrower nor or any Affiliate thereof, or to the knowledge of any Borrower or any Affiliate thereof, any of their respective agents acting in any capacity in connection with the Advances, Letters of Credit or other transactions hereunder (i) conducts any business or engages in making or receiving any contribution of funds, goods or services to or for the benefit of any Blocked Person, or (ii) deals in, or otherwise engages in any transaction relating to any property or interests in property blocked pursuant to the Executive Order No. 13224. VI. AFFIRMATIVE COVENANTS. Each Borrower (unless the context otherwise indicates that the provision applies only to LESCO) shall, until payment in full of the Obligations and termination of this Agreement: 6.1. Payment of Fees. Pay to Agent on demand all usual and customary fees and expenses which Agent incurs in connection with (a) the forwarding of Advance proceeds and (b) the establishment and maintenance of any Blocked Accounts or Depository Accounts as provided for in Section 4.15(h). Agent may, without making demand, charge Borrowers' Account for all such fees and expenses. 6.2. Conduct of Business and Maintenance of Existence and Assets. (a) Conduct continuously and operate actively in all material respects its business according to good business practices and maintain all of its properties useful or necessary in its business in good working order and condition (reasonable wear and tear excepted and except as may be disposed of in accordance with the terms of this Agreement), including, without limitation, all licenses, patents, copyrights, design rights, tradenames, trade secrets and trademarks and take all actions necessary to enforce and protect the validity of any intellectual property right or other right included in the Collateral; (b) keep in full force and effect its existence and comply in all material respects with the laws and regulations governing the conduct of its business where the failure to do so could reasonably be expected to have a Material Adverse Effect; and (c) in all material respects make all such reports and pay all such franchise and other taxes and license fees and do all such other acts and things as may be lawfully required to maintain its rights, licenses, leases, powers and franchises under the laws of the United States or any political subdivision thereof. 6.3. Violations. Promptly notify Agent in writing of any violation of any law, statute, regulation or ordinance of any Governmental Body, or of any agency thereof, applicable to any Borrower which could reasonably be expected to have a Material Adverse Effect. 6.4. Government Receivables. Take all steps necessary to protect Agent's interest in the Collateral under the Federal Assignment of Claims Act or other applicable state or local statutes or ordinances and deliver to Agent appropriately endorsed, any instrument or chattel paper connected with any Receivable 55 arising out of contracts between any Borrower and the United States, any state or any department, agency or instrumentality of any of them. 6.5. Intentionally Omitted. 6.6. Fixed Charge Coverage Ratio. Commencing with the fiscal quarter ending December 31, 2005, and at the end of each fiscal quarter thereafter, Borrowers on a consolidated basis shall maintain a Fixed Charge Coverage Ratio of not less than 1.0 to 1.0, as calculated at the end of each such fiscal quarter for the four fiscal quarters then ended. 6.7. [Intentionally Omitted]. 6.8. Landlord's Waivers. Provide to the Agent executed landlord and warehouseman agreements or reaffirmations of landlord and warehouseman agreements delivered under the Existing Loan Agreement satisfactory to Agent with respect to all premises leased by Borrowers at which Inventory is located (and for which Agent has not received such agreements prior to the Closing Date) within ninety (90) days after the Closing Date. In the event that any Inventory is located on a premises for which an acceptable landlord or warehouseman agreement has not been obtained during such period, the Borrowers hereby acknowledge and agree that the Agent shall reduce the Formula Amount calculated under Section 2.1(a)(i) by an amount established by the Agent in its sole reasonable discretion (but in the case of leased premises, in no event more than three months of rental payments related to such premises) for which an acceptable landlord or warehouseman agreement has not been obtained. 6.9. Execution of Supplemental Instruments. Execute and deliver to Agent from time to time, upon demand, such supplemental agreements, statements, assignments and transfers, or instructions or documents relating to the Collateral, and such other instruments as Agent may request, in order that the full intent of this Agreement may be carried into effect. 6.10. Payment of Indebtedness, Including Taxes, Etc. Pay, discharge or otherwise satisfy at or before maturity (subject, where applicable, to specified grace periods and, in the case of the trade payables, to normal payment practices) all its obligations and liabilities of whatever nature, including all taxes, assessments, and governmental charges upon it or any of its properties, assets, income or profits, except when the failure to do so could not reasonably be expected to have a Material Adverse Effect or when the amount or validity thereof is currently being contested in good faith by appropriate proceedings and each Borrower shall have provided for such reserves as Agent may reasonably deem proper and necessary, subject at all times to any applicable subordination arrangement in favor of Lenders. 56 6.11. Standards of Financial Statements. Cause all financial statements referred to in Sections 9.7, 9.8, 9.9, 9.10, 9.11, 9.12, 9.13 and 9.14 as to which GAAP is applicable to be complete and correct in all material respects (subject, in the case of interim financial statements, to normal year-end audit adjustments) and to be prepared in reasonable detail and in accordance with GAAP applied consistently throughout the periods reflected therein (except as concurred in by such reporting accountants or officer, as the case may be, and disclosed therein). 6.12. Inventory Appraisals. Cause an appraisal of the Inventory of Borrowers to be performed by an appraisal firm satisfactory to the Agent either prior to subsequent to the Closing Date and at the expense of the Borrowers. Prior to the occurrence and continuation of an Event of Default, additional appraisals shall be at the expense of the Lenders. After the occurrence and during the continuation of an Event of Default, all such appraisals shall be at the expense of the Borrowers. 6.13. Field Examinations. Cause examinations of Collateral to be performed by the Agent or, at Agent's option, a firm satisfactory to the Agent at least once annually. Prior to the occurrence and continuation of an Event of Default, and so long as after the Closing Date Undrawn Availability is greater than $10,000,000 at all times, the Borrowers shall pay the expenses of such field examinations one time per year. Prior to the occurrence of an Event of Default, field examinations in excess of one time per year shall be at the expense of the Lenders. After the occurrence and during the continuation of an Event of Default, or at such time as Undrawn Availability does not exceed $10,000,000, all such field examinations shall be at the expense of the Borrowers. 6.14. Anti-Terrorism Laws. Not nor shall any of their respective Affiliates (i) conduct any business or engage in any transaction or dealing with any Blocked Person, including the making or receiving any contribution of funds, goods or services to or for the benefit of any Blocked Person, (ii) deal in, or otherwise engage in any transaction relating to, any property or interest in property blocked pursuant to the Executive Order No. 13224; or (iii) engage in or conspire to engage in any transaction that evades or avoids, or has the purpose of evading or avoiding, or attempts to violate, any of the prohibitions set forth in the Executive Order No. 13224, the USA Patriot Act or any other Anti-Terrorism Law. Borrowers shall deliver to Lenders any certification or other evidence, from time to time requested by any Lender in its sole discretion, confirming Borrowers' compliance with this Section 6.14. VII. NEGATIVE COVENANTS. No Borrower shall, until satisfaction in full of the Obligations and termination of this Agreement: 57 7.1. Merger, Consolidation, Acquisition and Sale of Assets. (a) Enter into any merger, consolidation or other reorganization with or into any other Person or acquire all or a substantial portion of the assets or stock of any Person or permit any other Person to consolidate with or merge with it. (b) Sell, lease, transfer or otherwise dispose of any of its properties or assets, except (i) in the ordinary course of its business, (ii) as provided in Section 4.3, and (iii) the sale, lease and transfer of assets which are not Collateral for which the aggregate fair market value of such assets does not exceed $1,000,000. 7.2. Creation of Liens. Create or suffer to exist any Lien or transfer upon or against any of its property or assets now owned or hereafter acquired, except Permitted Encumbrances. 7.3. Guarantees. Become liable upon the obligations of any Person by assumption, endorsement or guaranty thereof or otherwise (other than to Lenders) except the endorsement of checks in the ordinary course of business. 7.4. Investments. Purchase or acquire obligations or stock of, or any other interest in, any Person, except (a) obligations issued or guaranteed by the United States of America or any agency thereof, (b) commercial paper with maturities of not more than 180 days and a published rating of not less than A-1 or P-1 (or the equivalent rating), (c) certificates of time deposit and bankers' acceptances having maturities of not more than 180 days and repurchase agreements backed by United States government securities of a commercial bank if (i) such bank has a combined capital and surplus of at least $500,000,000, or (ii) its debt obligations, or those of a holding company of which it is a Subsidiary, are rated not less than A (or the equivalent rating) by a nationally recognized investment rating agency, and (d) U.S. money market funds that invest solely in obligations issued or guaranteed by the United States of America or an agency thereof. 7.5. Loans. Make advances, loans or extensions of credit to any Person, including without limitation, any Parent, Subsidiary or Affiliate except (i) with respect to the extension of commercial trade credit in connection with the sale of Inventory in the ordinary course of its business, and (ii) loans by LSI and Technologies to LESCO. 7.6. Intentionally Omitted. 7.7. Dividends. Except for (i) non-cash dividends made in accordance with the terms of any Borrower's incentive compensation plans, or (ii) dividends made by LSI and Technologies to LESCO, 58 declare, pay or make any dividend or distribution on any shares of the common stock or preferred stock of any Borrower (other than dividends or distributions payable in its stock, or split-ups or reclassifications of its stock) or apply any of its funds, property or assets to the purchase, redemption or other retirement of any common or preferred stock, or of any options to purchase or acquire any such shares of common or preferred stock of any Borrower except that so long as (a) a notice of termination with regard to this Agreement shall not be outstanding, (b) no Event of Default or Default shall have occurred, and (c) the purpose for such purchase, redemption or dividend shall be as set forth in writing to Agent at least ten (10) days prior to such purchase, redemption or dividend and such purchase, redemption or dividend shall in fact be used for such purpose: (A) LESCO shall be permitted to pay cash dividends if after giving effect to such payment of cash dividends (x) the Borrowers shall have Undrawn Availability greater than $10,000,000 during the entire period commencing ninety (90) days prior to such dividend and after giving effect to such dividend, and (y) there shall not exist any Event of Default or Default, and (B) LESCO shall be permitted to repurchase or redeem its capital stock if after giving effect to such repurchase or redemption (x) the Formula Amount exceeds the outstanding Revolving Advances by an amount greater than $10,000,000 during the entire period commencing ninety (90) days prior to such repurchase or redemption and after giving effect to such repurchase or redemption, (y) the Borrowers shall have Undrawn Availability greater than $5,000,000 during the entire period commencing ninety (90) days prior to such repurchase or redemption and after giving effect to such repurchase or redemption, and (z) there shall not exist any Event of Default or Default. In addition to the foregoing, the aggregate amount of all dividends, repurchases and redemptions made pursuant to the previous sentence shall not exceed $30,000,000 in the aggregate. 7.8. Indebtedness. Create, incur, assume or suffer to exist any Indebtedness (exclusive of trade debt) except in respect of (i) Indebtedness to Lenders; (ii) Indebtedness incurred for capital expenditures; (iii) Indebtedness set forth on Schedule 7.8; (iv) Indebtedness of LESCO to LSI and Technologies, and (v) other unsecured Indebtedness on terms acceptable to the Agent not in excess of $25,000,000 at any one time outstanding. 7.9. Nature of Business. Substantially change the nature of the business in which it is presently engaged, nor except as specifically permitted hereby purchase or invest, directly or indirectly, in any assets or property other than in the ordinary course of business for assets or property which are useful in, necessary for and are to be used in its business as presently conducted. 59 7.10. Transactions with Affiliates. Directly or indirectly, purchase, acquire or lease any property from, or sell, transfer or lease any property to, or otherwise deal with, any Affiliate, except transactions in the ordinary course of business, on an arm's-length basis on terms no less favorable than terms which would have been obtainable from a Person other than an Affiliate. 7.11. Leases. Enter as lessee into any lease arrangement for real or personal property (unless capitalized) if after giving effect thereto, aggregate annual rental payments for all leased property in the aggregate for all the Borrowers would exceed (i) $30,000,000 in the fiscal year ended December 31, 2005; or (iii) $34,000,000 in the fiscal year ended December 31, 2006 or thereafter. 7.12. Subsidiaries. (a) Form any Subsidiary. (b) Enter into any partnership, joint venture or similar arrangement. 7.13. Fiscal Year and Accounting Changes. Change its fiscal year from January 1 to December 31 or make any change (i) in accounting treatment and reporting practices except as required by GAAP or (ii) in tax reporting treatment except as required by law. 7.14. Pledge of Credit. Now or hereafter pledge Agent's or any Lender's credit on any purchases or for any purpose whatsoever or use any portion of any Advance in or for any business other than such Borrower's business as conducted on the date of this Agreement. 7.15. Amendment of Articles of Incorporation, By-Laws. Amend, modify or waive any term or material provision of its Articles of Incorporation or By-Laws unless required by law. 7.16. Compliance with ERISA. (i) (x) Maintain, or permit any member of the Controlled Group to maintain, or (y) become obligated to contribute, or permit any member of the Controlled Group to become obligated to contribute, to any Plan, other than those Plans disclosed on Schedule 5.8(d), (ii) engage, or permit any member of the Controlled Group to engage, in any non-exempt "prohibited transaction", as that term is defined in section 406 of ERISA and Section 4975 of the Code, (iii) incur, or permit any member of the Controlled Group to incur, any "accumulated funding deficiency", as that term is defined in Section 302 of ERISA or Section 412 of the Code, (iv) terminate, or permit any member of the Controlled Group to terminate, any defined benefit 60 pension plan where such event could result in any material liability for underfunding of any Borrower or any member of the Controlled Group or the imposition of a lien on the property of any Borrower or any member of the Controlled Group pursuant to Section 4068 of ERISA, (v) assume, or permit any member of the Controlled Group to assume, any obligation to contribute to any Multiemployer Plan not disclosed on Schedule 5.8(d), (vi) incur, or permit any member of the Controlled Group to incur, any withdrawal liability to any Multiemployer Plan; (vii) fail promptly to notify Agent of the occurrence of any Termination Event, (viii) fail to comply, or permit a member of the Controlled Group to fail to comply in all material respects, with the requirements of ERISA or the Code or other applicable laws in respect of any Plan, (ix) fail to meet, or permit any member of the Controlled Group to fail to meet, all minimum funding requirements under ERISA or the Code or postpone or delay or allow any member of the Controlled Group to postpone or delay any funding requirement with respect of any Plan. 7.17. Prepayment of Indebtedness. At any time, directly or indirectly, prepay any Indebtedness (other than to Lenders), or repurchase, redeem, retire or otherwise acquire any Indebtedness of any Borrower. 7.18. Other Agreements. Either (i) enter into any amendment or modification of the Accounts Sales Agreement or the TCS Sales Agreement, or (ii) enter into any amendment or modification of the TCS Supply Agreement which would adversely affect the Collateral or be adverse in a material manner to the interests of the Lenders, provided that Borrowers may enter into any amendments or modifications as they expressly relate to the service levels being provided pursuant to the TSA (as defined in the TCS Supply Agreement). VIII. CONDITIONS PRECEDENT. 8.1. Conditions to Initial Advances. The agreement of Lenders to make the initial Advances requested to be made on the Closing Date is subject to the satisfaction, or waiver by Lenders, immediately prior to or concurrently with the making of such Advances, of the following conditions precedent: (a) Note; Other Documents. Agent shall have received the Notes and the Other Documents duly executed and delivered by an authorized officer of each Borrower; (b) Filings, Registrations and Recordings. Each document (including, without limitation, any Uniform Commercial Code financing statement) required by this Agreement, any related agreement or under law or reasonably requested by the Agent to be filed, registered or recorded in order to create, in favor of Agent, a perfected security interest in or lien upon the Collateral shall have been properly filed, registered or recorded in each jurisdiction in which the filing, registration or recordation thereof is so required or requested, and Agent shall have received an acknowledgment copy, or other evidence satisfactory to it, of each such filing, registration or recordation and satisfactory evidence of the payment of any necessary fee, tax or expense relating thereto; 61 (c) Corporate Proceedings of Borrowers. Agent shall have received a copy of the resolutions in form and substance reasonably satisfactory to Agent, of the Board of Directors or Board of Managers of each Borrower authorizing (i) the execution, delivery and performance of this Agreement, the Notes and any related agreements, (collectively the "Documents") and (ii) the granting by each Borrower of the security interests in and liens upon the Collateral in each case certified by the Secretary or an Assistant Secretary of each Borrower as of the Closing Date; and, such certificate shall state that the resolutions thereby certified have not been amended, modified, revoked or rescinded as of the date of such certificate; (d) Incumbency Certificates of Borrowers. Agent shall have received a certificate of the Secretary or an Assistant Secretary of each Borrower, dated the Closing Date, as to the incumbency and signature of the officers of each Borrower executing this Agreement, any certificate or other documents to be delivered by it pursuant hereto, together with evidence of the incumbency of such Secretary or Assistant Secretary; (e) Intentionally Omitted (f) Intentionally Omitted (g) Certificates. Agent shall have received a copy of the Articles or Certificate of Incorporation or Articles of Organization of each Borrower, and all amendments thereto, certified by the Secretary of State or other appropriate official of its jurisdiction of incorporation together with copies of the By-Laws or Operating Agreement of each Borrower and all agreements of each Borrower's shareholders certified as accurate and complete by the Secretary of each Borrower; (h) Good Standing Certificates. Agent shall have received good standing certificates for each Borrower dated not more than forty-five (45) days prior to the Closing Date, issued by the Secretary of State or other appropriate official of each Borrower's jurisdiction of incorporation and each jurisdiction where the conduct of each Borrower's business activities or the ownership of its properties necessitates qualification; (i) Legal Opinion. Agent shall have received the executed legal opinion of Baker & Hostetler in form and substance satisfactory to Agent which shall cover such matters incident to the transactions contemplated by this Agreement, the Notes and related agreements as Agent may reasonably require and each Borrower hereby authorizes and directs such counsel to deliver such opinion to Agent and Lenders; (j) No Litigation. (v) No litigation, investigation or proceeding before or by any arbitrator or Governmental Body shall be continuing or threatened against any Borrower or against the officers or directors of any Borrower (A) in connection with the Other Documents or any of the transactions contemplated thereby and which, in the reasonable opinion of Agent, is deemed material or (B) which could, in the reasonable opinion of Agent, have a Material Adverse Effect; and (vi) no injunction, writ, restraining order or other order of any nature materially adverse to any Borrower or the conduct of its business or inconsistent with the due consummation of the Transactions shall have been issued by any Governmental Body; 62 (k) Financial Condition Certificates. Agent shall have received an executed Financial Condition Certificate in the form of Exhibit 8.1(k). (l) Collateral Examination. Agent shall have completed Collateral examinations, the results of which shall be satisfactory in form and substance to Lenders, of the Receivables and Inventory and all books and records in connection therewith; (m) Fees. Agent shall have received all fees payable to Agent and Lenders on or prior to the Closing Date pursuant to Article III hereof and the Fee Letter; (n) Pro Forma Financial Statements. Agent shall have received a copy of the Pro Forma Financial Statements which shall be satisfactory in all respects to Lenders; (o) Payment of Existing Indebtedness. The Indebtedness under the Existing Loan Agreement shall be indefeasibly paid in full, and the Existing Loan Agreement shall have been terminated. (p) Accounts Sales Agreement. The Borrowers shall have delivered to the Agent such evidence as required by the Agent that the Accounts Sales Agreement, the GE Program Agreement, and all related documents, and the Intercreditor Agreement remain in full force and effect after giving effect to the Transactions, which evidence shall be satisfactory in form and content to the Agent and the Lenders. (q) Insurance. Agent shall have received in form and substance satisfactory to Agent, certified copies of Borrowers' casualty insurance policies, together with loss payable endorsements on Agent's standard form of loss payee endorsement naming Agent as loss payee, and certified copies of Borrowers' liability insurance policies, together with endorsements naming Agent as a co-insured; (r) TCS Sales Agreement. The Borrowers shall have delivered to the Agent true and correct copies of the TCS Sales Agreement, the TCS Supply Agreement, and all related documents, and the Subordination Agreement in the form of Exhibit 8.1(r) attached hereto and executed by TCS, which agreements shall be satisfactory in form and content to the Agent and the Lenders. The Borrowers shall have effected the closing under the TCS Sales Agreement and realized the sale proceeds with respect thereto simultaneously with the closing of the initial Advances on the Closing Date. (s) Intentionally Omitted. (t) Payment Instructions. Agent shall have received written instructions from Borrowers directing the application of proceeds of the initial Advances made pursuant to this Agreement; (u) Projections. Agent shall have received the Projections which shall be acceptable to the Agent and the Lenders; (v) Consents. Agent shall have received any and all Consents necessary to permit the effectuation of the transactions contemplated by this Agreement and the Other 63 Documents; and, Agent shall have received such Consents and waivers of such third parties as might assert claims with respect to the Collateral, as Agent and its counsel shall deem necessary; (w) No Adverse Material Change. (i) since December 31, 2002, there shall not have occurred any event, condition or state of facts which could reasonably be expected to have a Material Adverse Effect and (ii) no representations made or information supplied to Agent shall have been proven to be inaccurate or misleading in any material respect; (x) Leasehold Agreements. Subject to Section 6.8, Agent shall have received landlord and warehouseman agreements satisfactory to Agent with respect to all premises leased by Borrowers at which Inventory is located; (y) Intentionally Omitted. (z) Contract Review. Agent shall have reviewed all material contracts of Borrowers including, without limitation, leases, union contracts, labor contracts, vendor supply contracts, license agreements and distributorship agreements and such contracts and agreements shall be satisfactory in all respects to Agent; (aa) Closing Certificate. Agent shall have received a closing certificate signed by the Chief Financial Officer of each Borrower dated as of the date hereof, stating that (i) all representations and warranties set forth in this Agreement and the Other Documents are true and correct on and as of such date, (ii) Borrowers are on such date in compliance with all the terms and provisions set forth in this Agreement and the Other Documents and (iii) on such date no Default or Event of Default has occurred or is continuing; (bb) Borrowing Base. Agent shall have received evidence from Borrowers that the aggregate amount of Eligible Inventory is sufficient in value and amount to support Advances in the amount requested by Borrowers on the Closing Date; and (cc) Other. All corporate and other proceedings, and all documents, instruments and other legal matters in connection with the Transactions shall be satisfactory in form and substance to Agent and its counsel. 8.2. Conditions to Each Advance. The agreement of Lenders to make any Advance requested to be made on any date (including, without limitation, the initial Advance), is subject to the satisfaction of the following conditions precedent as of the date such Advance is made: (a) Representations and Warranties. Each of the representations and warranties made by any Borrower in or pursuant to this Agreement and any related agreements to which it is a party, and each of the representations and warranties contained in any certificate, document or financial or other statement furnished at any time under or in connection with this Agreement or any related agreement shall be true and correct in all material respects on and as of such date as if made on and as of such date; 64 (b) No Default. No Event of Default or Default shall have occurred and be continuing on such date, or would exist after giving effect to the Advances requested to be made, on such date; provided, however that Agent, in its sole discretion, may continue to make Advances notwithstanding the existence of an Event of Default or Default and that any Advances so made shall not be deemed a waiver of any such Event of Default or Default; and (c) Maximum Advances. In the case of any Advances requested to be made, after giving effect thereto, the aggregate Advances shall not exceed the maximum amount of Advances permitted under Section 2.1 hereof. Each request for an Advance by any Borrower hereunder shall constitute a representation and warranty by each Borrower as of the date of such Advance that the conditions contained in this subsection shall have been satisfied. IX. INFORMATION AS TO BORROWER. Each Borrower shall, until satisfaction in full of the Obligations and the termination of this Agreement: 9.1. Disclosure of Material Matters. Immediately upon learning thereof, report to Agent all matters materially affecting the value, enforceability or collectibility of any portion of the Collateral including, without limitation, any Borrower's reclamation or repossession of, or the return to any Borrower of, a material amount of goods or claims or disputes asserted by any Customer or other obligor. 9.2. Borrowing Base; Schedules. Deliver to Agent on or before the last day of each month as and for the prior month (a) Inventory reports, and (b) a Borrowing Base Certificate (which shall be calculated as of the last day of the prior month and which shall not be binding upon Agent or restrictive of Agent's rights under this Agreement). Notwithstanding the foregoing, if on any date after the Closing Date Undrawn Availability is less than $10,000,000 on any date, then the Inventory reports shall be delivered to the Agent on a weekly basis on Tuesday of each week evidencing the Inventory as of the previous Friday. In addition, each Borrower will deliver to Agent at such intervals as Agent may require: (i) confirmatory assignment schedules, (ii) copies of Customer's invoices, (iii) evidence of shipment or delivery, and (iv) such further schedules, documents and/or information regarding the Collateral as Agent may require including, without limitation, trial balances and test verifications. Agent shall have the right to confirm and verify all Receivables by any manner and through any medium it considers advisable and do whatever it may deem reasonably necessary to protect its interests hereunder. The items to be provided under this Section are to be in form satisfactory to Agent and executed by each Borrower and delivered to Agent from time to time solely for Agent's convenience in maintaining records of the Collateral, and any Borrower's failure to deliver any of such items to Agent shall not affect, terminate, modify or otherwise limit Agent's Lien with respect to the Collateral. 65 9.3. Consummation of Bank Products. Promptly notify Agent prior to effecting any Interest Rate Protection Agreement or other Bank Product with a Lender or an Affiliate of a Lender other than PNC Bank and its Affiliates, in order to permit Agent to establish any Bank Product Reserve deemed proper and necessary by Agent. 9.4. Litigation. Promptly notify Agent in writing of any litigation, suit or administrative proceeding affecting any Borrower, whether or not the claim is covered by insurance, and of any suit or administrative proceeding, which in any such case could reasonably be expected to have a Material Adverse Effect. 9.5. Material Occurrences. Promptly notify Agent in writing upon the occurrence of (a) any Event of Default or Default; (b) any event, development or circumstance whereby any financial statements or other reports furnished to Agent fail in any material respect to present fairly, in accordance with GAAP consistently applied, the financial condition or operating results of any Borrower as of the date of such statements; (c) any accumulated retirement plan funding deficiency which, if such deficiency continued for two plan years and was not corrected as provided in Section 4971 of the Code, could subject any Borrower to a tax imposed by Section 4971 of the Code; (d) each and every default by any Borrower which might result in the acceleration of the maturity of any Indebtedness, including the names and addresses of the holders of such Indebtedness with respect to which there is a default existing or with respect to which the maturity has been or could be accelerated, and the amount of such Indebtedness; and (e) any other development in the business or affairs of any Borrower which could reasonably be expected to have a Material Adverse Effect; in each case describing the nature thereof and the action Borrowers propose to take with respect thereto. 9.6. Government Receivables. Notify Agent promptly if any of its Receivables arise out of contracts between any Borrower and the United States or any department, agency or instrumentality thereof. 9.7. Annual Financial Statements. Furnish Agent within ninety (90) days after the end of each fiscal year of Borrowers, financial statements of Borrowers on a consolidating and consolidated basis including, but not limited to, statements of income and stockholders' equity and cash flow from the beginning of the current fiscal year to the end of such fiscal year and the balance sheet as at the end of such fiscal year, all prepared in accordance with GAAP applied on a basis consistent with prior practices, and in reasonable detail and, with respect to the consolidated balance sheet and consolidated statements, reported upon without qualification by an independent certified public accounting firm selected by Borrowers and reasonably satisfactory to Agent (the "Accountants"). The report of the Accountants shall be accompanied by a statement of the Accountants certifying that (i) they have caused the Loan Agreement to be reviewed, (ii) in making the examination 66 upon which such report was based either no information came to their attention which to their knowledge constituted an Event of Default or a Default under this Agreement or any related agreement or, if such information came to their attention, specifying any such Default or Event of Default, its nature, when it occurred and whether it is continuing, and such report shall contain or have appended thereto calculations which set forth Borrowers' compliance with the requirements or restrictions imposed by Sections 6.6 and 7.11 hereof. In addition, the reports shall be accompanied by a certificate of each Borrower's Chief Financial Officer which shall state that, based on an examination sufficient to permit him to make an informed statement, no Default or Event of Default exists, or, if such is not the case, specifying such Default or Event of Default, its nature, when it occurred, whether it is continuing and the steps being taken by such Borrower with respect to such event, and such certificate shall have appended thereto calculations which set forth Borrowers' compliance with the requirements or restrictions imposed by Sections 6.6 and 7.11 hereof, including, without limitation, a calculation of the Fixed Charge Coverage Ratio. 9.8. Quarterly Financial Statements. Furnish Agent within 45 days after the end of each fiscal quarter, an unaudited balance sheet of Borrowers on a consolidated and consolidating basis and unaudited statements of income and stockholders' equity and cash flow of Borrowers on a consolidated and consolidating basis reflecting results of operations from the beginning of the fiscal year to the end of such quarter and for such quarter, prepared on a basis consistent with prior practices and complete and correct in all material respects, subject to normal and recurring year end adjustments that individually and in the aggregate are not material to the business of Borrowers. The reports shall be accompanied by a certificate signed by the Chief Financial Officer of each Borrower, which shall state that, based on an examination sufficient to permit him to make an informed statement, no Default or Event of Default exists, or, if such is not the case, specifying such Default or Event of Default, its nature, when it occurred, whether it is continuing and the steps being taken by Borrowers with respect to such default and, such certificate shall have appended thereto calculations which set forth Borrowers' compliance with the requirements or restrictions imposed by Sections 6.6 and 7.11 hereof, including, without limitation, a calculation of the Fixed Charge Coverage Ratio. 9.9. Intentionally Omitted. 9.10. Other Reports. Furnish Agent as soon as available, but in any event within ten (10) days after the issuance thereof, with copies of such financial statements, reports and returns as each Borrower shall send to its stockholders. 9.11. Additional Information. Furnish Agent with such additional information as Agent shall reasonably request in order to enable Agent to determine whether the terms, covenants, provisions and conditions of this Agreement and the Notes have been complied with by Borrowers including, without limitation (a) copies of all environmental audits and reviews, (b) without the necessity of any 67 request by the Agent, at least on a quarterly basis, notice of any Borrower's opening of any new office or place of business or any Borrower's closing of any existing office or place of business; provided however, that Borrowers shall provide Agent with 30 days prior written notice with respect to any proposed change to the chief executive office of any Borrower, and (c) promptly upon any Borrower's learning thereof, notice of any labor dispute to which any Borrower may become a party, any strikes or walkouts relating to any of its plants or other facilities, and the expiration of any labor contract to which any Borrower is a party or by which any Borrower is bound. 9.12. Projected Operating Budget. Furnish Agent, no later than thirty (30) days prior to the beginning of each Borrower's fiscal years commencing with fiscal year 2006, a month by month projected operating budget and cash flow of Borrowers on a consolidated basis for such fiscal year (including an income statement for each month and a balance sheet as at the end of the last month in each fiscal quarter), such projections to be accompanied by a certificate signed by the President or Chief Financial Officer of each Borrower to the effect that such projections have been prepared on the basis of sound financial planning practice consistent with past budgets and financial statements and that such officer has no reason to question the reasonableness of any material assumptions on which such projections were prepared.. 9.13. Variances From Operating Budget. Upon request of Agent, furnish Agent, concurrently with the delivery of the financial statements referred to in Section 9.7 and each quarterly report, a written report summarizing all material variances from budgets submitted by Borrowers pursuant to Section 9.12 and a discussion and analysis by management with respect to such variances. 9.14. Notice of Suits, Adverse Events. Furnish Agent with prompt notice of (i) any lapse or other termination of any Consent issued to any Borrower by any Governmental Body or any other Person that is material to the operation of any Borrower's business, (ii) any refusal by any Governmental Body or any other Person to renew or extend any such Consent; and (iii) copies of any periodic or special reports filed by any Borrower with any Governmental Body or Person, if such reports indicate any material change in the business, operations, affairs or condition of any Borrower, or if copies thereof are reasonably requested by Lender, and (iv) copies of any material notices and other communications from any Governmental Body or Person which specifically relate to any Borrower. 9.15. ERISA Notices and Requests. Furnish Agent with immediate written notice in the event that (i) any Borrower or any member of the Controlled Group knows or has reason to know that a Termination Event has occurred, together with a written statement describing such Termination Event and the action, if any, which such Borrower or any member of the Controlled Group has taken, is taking, or proposes to take with respect thereto and, when known, any action taken or threatened by the Internal Revenue Service, Department of Labor or PBGC with respect thereto, (ii) any Borrower 68 or any member of the Controlled Group knows or has reason to know that a prohibited transaction (as defined in Sections 406 of ERISA and 4975 of the Code for which an exemption is not available) has occurred together with a written statement describing such transaction and the action which such Borrower or any member of the Controlled Group has taken, is taking or proposes to take with respect thereto, (iii) a funding waiver request has been filed with respect to any Plan together with all communications received by any Borrower or any member of the Controlled Group with respect to such request, (iv) any increase in the benefits of any existing defined benefit pension plan or the establishment of any new defined benefit pension plan or the commencement of contributions to any defined benefit pension plan to which any Borrower or any member of the Controlled Group was not previously contributing shall occur, (v) any Borrower or any member of the Controlled Group shall receive from the PBGC a notice of intention to terminate a Plan or to have a trustee appointed to administer a Plan, together with copies of each such notice, (vi) any Borrower or any member of the Controlled Group shall receive any unfavorable determination letter from the Internal Revenue Service regarding the qualification of a Plan under Section 401(a) of the Code, together with copies of each such letter; (vii) any Borrower or any member of the Controlled Group shall receive a notice regarding the imposition of withdrawal liability, together with copies of each such notice; (viii) any Borrower or any member of the Controlled Group shall fail to make a required installment or any other required payment under Section 412 of the Code on or before the due date for such installment or payment; (ix) any Borrower or any member of the Controlled Group knows that (a) a Multiemployer Plan has been terminated, (b) the administrator or plan sponsor of a Multiemployer Plan intends to terminate a Multiemployer Plan, or (c) the PBGC has instituted or will institute proceedings under Section 4042 of ERISA to terminate a Multiemployer Plan. 9.16. Additional Documents. Execute and deliver to Agent, upon reasonable request, such documents and agreements as Agent may, from time to time, reasonably request to carry out the purposes, terms or conditions of this Agreement. X. EVENTS OF DEFAULT. The occurrence of any one or more of the following events shall constitute an "Event of Default": 10.1 failure by any Borrower to pay any principal or interest on the Obligations when due, whether at maturity or by reason of acceleration pursuant to the terms of this Agreement or by notice of intention to prepay, or by required prepayment or failure to pay any other liabilities or make any other payment, fee or charge provided for herein when due or in any Other Document; 10.2 any representation or warranty made or deemed made by any Borrower in this Agreement or any related agreement or in any certificate, document or financial or other statement furnished at any time in connection herewith or therewith shall prove to have been misleading in any material respect on the date when made or deemed to have been made; 69 10.3 failure by any Borrower to (i) furnish financial information when due or when reasonably requested, or (ii) permit the inspection of its books or records; 10.4 issuance of a notice of Lien, levy, assessment, injunction or attachment against a material portion of any Borrower's property, except for Permitted Encumbrances; 10.5 except as otherwise provided for in Sections 10.1 and 10.3, failure or neglect of any Borrower to perform, keep or observe any term, provision, condition, covenant herein contained, or contained in any other agreement or arrangement, now or hereafter entered into between any Borrower and Agent or any Lender except for a failure or neglect of any Borrower to perform, keep or observe any term, provision, condition or covenant, contained in Sections 4.6, 4.7, 4.9, 6.4 or 9.6 hereof which is cured within five (5) days from the occurrence of such failure or neglect; 10.6 any judgment or judgments are rendered or judgment liens filed against any Borrower for an aggregate amount in excess of $450,000 which within thirty (30) days of such rendering or filing is not either satisfied, stayed or discharged of record; 10.7 any Borrower shall (i) apply for, consent to or suffer the appointment of, or the taking of possession by, a receiver, custodian, trustee, liquidator or similar fiduciary of itself or of all or a substantial part of its property, (ii) make a general assignment for the benefit of creditors, (iii) commence a voluntary case under any state or federal bankruptcy laws (as now or hereafter in effect), (iv) be adjudicated a bankrupt or insolvent, (v) file a petition seeking to take advantage of any other law providing for the relief of debtors, (vi) acquiesce to, or fail to have dismissed, within thirty (30) days, any petition filed against it in any involuntary case under such bankruptcy laws, or (vii) take any action for the purpose of effecting any of the foregoing; 10.8 any Borrower shall admit in writing its inability, or be generally unable, to pay its debts as they become due or cease operations of its present business; 10.9 any Affiliate or any Subsidiary of any Borrower shall (i) apply for, consent to or suffer the appointment of, or the taking of possession by, a receiver, custodian, trustee, liquidator or similar fiduciary of itself or of all or a substantial part of its property, (ii) admit in writing its inability, or be generally unable, to pay its debts as they become due or cease operations of its present business, (iii) make a general assignment for the benefit of creditors, (iv) commence a voluntary case under any state or federal bankruptcy laws (as now or hereafter in effect), (v) be adjudicated a bankrupt or insolvent, (vi) file a petition seeking to take advantage of any other law providing for the relief of debtors, (vii) acquiesce to, or fail to have dismissed, within thirty (30) days, any petition filed against it in any involuntary case under such bankruptcy laws, or (viii) take any action for the purpose of effecting any of the foregoing; 10.10 any change in any Borrower's condition or affairs (financial or otherwise) which in Agent's opinion has a Material Adverse Effect; 10.11 any Lien created hereunder or provided for hereby or under any related agreement which relates to Collateral having a value in excess of $500,000 individually or in the aggregate for any reason ceases to be or is not a valid and perfected Lien having a first priority interest; 70 10.12 a Termination Event, as such term is defined in the Accounts Sales Agreement, shall have occurred. 10.13 there shall exist a material default by LESCO of its obligations under the TCS Supply Agreement which would permit TCS to terminate the TCS Supply Agreement, or the TCS Supply Agreement shall terminate prior to October 7, 2008, other than as a result of LESCO's termination of such agreement in accordance with Section 8 thereof. 10.14 a default of the obligations of any Borrower under any other agreement to which it is a party shall occur which adversely affects its condition, affairs or prospects (financial or otherwise) which default is not cured within any applicable grace period; 10.15 Any Borrower shall be required to pay any base rent, operating expenses, additional rent or real estate taxes under the Strongsville Lease Agreement for any period after December 31, 2005, and such amounts are not (i) reimbursed by The Glidden Company within forty-five (45) days after the expiration of any cure period for The Glidden Company to make such payment to the Borrower, or (ii) paid to the Borrower within sixty (60) days after the expiration of any cure period for such payment by The Glidden Company pursuant to a presentation made upon the bank issuing the letter of credit in favor of LESCO for the account of The Glidden Company. 10.16 any Change of Ownership or Change of Control shall occur; 10.17 any material provision of this Agreement shall, for any reason, cease to be valid and binding on any Borrower, or any Borrower shall so claim in writing to Agent; 10.18 (i) any Governmental Body shall (A) revoke, terminate, suspend or adversely modify any material license, permit, patent trademark or tradename of any Borrower, the continuation of which is material to the continuation of any Borrower's business, or (B) commence proceedings to suspend, revoke, terminate or adversely modify any such license, permit, trademark, tradename or patent and such proceedings shall not be dismissed or discharged within sixty (60) days, or (c) schedule or conduct a hearing on the renewal of any license, permit, trademark, tradename or patent necessary for the continuation of any Borrower's business and the staff of such Governmental Body issues a report recommending the termination, revocation, suspension or material, adverse modification of such license, permit, trademark, tradename or patent; (ii) any agreement which is necessary or material to the operation of any Borrower's business shall be revoked or terminated and not replaced by a substitute acceptable to Agent within thirty (30) days after the date of such revocation or termination, and such revocation or termination and non-replacement would reasonably be expected to have a Material Adverse Effect; 10.19 any portion of the Collateral shall be seized or taken by a Governmental Body, or any Borrower or the title and rights of any Borrower or any Original Owner which is the owner of any material portion of the Collateral shall have become the subject matter of litigation which might, in the opinion of Agent, upon final determination, result in impairment or loss of the security provided by this Agreement or the Other Documents; 71 10.20 an event or condition specified in Sections 7.16 or 9.15 hereof shall occur or exist with respect to any Plan and, as a result of such event or condition, together with all other such events or conditions, any Borrower or any member of the Controlled Group shall incur, or in the opinion of Agent be reasonably likely to incur, a liability to a Plan or the PBGC (or both) which, in the reasonable judgment of Agent, would have a Material Adverse Effect. XI. LENDERS' RIGHTS AND REMEDIES AFTER DEFAULT. 11.1. Rights and Remedies. Upon the occurrence of (i) an Event of Default pursuant to Section 10.7 all Obligations shall be immediately due and payable and this Agreement and the obligation of Lenders to make Advances shall be deemed terminated; and, (ii) any of the other Events of Default and at any time thereafter (such default not having previously been cured), at the option of Required Lenders all Obligations shall be immediately due and payable and Lenders shall have the right to terminate this Agreement and to terminate the obligation of Lenders to make Advances and (iii) a filing of a petition against Borrower in any involuntary case under any state or federal bankruptcy laws, the obligation of Lenders to make Advances hereunder shall be terminated other than as may be required by an appropriate order of the bankruptcy court having jurisdiction over any Borrower. Upon the occurrence of any Event of Default, Agent shall have the right to exercise any and all other rights and remedies provided for herein, under the Uniform Commercial Code and at law or equity generally, including, without limitation, the right to foreclose the security interests granted herein and to realize upon any Collateral by any available judicial procedure and/or to take possession of and sell any or all of the Collateral with or without judicial process. Agent may enter any of any Borrower's premises or other premises without legal process and without incurring liability to any Borrower therefor, and Agent may thereupon, or at any time thereafter, in its discretion without notice or demand, take the Collateral and remove the same to such place as Agent may deem advisable and Agent may require Borrowers to make the Collateral available to Agent at a convenient place. With or without having the Collateral at the time or place of sale, Agent may sell the Collateral, or any part thereof, at public or private sale, at any time or place, in one or more sales, at such price or prices, and upon such terms, either for cash, credit or future delivery, as Agent may elect. Except as to that part of the Collateral which is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market, Agent shall give Borrowers reasonable notification of such sale or sales, it being agreed that in all events written notice mailed to Borrowers at least five (5) days prior to such sale or sales is reasonable notification. At any public sale Agent or any Lender may bid for and become the purchaser, and Agent, any Lender or any other purchaser at any such sale thereafter shall hold the Collateral sold absolutely free from any claim or right of whatsoever kind, including any equity of redemption and such right and equity are hereby expressly waived and released by each Borrower. In connection with the exercise of the foregoing remedies, Agent is granted permission to use all of each Borrower's trademarks, trade styles, trade names, patents, patent applications, licenses, franchises and other proprietary rights which are used in connection with (a) Inventory for the purpose of disposing of such Inventory and (b) Equipment for the purpose of completing the manufacture of unfinished goods. The proceeds realized from the sale of any Collateral shall be applied as follows: first, to the reasonable costs, expenses and attorneys' fees and expenses incurred by Agent for collection 72 and for acquisition, completion, protection, removal, storage, sale and delivery of the Collateral; second, to interest due upon any of the Obligations and any fees payable under this Agreement; and, third, to the principal of the Obligations. If any deficiency shall arise, Borrowers shall remain liable to Agent and Lenders therefor. 11.2. Agent's Discretion. Agent shall have the right in its sole discretion to determine which rights, Liens, security interests or remedies Agent may at any time pursue, relinquish, subordinate, or modify or to take any other action with respect thereto and such determination will not in any way modify or affect any of Agent's or Lenders' rights hereunder. 11.3. Setoff. In addition to any other rights which Agent or any Lender may have under applicable law, upon the occurrence of an Event of Default hereunder, Agent and such Lender shall have a right to apply any Borrower's property held by Agent and such Lender to reduce the Obligations. 11.4. Rights and Remedies not Exclusive. The enumeration of the foregoing rights and remedies is not intended to be exhaustive and the exercise of any right or remedy shall not preclude the exercise of any other right or remedies provided for herein or otherwise provided by law, all of which shall be cumulative and not alternative. 11.5. Allocation of Payments After Event of Default. Notwithstanding any other provisions of this Agreement to the contrary, after the occurrence and during the continuance of an Event of Default, all amounts collected or received by the Agent on account of the Obligations or any other amounts outstanding under any of the Other Documents or in respect of the Collateral may, at Agent's discretion, be paid over or delivered as follows: FIRST, to the payment of all reasonable out-of-pocket costs and expenses (including without limitation, reasonable attorneys' fees) of the Agent in connection with enforcing the rights of the Lenders under this Agreement and the Other Documents and any protective advances made by the Agent with respect to the Collateral under or pursuant to the terms of this Document; SECOND, to payment of any fees owed to the Agent; THIRD, to the payment of all reasonable out-of-pocket costs and expenses (including without limitation, reasonable attorneys' fees) of each of the Lenders in connection with enforcing its rights under this Agreement and the Other Documents or otherwise with respect to the Obligations owing to such Lender; FOURTH, to the payment of all of the Obligations consisting of accrued fees and interest; 73 FIFTH, to the payment of the outstanding principal amount of the Obligations (including the payment or cash collateralization of the outstanding Letters of Credit); SIXTH, to all other Obligations and other obligations which shall have become due and payable under the Other Documents or otherwise and not repaid pursuant to clauses "FIRST" through "FIFTH" above; SEVENTH, to the payment of the surplus, if any, to whoever may be lawfully entitled to receive such surplus. In carrying out the foregoing, (i) amounts received shall be applied in the numerical order provided until exhausted prior to application to the next succeeding category; (ii) each of the Lenders shall receive (so long as it is not a Defaulting Lender) an amount equal to its pro rata share (based on the proportion that the then outstanding Advances held by such Lender bears to the aggregate then outstanding Advances) of amounts available to be applied pursuant to clauses "THIRD", "FOURTH", "FIFTH" and "SIXTH" above; and (iii) to the extent that any amounts available for distribution pursuant to clause "FIFTH" above are attributable to the issued but undrawn amount of outstanding Letters of Credit, such amounts shall be held by the Agent in a cash collateral account and applied (A) first, to reimburse the Issuer from time to time for any drawings under such Letters of Credit and (B) then, following the expiration of all Letters of Credit, to all other obligations of the types described in clauses "FIFTH" and "SIXTH" above in the manner provided in this Section 11.5. XII. WAIVERS AND JUDICIAL PROCEEDINGS. 12.1. Waiver of Notice. Each Borrower hereby waives notice of non-payment of any of the Receivables, demand, presentment, protest and notice thereof with respect to any and all instruments, notice of acceptance hereof, notice of loans or advances made, credit extended, Collateral received or delivered, or any other action taken in reliance hereon, and all other demands and notices of any description, except such as are expressly provided for herein. 12.2. Delay. No delay or omission on Agent's or any Lender's part in exercising any right, remedy or option shall operate as a waiver of such or any other right, remedy or option or of any default. 12.3. Jury Waiver. EACH PARTY TO THIS AGREEMENT HEREBY EXPRESSLY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (A) ARISING UNDER THIS AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH, OR (B) IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO OR ANY OF THEM WITH RESPECT TO THIS AGREEMENT OR ANY OTHER INSTRUMENT, 74 DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH, OR THE TRANSACTIONS RELATED HERETO OR THERETO IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE AND EACH PARTY HEREBY CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY, AND THAT ANY PARTY TO THIS AGREEMENT MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENTS OF THE PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY. XIII. EFFECTIVE DATE AND TERMINATION. 13.1. Term. This Agreement, which shall inure to the benefit of and shall be binding upon the respective successors and permitted assigns of each Borrower, Agent and each Lender, shall become effective on the date hereof and shall continue in full force and effect until October October 7, 2010 (the "Term") unless sooner terminated as herein provided. Borrowers may terminate this Agreement at any time upon thirty (30) days' prior written notice upon payment in full of the Obligations. 13.2. Termination. The termination of the Agreement shall not affect any Borrower's, Agent's or any Lender's rights, or any of the Obligations having their inception prior to the effective date of such termination, and the provisions hereof shall continue to be fully operative until all transactions entered into, rights or interests created or Obligations have been fully disposed of, concluded or liquidated. The security interests, Liens and rights granted to Agent and Lenders hereunder and the financing statements filed hereunder shall continue in full force and effect, notwithstanding the termination of this Agreement or the fact that Borrowers' Account may from time to time be temporarily in a zero or credit position, until all of the Obligations of each Borrower have been paid or performed in full after the termination of this Agreement or each Borrower has furnished Agent and Lenders with an indemnification reasonably satisfactory to Agent and Lenders with respect thereto. Accordingly, each Borrower waives any rights which it may have under the Uniform Commercial Code to demand the filing of termination statements with respect to the Collateral, and Agent shall not be required to send such termination statements to each Borrower, or to file them with any filing office, unless and until this Agreement shall have been terminated in accordance with its terms and all Obligations paid in full in immediately available funds. All representations, warranties, covenants, waivers and agreements contained herein shall survive termination hereof until all Obligations are paid or performed in full. 75 XIV. REGARDING AGENT. 14.1. Appointment, Intercreditor Agreement. Each Lender hereby designates PNC to act as Agent for such Lender under this Agreement and the Other Documents. Each Lender hereby irrevocably authorizes Agent to take such action on its behalf under the provisions of this Agreement and the Other Documents and to exercise such powers and to perform such duties hereunder and thereunder as are specifically delegated to or required of Agent by the terms hereof and thereof and such other powers as are reasonably incidental thereto and Agent shall hold all Collateral, payments of principal and interest, fees (except the fees set forth in the Fee Letter and Section 3.4), charges and collections (without giving effect to any collection days) received pursuant to this Agreement, for the ratable benefit of Lenders. Agent may perform any of its duties hereunder by or through its agents or employees. Without limiting the generality of the foregoing, each of the Lenders hereby authorizes and directs Agent to execute and deliver the Intercreditor Agreement and the Subordination Agreement, and each Lender acknowledges and agrees that the Intercreditor Agreement and the Subordination Agreement shall be binding on each such Lender. As to any matters not expressly provided for by this Agreement, the Intercreditor Agreement or the Subordination Agreement (including without limitation, collection of the Note) Agent shall not be required to exercise any discretion or take any action, but shall be required to act or to refrain from acting (and shall be fully protected in so acting or refraining from acting) upon the instructions of the Required Lenders, and such instructions shall be binding; provided, however, that Agent shall not be required to take any action which exposes Agent to liability or which is contrary to this Agreement or the Other Documents or applicable law unless Agent is furnished with an indemnification reasonably satisfactory to Agent with respect thereto. 14.2. Nature of Duties. Agent shall have no duties or responsibilities except those expressly set forth in this Agreement and the Other Documents. Neither Agent nor any of its officers, directors, employees or agents shall be (i) liable for any action taken or omitted by them as such hereunder or in connection herewith, unless caused by their gross (not mere) negligence or willful misconduct, or (ii) responsible in any manner for any recitals, statements, representations or warranties made by any Borrower or any officer thereof contained in this Agreement, or in any of the Other Documents or in any certificate, report, statement or other document referred to or provided for in, or received by Agent under or in connection with, this Agreement or any of the Other Documents or for the value, validity, effectiveness, genuineness, due execution, enforceability or sufficiency of this Agreement, or any of the Other Documents or for any failure of any Borrower to perform its obligations hereunder. Agent shall not be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any of the Other Documents, or to inspect the properties, books or records of any Borrower. The duties of Agent as respects the Advances to Borrowers shall be mechanical and administrative in nature; Agent shall not have by reason of this Agreement a fiduciary relationship in respect of any Lender; and nothing in this Agreement, expressed or implied, is intended to or shall be so construed as to impose upon Agent any obligations in respect of this Agreement except as expressly set forth herein. 76 14.3. Lack of Reliance on Agent and Resignation. Independently and without reliance upon Agent or any other Lender, each Lender has made and shall continue to make (i) its own independent investigation of the financial condition and affairs of each Borrower in connection with the making and the continuance of the Advances hereunder and the taking or not taking of any action in connection herewith, and (ii) its own appraisal of the creditworthiness of each Borrower. Agent shall have no duty or responsibility, either initially or on a continuing basis, to provide any Lender with any credit or other information with respect thereto, whether coming into its possession before making of the Advances or at any time or times thereafter except as shall be provided by any Borrower pursuant to the terms hereof. Agent shall not be responsible to any Lender for any recitals, statements, information, representations or warranties herein or in any agreement, document, certificate or a statement delivered in connection with or for the execution, effectiveness, genuineness, validity, enforceability, collectibility or sufficiency of this Agreement or any Other Document, or of the financial condition of any Borrower, or be required to make any inquiry concerning either the performance or observance of any of the terms, provisions or conditions of this Agreement, the Note, the Other Documents or the financial condition of any Borrower, or the existence of any Event of Default or any Default. Agent may resign on sixty (60) days' written notice to each of Lenders and Borrowing Agent and upon such resignation, the Required Lenders will promptly designate a successor Agent reasonably satisfactory to Borrowers. Any such successor Agent shall succeed to the rights, powers and duties of Agent, and the term "Agent" shall mean such successor agent effective upon its appointment, and the former Agent's rights, powers and duties as Agent shall be terminated, without any other or further act or deed on the part of such former Agent. After any Agent's resignation as Agent, the provisions of this Article XIV shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement. 14.4. Certain Rights of Agent. If Agent shall request instructions from Lenders with respect to any act or action (including failure to act) in connection with this Agreement or any Other Document, Agent shall be entitled to refrain from such act or taking such action unless and until Agent shall have received instructions from the Required Lenders; and Agent shall not incur liability to any Person by reason of so refraining. Without limiting the foregoing, Lenders shall not have any right of action whatsoever against Agent as a result of its acting or refraining from acting hereunder in accordance with the instructions of the Required Lenders. 14.5. Reliance. Agent shall be entitled to rely, and shall be fully protected in relying, upon any note, writing, resolution, notice, statement, certificate, telex, teletype or telecopier message, cablegram, order or other document or telephone message believed by it to be genuine and correct and to have been signed, sent or made by the proper person or entity, and, with respect to all legal matters pertaining to this Agreement and the Other Documents and its duties hereunder, 77 upon advice of counsel selected by it. Agent may employ agents and attorneys-in-fact and shall not be liable for the default or misconduct of any such agents or attorneys-in-fact selected by Agent with reasonable care other than for Agent's gross negligence or willful misconduct. 14.6. Notice of Default. Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default hereunder or under the Other Documents, unless Agent has received notice from a Lender or a Borrower referring to this Agreement or the Other Documents, describing such Default or Event of Default and stating that such notice is a "notice of default". In the event that Agent receives such a notice, Agent shall give notice thereof to Lenders. Agent shall take such action with respect to such Default or Event of Default as shall be reasonably directed by the Required Lenders; provided, that, unless and until Agent shall have received such directions, Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable in the best interests of Lenders. 14.7. Indemnification. To the extent Agent is not reimbursed and indemnified by Borrowers, each Lender will reimburse and indemnify Agent in proportion to its respective portion of the Advances (or, if no Advances are outstanding, according to its Commitment Percentage), from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred by or asserted against Agent in performing its duties hereunder, or in any way relating to or arising out of this Agreement or any Other Document; provided that, Lenders shall not be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from Agent's gross (not mere) negligence or willful misconduct. 14.8. Agent in its Individual Capacity. With respect to the obligation of Agent to lend under this Agreement, the Advances made by it shall have the same rights and powers hereunder as any other Lender and as if it were not performing the duties as Agent specified herein; and the term "Lender" or any similar term shall, unless the context clearly otherwise indicates, include Agent in its individual capacity as a Lender. Agent may engage in business with any Borrower as if it were not performing the duties specified herein, and may accept fees and other consideration from any Borrower for services in connection with this Agreement or otherwise without having to account for the same to Lenders. 14.9. Delivery of Documents. To the extent Agent receives financial statements required under Sections 9.7, 9.8, 9.9, 9.10, 9.12, 9.13 and the Borrowing Base Certificate from any Borrower pursuant to the terms of this Agreement, Agent will promptly furnish such documents and information to Lenders. 78 14.10. Borrowers' Undertaking to Agent. Without prejudice to their respective obligations to Lenders under the other provisions of this Agreement, each Borrower hereby undertakes with Agent to pay to Agent from time to time on demand all amounts from time to time due and payable by it for the account of Agent or Lenders or any of them pursuant to this Agreement to the extent not already paid. Any payment made pursuant to any such demand shall pro tanto satisfy the relevant Borrower's obligations to make payments for the account of Lenders or the relevant one or more of them pursuant to this Agreement. 14.11. No Reliance on Agent's Customer Identification Program. Each Lender acknowledges and agrees that neither such Lender, nor any of its Affiliates, participants or assignees, may rely on Agent to carry out such Lender's, Affiliate's, participant's or assignee's customer identification program, or other obligations required or imposed under or pursuant to the USA Patriot Act or the regulations thereunder, including the regulations contained in 31 CFR 103.121 (as hereafter amended or replaced, the "CIP Regulations"), or any other Anti-Terrorism Law, including any program involving any of the following items relating to or in connection with any of the Borrowers, their Affiliates or their agents, this Agreement or the Other Documents or the transactions hereunder or contemplated hereby: (1) any identity verification procedures, (2) any recording keeping, (3) comparisons with government lists, (4) customer notices or (5) other procedures required under the CIP Regulations or such other laws. XV. BORROWING AGENCY. 15.1. Borrowing Agency Provisions. (a) Each Borrower hereby irrevocably designates Borrowing Agent to be its attorney and agent and in such capacity to borrow, sign and endorse notes, and execute and deliver all instruments, documents, writings and further assurances now or hereafter required hereunder, on behalf of such Borrower or Borrowers, and hereby authorizes Agent to pay over or credit all loan proceeds hereunder in accordance with the request of Borrowing Agent. (b) The handling of this credit facility as a co-borrowing facility with a borrowing agent in the manner set forth in this Agreement is solely as an accommodation to Borrowers and at their request. Neither Agent nor any Lender shall incur liability to Borrowers as a result thereof. To induce Agent and Lenders to do so and in consideration thereof, each Borrower hereby indemnifies Agent and each Lender and holds Agent and each Lender harmless from and against any and all liabilities, expenses, losses, damages and claims of damage or injury asserted against Agent or any Lender by any Person arising from or incurred by reason of the handling of the financing arrangements of Borrowers as provided herein, reliance by Agent or any Lender on any request or instruction from Borrowing Agent or any other action taken by Agent or any Lender with respect to this Section 15.1 except due to willful misconduct or gross (not mere) negligence by the indemnified party. 79 (c) All Obligations shall be joint and several, and each Borrower shall make payment upon the maturity of the Obligations by acceleration or otherwise, and such obligation and liability on the part of each Borrower shall in no way be affected by any extensions, renewals and forbearance granted to Agent or any Lender to any Borrower, failure of Agent or any Lender to give any Borrower notice of borrowing or any other notice, any failure of Agent or any Lender to pursue or preserve its rights against any Borrower, the release by Agent or any Lender of any Collateral now or thereafter acquired from any Borrower, and such agreement by each Borrower to pay upon any notice issued pursuant thereto is unconditional and unaffected by prior recourse by Agent or any Lender to the other Borrowers or any Collateral for such Borrower's Obligations or the lack thereof. Each Borrower waives all suretyship defenses. 15.2. Waiver of Subrogation. Each Borrower expressly waives any and all rights of subrogation, reimbursement, indemnity, exoneration, contribution of any other claim which such Borrower may now or hereafter have against the other Borrowers or other Person directly or contingently liable for the Obligations hereunder, or against or with respect to the other Borrowers' property (including, without limitation, any property which is Collateral for the Obligations), arising from the existence or performance of this Agreement, until termination of this Agreement and repayment in full of the Obligations. XVI. MISCELLANEOUS. 16.1. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Ohio. Any judicial proceeding brought by or against any Borrower with respect to any of the Obligations, this Agreement or any related agreement may be brought in any court of competent jurisdiction in the State of Ohio, United States of America, and, by execution and delivery of this Agreement, each Borrower accepts for itself and in connection with its properties, generally and unconditionally, the non-exclusive jurisdiction of the aforesaid courts, and irrevocably agrees to be bound by any judgment rendered thereby in connection with this Agreement. Each Borrower hereby waives personal service of any and all process upon it and consents that all such service of process may be made by registered mail (return receipt requested) directed to Borrowing Agent at its address set forth in Section 16.6 and service so made shall be deemed completed five (5) days after the same shall have been so deposited in the mails of the United States of America, or, at the Agent's and/or any Lender's option, by personal service upon Borrowing Agent which each Borrower irrevocably appoints as such Borrower's Agent for the purpose of accepting service within the State of Ohio. Nothing herein shall affect the right to serve process in any manner permitted by law or shall limit the right of Agent or any Lender to bring proceedings against any Borrower in the courts of any other jurisdiction. Each Borrower waives any objection to jurisdiction and venue of any action instituted hereunder and shall not assert any defense based on lack of jurisdiction or venue or based upon forum non conveniens. Any judicial proceeding by any Borrower against Agent or any Lender involving, directly or indirectly, any matter or claim in any way arising out of, related to or connected with this Agreement or any related agreement, shall be brought only in a federal or state court located in the County of Cuyahoga, State of Ohio. 80 16.2. Entire Understanding. (a) This Agreement and the documents executed concurrently herewith contain the entire understanding between each Borrower, Agent and each Lender and supersedes all prior agreements and understandings, if any, relating to the subject matter hereof. Any promises, representations, warranties or guarantees not herein contained and hereinafter made shall have no force and effect unless in writing, signed by each Borrower's, Agent's and each Lender's respective officers. Neither this Agreement nor any portion or provisions hereof may be changed, modified, amended, waived, supplemented, discharged, cancelled or terminated orally or by any course of dealing, or in any manner other than by an agreement in writing, signed by the party to be charged. Each Borrower acknowledges that it has been advised by counsel in connection with the execution of this Agreement and Other Documents and is not relying upon oral representations or statements inconsistent with the terms and provisions of this Agreement. (b) The Required Lenders, Agent with the consent in writing of the Required Lenders, and Borrowers may, subject to the provisions of this Section 16.2 (b), from time to time enter into written supplemental agreements to this Agreement or the Other Documents executed by Borrowers, for the purpose of adding or deleting any provisions or otherwise changing, varying or waiving in any manner the rights of Lenders, Agent or Borrowers thereunder or the conditions, provisions or terms thereof of waiving any Event of Default thereunder, but only to the extent specified in such written agreements; provided, however, that no such supplemental agreement shall, without the consent of all Lenders: (i) increase the Maximum Revolving Advance Amount or the Commitment Percentage or maximum dollar commitment of any Lender. (ii) extend the maturity of any Note or the due date for any amount payable hereunder, or decrease the rate of interest or reduce any fee payable by Borrowers to Lenders pursuant to this Agreement. (iii) alter the definition of the term Required Lenders or alter, amend or modify this Section 16.2(b). (iv) release any Collateral during any calendar year (other than in accordance with the provisions of this Agreement) having an aggregate value in excess of $1,000,000, or, except in mergers, consolidations, sales and other dispositions of any Borrower permitted under Section 7.1 hereof, release such Borrower from its Obligations hereunder. (v) change the rights and duties of Agent. (vi) permit any Revolving Advance to be made if after giving effect thereto the total of Revolving Advances outstanding hereunder would exceed the Formula Amount for more than thirty (30) consecutive Business Days or exceed one hundred and five percent (105%) of the Formula Amount. 81 (vii) increase the Inventory Advance Rate or the Cash on Deposit Advance Rate. Any such supplemental agreement shall apply equally to each Lender and shall be binding upon Borrowers, Lenders and Agent and all future holders of the Obligations. In the case of any waiver, Borrowers, Agent and Lenders shall be restored to their former positions and rights, and any Event of Default waived shall be deemed to be cured and not continuing, but no waiver of a specific Event of Default shall extend to any subsequent Event of Default (whether or not the subsequent Event of Default is the same as the Event of Default which was waived), or impair any right consequent thereon. In the event that Agent requests the consent of a Lender pursuant to this Section 16.2 and such Lender shall not respond or reply to Agent in writing within ten (10) days of delivery of such request, such Lender shall be deemed not to have consented to the matter that was the subject of the request. In the event that Agent requests the consent of a Lender pursuant to this Section 16.2 and such consent is denied, then PNC may, at its option, require such Lender to assign its interest in the Advances to PNC or to another Lender or to any other Person designated by the Agent (the "Designated Lender"), for a price equal to the then outstanding principal amount thereof plus accrued and unpaid interest, fees and other amounts due such Lender hereunder, which interest, fees and other amounts shall be paid when collected from Borrowers. In the event PNC elects to require any Lender to assign its interest to PNC or to the Designated Lender, PNC will so notify such Lender in writing within forty five (45) days following such Lender's denial, and such Lender will assign its interest to PNC or the Designated Lender no later than five (5) days following receipt of such notice pursuant to a Commitment Transfer Supplement executed by such Lender, PNC or the Designated Lender, as appropriate, and Agent. Notwithstanding (a) the existence of a Default or an Event of Default, (b) that any of the other applicable conditions precedent set forth in Section 8.2 hereof have not been satisfied or (c) any other provision of this Loan Agreement, Agent may at its discretion and without the consent of the Required Lenders, voluntarily permit the outstanding Revolving Advances at any time to exceed the Formula Amount by up to five percent (5%) of the Formula Amount for up to thirty (30) consecutive Business Days. For purposes of the preceding sentence, the discretion granted to Agent hereunder shall not preclude involuntary overadvances that may result from time to time due to the fact that the Formula Amount was unintentionally exceeded for any reason, including, but not limited to, Collateral previously deemed to be "Eligible Inventory" becomes ineligible, collections of Receivables applied to reduce outstanding Revolving Advances are thereafter returned for insufficient funds or overadvances are made to protect or preserve the Collateral. In addition to (and not in substitution of) the discretionary Revolving Advances permitted above in this Section 16.2, the Agent is hereby authorized by the Borrowers and the Lenders, from time to time in the Agent's sole discretion, (A) after the occurrence and during the continuation of a Default or an Event of Default, or (b) at any time that any of the other applicable conditions precedent set forth in Section 8.2 hereof have not been satisfied, to make Revolving Advances to the Borrowers on behalf of the Lenders which the Agent, in its reasonable business judgment, deems necessary or desirable (a) to preserve or protect the Collateral, or any portion thereof, (b) to enhance the likelihood of, or maximize the amount of, 82 repayment of the Advances and other Obligations, or (iii) to pay any other amount chargeable to the Borrowers pursuant to the terms of this Agreement; provided, that at any time after giving effect to any such Revolving Advances the outstanding Revolving Advances do not exceed one hundred and five percent (105%) of the Formula Amount". 16.3. Successors and Assigns; Participations; New Lenders. (a) This Agreement shall be binding upon and inure to the benefit of Borrowers, Agent, each Lender, all future holders of the Obligations and their respective successors and assigns, except that no Borrower may assign or transfer any of its rights or obligations under this Agreement without the prior written consent of Agent and each Lender. (b) Each Borrower acknowledges that in the regular course of commercial banking business one or more Lenders may at any time and from time to time sell participating interests in the Advances to other financial institutions (each such transferee or purchaser of a participating interest, a "Transferee"). Each Transferee may exercise all rights of payment (including without limitation rights of set-off) with respect to the portion of such Advances held by it or other Obligations payable hereunder as fully as if such Transferee were the direct holder thereof provided that Borrowers shall not be required to pay to any Transferee more than the amount which it would have been required to pay to Lender which granted an interest in its Advances or other Obligations payable hereunder to such Transferee had such Lender retained such interest in the Advances hereunder or other Obligations payable hereunder and in no event shall Borrowers be required to pay any such amount arising from the same circumstances and with respect to the same Advances or other Obligations payable hereunder to both such Lender and such Transferee. Each Borrower hereby grants to any Transferee a continuing security interest in any deposits, moneys or other property actually or constructively held by such Transferee as security for the Transferee's interest in the Advances. (c) Any Lender may with the consent of Agent which shall not be unreasonably withheld or delayed sell, assign or transfer all or any part of its rights under this Agreement and the Other Documents to one or more additional banks or financial institutions and one or more additional banks or financial institutions may commit to make Advances hereunder (each a "Purchasing Lender"), in minimum amounts of not less than $5,000,000, pursuant to a Commitment Transfer Supplement, executed by a Purchasing Lender, the transferor Lender, and Agent and delivered to Agent for recording. Upon such execution, delivery, acceptance and recording, from and after the transfer effective date determined pursuant to such Commitment Transfer Supplement, (i) Purchasing Lender thereunder shall be a party hereto and, to the extent provided in such Commitment Transfer Supplement, have the rights and obligations of a Lender thereunder with a Commitment Percentage as set forth therein, and (ii) the transferor Lender thereunder shall, to the extent provided in such Commitment Transfer Supplement, be released from its obligations under this Agreement, the Commitment Transfer Supplement creating a novation for that purpose. Such Commitment Transfer Supplement shall be deemed to amend this Agreement to the extent, and only to the extent, necessary to reflect the addition of such Purchasing Lender and the resulting adjustment of the Commitment Percentages arising from the purchase by such Purchasing Lender of all or a portion of the rights and obligations of such transferor Lender under this Agreement and the Other Documents. Borrowers hereby consent to the addition of such Purchasing Lender and the resulting adjustment of the 83 Commitment Percentages arising from the purchase by such Purchasing Lender of all or a portion of the rights and obligations of such transferor Lender under this Agreement and the Other Documents. Borrowers shall execute and deliver such further documents and do such further acts and things in order to effectuate the foregoing. (d) Agent shall maintain at its address a copy of each Commitment Transfer Supplement delivered to it and a register (the "Register") for the recordation of the names and addresses of the Advances owing to each Lender from time to time. The entries in the Register shall be conclusive, in the absence of manifest error, and Borrowers, Agent and Lenders may treat each Person whose name is recorded in the Register as the owner of the Advance recorded therein for the purposes of this Agreement. The Register shall be available for inspection by Borrowers or any Lender at any reasonable time and from time to time upon reasonable prior notice. Agent shall receive a fee in the amount of $3,500 payable by the applicable Purchasing Lender upon the effective date of each transfer or assignment to such Purchasing Lender. (e) Each Borrower authorizes each Lender to disclose to any Transferee or Purchasing Lender and any prospective Transferee or Purchasing Lender any and all financial information in such Lender's possession concerning such Borrower which has been delivered to such Lender by or on behalf of such Borrower pursuant to this Agreement or in connection with such Lender's credit evaluation of such Borrower. 16.4. Application of Payments, Overadvances for GE Capital Proceeds. Agent shall have the continuing and exclusive right to apply or reverse and re-apply any payment and any and all proceeds of Collateral to any portion of the Obligations. (a) To the extent that any Borrower makes a payment or Agent or any Lender receives any payment or proceeds of the Collateral for any Borrower's benefit, which are subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid to a trustee, debtor in possession, receiver, custodian or any other party under any bankruptcy law, common law or equitable cause, then, to such extent, the Obligations or part thereof intended to be satisfied shall be revived and continue as if such payment or proceeds had not been received by Agent or such Lender. (b) In the event that within sixty (60) days after any date on which Agent has applied GE Capital Proceeds in an aggregate amount for that date not exceeding $10,000 to any portion of the Obligations or in the event that within thirty (30) days after any date on which Agent has applied GE Capital Proceeds in an aggregate amount for that date in excess of $10,000 to any portion of the Obligations and, in either event, GE Capital has provided notice thereof (a "GE Proceeds Notice") within such time to Agent and Borrowing Agent (a copy of which Agent shall promptly provide to the Lenders): (i) Each Lender shall, within three (3) Business Days of the date of receipt by Agent of the GE Proceeds Notice, make an Advance (a "GE Proceeds Advance") in an amount equal to its Commitment Percentage of the amount by which the GE Capital Proceeds which were applied to the Obligations and described in the GE Proceeds Notice exceeds the amount of Undrawn Availability on the date of such Advance; 84 (ii) Each Lender's GE Proceeds Advance shall be made in immediately available funds to the Agent and, to the extent of its receipt of GE Proceeds Advances from the Lenders in such funds, Agent shall transmit the same to GE Capital as directed by the GE Proceeds Notice; (iii) Each GE Proceeds Advance shall be immediately due and payable by Borrowers, jointly and severally, at the Payment Office without the necessity of any demand, and at all times until paid shall accrue interest at the Default Rate as a Domestic Rate Loan; (iv) Each Lender shall be obligated unconditionally and irrevocably to make GE Proceeds Advances in accordance with this Section 16.4, notwithstanding that there is no Undrawn Availability or that any other condition to the making of Advances has not been satisfied. (v) To avoid duplication of Obligations relating to GE Proceeds Advances, to the extent of the GE Proceeds Advances made by Lenders, the Obligations intended to have been satisfied by the related GE Capital Proceeds which were applied to the Obligations shall, solely to the extent of the GE Proceeds Advances made by Lenders, be revived and continue as if such amount had not been received by Agent or any such Lenders. 16.5. Indemnity. Each Borrower shall indemnify Agent, each Lender and each of their respective officers, directors, Affiliates, employees and agents from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses and disbursements of any kind or nature whatsoever (including, without limitation, fees and disbursements of counsel) which may be imposed on, incurred by, or asserted against Agent or any Lender in any litigation, proceeding or investigation instituted or conducted by any governmental agency or instrumentality or any other Person with respect to any aspect of, or any transaction contemplated by, or referred to in, or any matter related to, this Agreement or the Other Documents, whether or not Agent or any Lender is a party thereto, except to the extent that any of the foregoing arises out of the gross negligence or willful misconduct of the party being indemnified. 16.6. Notice. Except as otherwise provided in Section 16.1, any notice or request hereunder may be given to Borrowing Agent or any Borrower or to Agent or any Lender at their respective addresses set forth below or at such other address as may hereafter be specified in a notice designated as a notice of change of address under this Section. Any notice, request, demand, direction or other communication (for purposes of this Section 16.6 only, a "Notice") to be given to or made upon any party hereto under any provision of this Loan Agreement shall be given or made by telephone or in writing (which includes by means of electronic transmission (i.e., "e-mail") or facsimile transmission or by setting forth such Notice on a site on the World Wide Web (a "Website Posting") if Notice of such Website Posting (including the information necessary to 85 access such site) has previously been delivered to the applicable parties hereto by another means set forth in this Section 16.6) in accordance with this Section 16.6. Any such Notice must be delivered to the applicable parties hereto at the addresses and numbers set forth under their respective names on Section 16.6 hereof or in accordance with any subsequent unrevoked Notice from any such party that is given in accordance with this Section 16.6. Any Notice shall be effective: (a) In the case of hand-delivery, when delivered; (b) If given by mail, four days after such Notice is deposited with the United States Postal Service, with first-class postage prepaid, return receipt requested; (c) In the case of a telephonic Notice, when a party is contacted by telephone, if delivery of such telephonic Notice is confirmed no later than the next Business Day by hand delivery, a facsimile or electronic transmission, a Website Posting or an overnight courier delivery of a confirmatory Notice (received at or before noon on such next Business Day); (d) In the case of a facsimile transmission, when sent to the applicable party's facsimile machine's telephone number, if the party sending such Notice receives confirmation of the delivery thereof from its own facsimile machine; (e) In the case of electronic transmission, when actually received; (f) In the case of a Website Posting, upon delivery of a Notice of such posting (including the information necessary to access such site) by another means set forth in this Section 16.6; and (g) If given by any other means (including by overnight courier), when actually received. Any Lender giving a Notice to Borrowing Agent or any Borrower shall concurrently send a copy thereof to the Agent, and the Agent shall promptly notify the other Lenders of its receipt of such Notice. (A) If to Agent or PNC at: PNC Bank, National Association One PNC Plaza, 6th Floor 249 Fifth Avenue Pittsburgh, PA 15222 Attention: James M. Steffy Telephone: (412) 768-6387 Telecopier: (412) 768-4369 86 with a copy to: PNC Bank, National Association PNC Firstside Center 500 First Avenue, 4th Floor Pittsburgh, PA 15219 Attention: Lisa Pierce Telephone: (412) 762-6442 Telecopier: (412) 762-8672 and a copy to: Buchanan Ingersoll PC 301 Grant Street, 20th Floor Pittsburgh, PA 15219 Attention: Thomas S. Galey Telephone: (412) 562-3927 Telecopier: (412) 562-1041 (B) If to a Lender other than Agent, as specified on the signature pages hereof. (C) If to Borrowing Agent or any Borrower, at: LESCO, Inc. 1301 East Ninth Street Cleveland, OH 44114 Attention: Chief Financial Officer Telephone: (216) 706-9250 Telecopier: (216) 706-5163 with a copy to: LESCO, Inc. 1301 East Ninth Street Cleveland, OH 44114 Attention: Law Department Telephone: (216) 706-9250 Telecopier: (216) 706-5163 and Baker & Hostetler LLP 3200 National City Center 1900 East Ninth Street Cleveland, OH 44114 Attention: M.H. (Bart) Sauer III Telephone: (216) 621-0200 Telecopier: (216) 696-0740 16.7. Survival. The obligations of Borrowers under Sections 2.2(f), 3.7, 3.8, 3.9, 4.19(h) and 16.5 shall survive termination of this Agreement and the Other Documents and payment in full of the 87 Obligations. The obligations of the Lenders to the Agent under Section 14.7 shall survive termination of this Agreement and the Other Documents and payment in full of the Obligations. 16.8. Severability. If any part of this Agreement is contrary to, prohibited by, or deemed invalid under applicable laws or regulations, such provision shall be inapplicable and deemed omitted to the extent so contrary, prohibited or invalid, but the remainder hereof shall not be invalidated thereby and shall be given effect so far as possible. 16.9. Expenses. All costs and expenses including, without limitation, reasonable attorneys' fees (including the allocated costs of in house counsel) and disbursements incurred by Agent on its behalf or on behalf of Lenders (a) in connection with the entering into, modification, amendment, and administration of this Agreement or any consents or waivers hereunder and all related agreements, documents and instruments, or (b) in instituting, maintaining, preserving, enforcing and foreclosing on Agent's security interest in or Lien on any of the Collateral, whether through judicial proceedings or otherwise, or (c) in connection with any advice given to Agent or any Lender with respect to its rights and obligations under this Agreement and all related agreements, may be charged to Borrowers' Account and shall be part of the Obligations. All costs and expenses including, without limitation, reasonable attorneys' fees (including the allocated costs of in house counsel) and disbursements incurred by Agent or Lenders (a) in all efforts made to enforce payment of any Obligation, enforcement of this Agreement or effect collection of any Collateral, or (b) in defending or prosecuting any actions or proceedings arising out of or relating to Agent's or any Lender's transactions with any Borrower, may be charged to Borrowers' Account and shall be part of the Obligations. 16.10. Injunctive Relief. Each Borrower recognizes that, in the event any Borrower fails to perform, observe or discharge any of its obligations or liabilities under this Agreement, any remedy at law may prove to be inadequate relief to Lenders; therefore, Agent, if Agent so requests, shall be entitled to temporary and permanent injunctive relief in any such case without the necessity of proving that actual damages are not an adequate remedy. 16.11. Consequential Damages. Neither Agent nor any Lender, nor any agent or attorney for any of them, shall be liable to any Borrower for consequential damages arising from any breach of contract, tort or other wrong relating to the establishment, administration or collection of the Obligations. 16.12. Captions. The captions at various places in this Agreement are intended for convenience only and do not constitute and shall not be interpreted as part of this Agreement. 88 16.13. Counterparts; Telecopied Signatures. This Agreement may be executed in any number of and by different parties hereto on separate counterparts, all of which, when so executed, shall be deemed an original, but all such counterparts shall constitute one and the same agreement. Any signature delivered by a party by facsimile transmission shall be deemed to be an original signature hereto. 16.14. Construction. The parties acknowledge that each party and its counsel have reviewed this Agreement and that the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Agreement or any amendments, schedules or exhibits thereto. 16.15. Confidentiality; Sharing Information. (a) Agent, each Lender and each Transferee shall hold all non-public information obtained by Agent, such Lender or such Transferee pursuant to the requirements of this Agreement in accordance with Agent's, such Lender's and such Transferee's customary procedures for handling confidential information of this nature; provided, however, Agent, each Lender and each Transferee may disclose such confidential information (a) to its examiners, affiliates, outside auditors, counsel and other professional advisors, (b) to Agent, any Lender or to any prospective Transferees and Purchasing Lenders, and (c) as required or requested by any Governmental Body or representative thereof or pursuant to legal process; provided, further that (i) unless specifically prohibited by applicable law or court order, Agent, each Lender and each Transferee shall use its best efforts prior to disclosure thereof, to notify the applicable Borrower of the applicable request for disclosure of such non-public information (A) by a Governmental Body or representative thereof (other than any such request in connection with an examination of the financial condition of a Lender or a Transferee by such Governmental Body) or (B) pursuant to legal process and (ii) in no event shall Agent, any Lender or any Transferee be obligated to return any materials furnished by any Borrower other than those documents and instruments in possession of Agent or any Lender in order to perfect its Lien on the Collateral once the Obligations have been paid in full and this Agreement has been terminated. Notwithstanding anything herein to the contrary, the information subject to this Section 16.15 shall not include, and Agent and each Lender may disclose without limitation of any kind, any information with respect to the "tax treatment" and "tax structure" (in each case, within the meaning of Income Tax Regulation Section 1.6011-4) of the transactions contemplated hereby and all materials of any kind (including opinions or other tax analyses) that are provided to the Agent or such Lender relating to such tax treatment and tax structure; provided that with respect to any document or similar item that in either case contains information concerning the tax treatment or tax structure of the transaction as well as other information, this sentence shall only apply to such portion of the document or similar item that relate to the tax treatment or tax structure of the Advances, Letters of Credit and transactions contemplated hereby. (b) Each Borrower acknowledges that from time to time financial advisory, investment banking and other services may be offered or provided to such Borrower or one or 89 more of its Affiliates (in connection with this Agreement or otherwise) by any Lender or by one or more Subsidiaries or Affiliates of such Lender and each Borrower hereby authorizes each Lender to share any information delivered to such Lender by such Borrower and its Subsidiaries pursuant to this Agreement, or in connection with the decision of such Lender to enter into this Agreement, to any such Subsidiary or Affiliate of such Lender, it being understood that any such Subsidiary or Affiliate of any Lender receiving such information shall be bound by the provision of Section 16.15 as if it were a Lender hereunder. Such authorization shall survive the repayment of the other Obligations and the termination of the Loan Agreement. 16.16. Publicity. Each Borrower and each Lender hereby authorizes Agent to make appropriate announcements of the financial arrangement entered into among Borrowers, Agent and Lenders, including, without limitation, announcements which are commonly known as tombstones, in such publications and to such selected parties as Agent shall in its sole and absolute discretion deem appropriate. [SIGNATURE PAGES FOLLOW] 90 [SIGNATURE PAGE 1 OF 2 TO AMENDED AND RESTATED REVOLVING CREDIT AND SECURITY AGREEMENT] Each of the parties has signed this Agreement as of the day and year first above written. LESCO, INC. By: /s/ Jeffrey L. Rutherford (SEAL) ------------------------------ Name: Jeffrey L. Rutherford Title: Senior Vice President and Chief Financial Officer Address: 1301 East Ninth Street Cleveland, OH 44114 LESCO SERVICES, INC. By: /s/ Jeffrey L. Rutherford (SEAL) ------------------------------ Name: Jeffrey L. Rutherford Title: Vice President and Chief Financial Officer Address: 1301 East Ninth Street Cleveland, OH 44114 LESCO TECHNOLOGIES, LLC By: /s/ Jeffrey L. Rutherford (SEAL) ------------------------------ Name: Jeffrey L. Rutherford Title: Vice President and Chief Financial Officer Address: 1301 East Ninth Street Cleveland, OH 44114 AIM LAWN & GARDEN PRODUCTS, INC. By: /s/ Jeffrey L. Rutherford (SEAL) ------------------------------ Name: Jeffrey L. Rutherford Title: Vice President and Chief Financial Officer Address: 1301 East Ninth Street Cleveland, OH 44114 [SIGNATURE PAGE 2 OF 2 TO AMENDED AND RESTATED REVOLVING CREDIT AND SECURITY AGREEMENT] PNC BANK, NATIONAL ASSOCIATION, as Lender and as Agent By: /s/ James M. Steffy ------------------------------------ Name: James M. Steffy ---------------------------------- Title: Vice President --------------------------------- Address: PNC Bank, National Association One PNC Plaza, 6th Floor 249 Fifth Avenue Pittsburgh, PA 15222 Attention: James M. Steffy -2- LIST OF EXHIBITS AND SCHEDULES EXHIBITS Exhibit 2.1(a) Revolving Credit Note Exhibit 5.5(b) Financial Projections Exhibit 8.1(k) Financial Condition Certificate Exhibit 8.1(r) Subordination Agreement Exhibit 16.3 Commitment Transfer Supplement Exhibit A Borrowing Base Certificate SCHEDULES Schedule 1.2(p) Permitted Encumbrances Schedule 2.9 Letters of Credit (on Closing Date) Schedule 4.5 Equipment and Inventory Locations Schedule 4.15(c) Location of Executive Offices Schedule 4.19 Real Property Schedule 5.2(a) States of Qualification and Good Standing Schedule 5.2(b) Subsidiaries Schedule 5.4 Federal Tax Identification Number Schedule 5.6 Prior Names Schedule 5.7 Environmental Schedule 5.8(b) Litigation Schedule 5.8(d) Plans Schedule 5.9 Intellectual Property, Source Code Escrow Agreements Schedule 5.10 Licenses and Permits Schedule 5.14 Labor Disputes Schedule 5.19 Interest Rate Protection Agreements Schedule 7.8 Indebtedness EX-10.G 4 l18240aexv10wg.txt EXHIBIT 10(G) EMPLOYMENT AGREEMENT Exhibit 10 (g) EMPLOYMENT AGREEMENT THIS AGREEMENT (the "Agreement") is made effective as of the 1st day of January 2006 (the "Agreement Date"), by and between LESCO, INC., an Ohio corporation (the "Company"), and JEFFERY L. RUTHERFORD (the "Executive"). WHEREAS, Executive currently is employed by the Company in an at-will capacity; WHEREAS, the Company desires to change the duties and responsibilities of Executive (but not his at-will employment status) to provide for the employment of the Executive on the terms and conditions set forth herein, in the best interest of the Company and its constituencies; and WHEREAS, the Executive desires to be employed by the Company, as provided herein; NOW, THEREFORE, in consideration of the premises and the respective covenants and agreements of the parties herein contained, the parties agree as follows: 1. Employment. The Company agrees to employ the Executive and the Executive agrees to be employed on a full-time basis by the Company for the period and upon the terms and conditions hereinafter set forth. 2. Term: Employment Period. The term of this Agreement shall commence on the date hereof (the "Effective Date") and shall continue hereunder, unless amended, until terminated under the provisions of Section 6 of this Agreement. The period during which the Executive is employed by the Company pursuant to this Agreement is referred to herein as the "Employment Period." The date on which the termination of the Executive's employment hereunder shall become effective is referred to herein as the "Termination Date." For purposes of this Agreement, an "Employment Year" shall be the calendar year. 3. Position and Duties. During the Employment Period, the Executive shall serve as President and Chief Executive Officer of the Company and shall have such responsibilities, duties and authority as are customarily and ordinarily exercised by executives in similar positions in similar businesses in the United States and shall exercise such responsibilities, duties and authority consistent with the foregoing as the Chairman of the Company's Board of Directors (the "Board") shall determine from time to time. During the Employment Period, the Executive shall report to the Board as a whole. The Executive shall devote substantially all his working time and efforts to the business and affairs of the Company and shall use his best efforts to carry out his responsibilities faithfully and efficiently in a professional manner. Notwithstanding the foregoing, it is understood that during the Employment Period, subject to any conflict of interest policies of the Company and Section 8, the Executive may (i) serve in any capacity with any civic, charitable, or industry organizations, provided that such service does not materially interfere with his duties and responsibilities hereunder or the interests of LESCO; (ii) make and manage personal investments of his choice; provided that such activities do not materially interfere with his duties and responsibilities hereunder or conflict with the interests of LESCO, and (iii) with approval of the Board, which approval shall not be unreasonably withheld, serve on the board of directors of up to two (2) noncompeting for-profit business enterprises. During the Employment Period, the Company shall take all actions required for the Executive to be elected to the Board. 4. Place of Performance. During the Employment Period, the Executive's place of performance of his services shall be at the Company's corporate headquarters, except for required travel by the Executive on the Company's behalf. 5. Compensation and Benefits. (a) Salary. During the Employment Period, the Company shall pay to the Executive an initial annual base salary of Three Hundred Seventy-Five Thousand Dollars ($375,000) (as the same may be increased from time to time, the "Base Salary"), such salary to be paid in periodic installments in accordance with the Company's payroll practices as in effect from time to time. The Base Salary shall be reviewed annually by the Compensation, Governance and Nominating Committee of the Board (the "Compensation Committee") and may be increased from time to time in accordance with normal business practices of the Company and, if so increased, shall not, absent compelling economic circumstances, thereafter be reduced. (b) Annual Bonus. During the Employment Period, the Executive shall be eligible to earn an annual bonus under the Company's bonus plan, or a successor plan thereto, as shall be in effect from time to time (the "Bonus Plan"), subject to achievement of performance goals determined in accordance with the terms of the Bonus Plan (such annual bonus, the "Annual Bonus"). The Annual Bonus shall be payable as determined by the Compensation Committee at such time as bonuses are ordinarily paid to senior executives of the Company. (c) Performance Plan. The Executive shall be entitled to immediate participation in the Company's Performance Plan as and when such Performance Plan is approved by the Compensation Committee for Management Committee Members. (d) Expenses. During the Employment Period, the Company shall promptly reimburse the Executive for all reasonable out-of-pocket expenses incurred by the Executive in connection with the business of the Company and the performance of his duties under this Agreement in accordance with the terms of the Company's expense reimbursement policies as in effect from time to time. (e) Benefit Plans. During the Employment Period, the Executive shall be entitled to participate in all of the employee benefit plans, programs, -2- agreements and arrangements provided to employees generally and to senior executives of the Company, as such are in effect from time to time, consistent with the terms and conditions thereof and on a basis no less favorable than that provided to such senior executives; provided, however, that Executive shall be given the opportunity, on a yearly basis, during the open enrollment period generally applicable to all employees of the Company, to change his benefit plan elections, and shall be required to pay the employee portion of the benefits elected. (f) Perquisites. During the Employment Period, the Executive shall be entitled to (i) payment by the Company or reimbursement for an executive annual physical examination and (ii) an automobile allowance of Five Hundred Dollars ($500) per month plus payment by the Company or reimbursement for operating expenses. (g) Vacations. During the Employment Period, the Executive shall be entitled to vacation time, paid holidays and personal days, determined in accordance with the Company's policy with respect to its senior executives as in effect from time to time, it being understood that the Executive shall be entitled to not less than four weeks' vacation in any Employment Year. 6. Termination of Employment (a) Accrued Benefits and Unvested Awards. In the event of the termination of the Executive's employment hereunder for any reason other than For Cause or a Voluntary Resignation under Special Circumstances (as defined herein) or death or disability, (i) the Executive (or his estate or representative, as applicable) shall be entitled to receive any Base Salary (earned but unpaid), prior year's Annual Bonus or other incentive award, if the Annual Bonus or other incentive award would have been earned had the Executive continued employment, vacation time and expenses that have in each case accrued but are unpaid as of the Termination Date, vested options, vested benefits under the Company's benefit plans, as well as any post-termination benefits to which he may be entitled pursuant to the Company's retirement, insurance and other benefit plans, programs and arrangements as in effect immediately prior to the Termination Date, but not the car allowance or car insurance (the "Accrued Benefits") and (ii) all long-term stock incentive awards held by the Executive (whether in the form of options, phantom units, performance shares, restricted shares or other awards of whatever nature) which are otherwise unvested on the Termination Date (the "Unvested Awards") shall fully vest, and all restrictions and conditions shall be removed, on the Date of Termination; provided, however, that notwithstanding anything contained in this Agreement or in any other agreement to the contrary, in order to induce the Company to vest such otherwise Unvested Awards, the Executive -3- hereby agrees to exercise all such otherwise Unvested Awards within one year of the Termination Date. (b) Death. The Executive's employment hereunder shall terminate as of the date of his death. Upon the termination of the Executive's employment hereunder because of his death, the Executive's estate or representative, as the case may be, shall be entitled to receive the Accrued Benefits, except that the Annual Bonus payable, if any, will be on a pro rata basis. Such pro rata Annual Bonus shall be determined by multiplying the amount of the Annual Bonus by a fraction, the numerator of which is the number of days in the Employment Year elapsed prior to the date of death and the denominator of which is three hundred sixty-five (365). (c) Disability. The Executive's employment hereunder may be terminated, at the discretion of the Board, during the Employment Period, upon the Executive's Disability. For this purpose, the term "Disability" means: the Executive, by reason of any medically determinable physical or mental impairment that is expected to result in death or last for a period of at least twelve months, is unable to engage in any substantial gainful activity. In such event, the Executive (or his representatives, as applicable) shall be entitled to receive the Accrued Benefits, except that the Annual Bonus payable, if any, will be on a pro rata basis. Such pro rata Annual Bonus shall be determined by multiplying the target amount of the Annual Bonus by a fraction, the numerator of which is the number of days in the Employment Year elapsed prior to the date of termination by reason of disability and the denominator of which is three hundred and sixty-five (365). The Company shall have sole discretion as to whether the Executive has experienced a Disability. (d) Voluntary Resignation. The Executive may voluntarily terminate his employment hereunder during the Employment Period by providing thirty (30) days' written notice of termination to the Company (a "Voluntary Resignation") unless circumstances exist in which the Company could terminate For Cause. In the event that the Executive's employment hereunder is terminated pursuant to this Section 6(d), subject to Section 6(j) below, the Executive shall be entitled to the Accrued Benefits; provided, however, that if any element of Accrued Benefits is subject to the limitations of Internal Revenue Code ("Code") Section 409A, such element(s) of Accrued Benefits will be paid no earlier than six (6) months after Executive's Separation From Service. For purposes of this Agreement, Executive will have a "Separation From Service" if: such Executive dies, retires, experiences Disability, or terminates employment. For this purpose, an Executive terminates employment if, after the Termination Date, he no longer is providing any services for the Company, in any capacity, or, if he is providing services after such date, such services are insignificant within the meaning of Prop. Treas. Reg. Section 1.409A-1(h). -4- (e) For Cause: Voluntary Resignation Under Special Circumstances. The Executive's employment hereunder may be terminated during the Employment Period (i) by the Company For Cause (as defined below) or (ii) by the Executive's Voluntary Resignation under circumstances in which the Company could terminate For Cause (a "Voluntary Resignation Under Special Circumstances). In the event that the Company terminates the Executive's employment hereunder For Cause or the Executive terminates employment by Voluntary Resignation Under Special Circumstances, the Termination Date shall be the date specified in the notice of termination For Cause delivered by the Company to the Executive or the date the Executive tenders his resignation, as the case may be. If the Executive's employment is terminated For Cause or by a Voluntary Resignation Under Special Circumstances, the Executive shall not be entitled to receive any further compensation or benefits under the Employment Agreement, except as to any unpaid salary and other benefits accrued and earned through the date of termination. (f) Without Cause: For Good Reason. The Executive's employment hereunder may be terminated during the Employment Period (i) by the Company Without Cause or (ii) by the Executive For Good Reason. In the event that the Executive's employment is terminated pursuant to this Section 6(f) (whether by the Company or by the Executive), the Termination Date shall be no earlier than thirty (30) days following the date on which a notice of termination is delivered by one party to the other. In the event that the Executive's employment is terminated pursuant to this Section 6(f), subject to Section 6(j) below, the Executive (or his estate or representative, as the case may be) shall be entitled to receive (A) the Accrued Benefits; (B) one year's Base Salary as in effect on the Termination Date and an amount equal to the Executive's Annual Bonus at target; (C) the continuation for one year of health benefits for the Executive and his eligible dependents at the same expense any employee would incur if such employee elected the same benefits as Executive, then full COBRA continuation at the Executive's expense; (D) executive level career outplacement services by an outplacement firm selected by the Executive and paid for as incurred by the Company and (E) the Unvested Awards on the terms described in Section 6(a). The payments contemplated in items (A) and (B) above which are subject to the limitations of Code Section 409A shall be paid as follows: one-half shall be paid on the date that is six months after Executive's Separation From Service, and the remaining one-half shall be paid, in one-sixth increments, over the following six months. During the first six months after Executive's Termination Date, he shall be required to pay to the Company, by check, the amounts necessary to fund Executive's share of the health care insurance premiums (in the event he elects continued coverage under item (C) above). -5- (g) Definition of "For Cause" and "For Good Reason". For purposes of this Agreement, "For Cause" means: (i) the Executive's conviction of, or plea of guilty or no contest to, a felony, (ii) the Executive engages in conduct that constitutes fraud, willful gross neglect or willful gross misconduct; or (iii) material breach of the Executive's duties of employment under this Agreement which is not cured within fifteen (15) days after receipt of written notice of such material breach. For purposes of clause (ii) of this definition, action or inaction by the Executive shall not be considered "willful" unless done or omitted by him (A) intentionally or not in good faith and (B) without reasonable belief that his action or inaction was in the best interest of the Company, and shall not include failure to act by reason of total or partial incapacity due to physical or mental illness. For purposes of this Agreement, "For Good Reason" means (i) material breach of this Agreement by the Company which is not cured within fifteen (15) days after receipt of written notice of such material breach; or (ii) without the Executive's consent: (A) and material diminution in the Executive's duties or authority, (B) any assignment of duties materially inconsistent with Executive's duties as provided in Section 3, (C) any change in the reporting structure to someone other than the Chairman of the Board [or the Board as a whole], or (D) any requirement that the Executive relocate his principal residence outside the greater Cleveland, Ohio, area. For purposes of this paragraph 6(g), the Executive shall be deemed to have consented to any of the items listed in clause (ii) unless he gives written notice of his objection to the Chairman of the Board within thirty (30) days of the event. (h) Retention Agreement. The provisions set forth in the Retention Agreement attached hereto as Exhibit A are hereby incorporated into this Agreement. The Executive hereby acknowledges that in the event he becomes entitled to the payments set forth in the Retention Agreement, such payments will be in lieu of any other payments to be made or benefits otherwise deliverable pursuant to the terms of this Agreement. In the event payments are made to Executive under the Retention Agreement, Executive nevertheless shall be bound by the covenants of Sections 8 and 18 of this Agreement. Executive agrees further that, if so requested by the Company, Executive shall agree to such amendments of the Retention Agreement as are necessary to bring that agreement into compliance with the rules and regulations under Code Section 409A. (i) No Mitigation. Upon termination of the Executive's employment with the Company, subject to the Executive's affirmative obligations pursuant to Section 8, the Executive shall be under no obligation to seek other employment or otherwise mitigate the obligations of the Company under this Agreement. -6- (j) In order for Executive to be entitled to receive the benefits under Sections 6(d) or 6(f), Executive shall be required to execute a General Release in a form designated by the Company. 7. Directors' and Officers' Insurance: Indemnification. In addition to any rights to indemnification to which the Executive is entitled under the Company's Articles of Incorporation and Code of Regulations (and any directors and officers liability insurance policy), the Company shall indemnify the Executive at all times during and after the Employment Period to the maximum extent permitted under the Ohio Corporation Act or any successor provision thereof, and any and all applicable state law and shall pay the Executive's expenses (including reasonable attorneys' fees and expenses, which shall be paid in advance by the Company as incurred, subject to recoupment in accordance with applicable law) in defending any civil action, suit or proceeding in advance of the final disposition of such action, suit or proceeding to the maximum extent permitted under such applicable state laws for the Executive's action or inaction on behalf of the Company under the terms of this Agreement, including but not limited to any acts or alleged acts arising out of events prior to the Executive's employment by the Company, which obligation shall survive the termination of the Executive's employment or the termination of the other provisions of this Agreement. 8. Confidential Information. For purposes of this Section 8, "Company" shall mean the Company and its subsidiaries and affiliates. (a) The Executive acknowledges the Company's reliance and expectation of Executive's continued commitment to performance of his duties and responsibilities during the Employment Period. In light of such reliance and expectation on the part of the Company, during the Employment Period and for a period beginning with the Termination Date and ending the later of (i) the date the Executive no longer receives payment from the Company or (ii) two (2) years from the Termination Date (and, as to clauses (ii) of this subparagraph (a), at any time during and after the Employment Period), the Executive shall not, directly or indirectly, do or suffer any of the following, except as otherwise expressly provided in this Agreement: (i) Own, manage, control or participate in the ownership, management, or control of, or be employed or engaged by or otherwise affiliated or associated as a consultant, independent contractor or otherwise with, any other corporation, partnership, proprietorship, firm, association or other business entity, or otherwise engage in any business which is in competition with the Company (as described in subparagraph (b) below); provided, however, that the ownership of not more than one percent (1%) of any class of publicly traded securities of any entity shall not be deemed a violation of this covenant; -7- (ii) Disclose, divulge, discuss, copy or otherwise use or suffer to be used in any manner, the customer lists, manufacturing methods, product research or engineering data or other trade secrets of the Company, it being acknowledged by the Executive that all such information regarding the business of the Company compiled or obtained by, or furnished to, the Executive while the Executive shall have been employed by or associated with the Company is confidential information and the Company's exclusive property; and (iii) Directly or indirectly contact, solicit or entice away (or attempt or assist in any such action) any customers, suppliers, contractors or employees of the Company, or in any way disparage any product or person associated with the Company. (b) For purposes of this Agreement, an entity shall be deemed to be in competition with the Company if such entity is engaged in the business of operating service centers for, or manufacturing or distributing, professional lawn or turf care equipment, fertilizers or supplies in the United States, or any other business in which the Company is engaged during the Employment Period. (c) The Executive expressly agrees and understands that the remedy at law for any breach by him of this Section 8 will be inadequate and that the damages flowing from such breach are not readily susceptible to being measured in monetary terms. Accordingly, it is acknowledged that, upon adequate proof of the Executive's violation of any legally enforceable provision of this Section 8, the Company shall be entitled to immediate injunctive relief and may obtain a temporary order restraining any threatened or further breach. Nothing in this Section 8 shall be deemed to limit the Company's remedies at law or in equity for any breach by the Executive of any of the provisions of this Section 8 that may be pursued or availed of by the Company. (d) If the Executive violates any legally enforceable provision of this Section 8 as to which there is a specific time period during which he is prohibited from taking certain actions or from engaging in certain activities, as set forth in such provision, then, in such event, such violation shall toll the running of such time period from the date of such violation until such violation shall cease. (e) The Executive has carefully considered the nature and extent of the restrictions upon him and the rights and remedies conferred upon the Company under this Section 8, and has had legal advice concerning the same, and hereby acknowledges and agrees that the same are reasonable in time and territory, are designed to eliminate competition which otherwise would be unfair to the Company, do not stifle the inherent skill and -8- experience of the Executive, would not operate as a bar to the Executive's sole means of support, are fully required to protect the legitimate interests of the Company and do not confer a benefit upon the Company disproportionate to the detriment to the Executive. 9. Withholding Taxes. All payments to the Executive, including the issuance of Common Stock required to be made to the Executive under this Agreement, shall be subject to withholding on account of federal, state and local taxes as required by law. If any particular payment required hereunder is insufficient to provide the amount of such taxes required to be withheld, the Company may withhold such taxes from any other payment due the Executive. If cash payments due the Executive are insufficient to provide the required amount of such withholding taxes, the Executive, within five (5) days of written notice from the Company, shall pay to the Company the amount of such withholding taxes in excess of all cash payments due the Executive at the time such withholding is required to be made by the Company. 10. No Conflicting Agreements. The Executive represents and warrants that he is not a party to any agreement, contract or understanding, whether employment or otherwise, which would restrict or prohibit him from undertaking or performing employment or services and advice in accordance with the terms and conditions of this Agreement. 11. Severability. It is the desire and intent of the parties that the provisions of this Agreement shall be enforced to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought. Accordingly, if any particular provision or portion of this Agreement shall be adjudicated to be invalid or unenforceable, this Agreement shall be deemed amended to delete therefrom the portion thus adjudicated to be invalid or unenforceable, such deletion to apply only with respect to the operation of such provision in the particular jurisdiction in which such adjudication is made. 12. Notices. Any notice to be given under this Agreement shall be personally delivered in writing or shall have been deemed duly given when received after it is posted in the United States mail, postage prepaid, registered or certified, return receipt requested, and if mailed to the Company, shall be addressed to it at 15885 Sprague Road, Strongsville, OH 44136-1799, Attention: General Counsel, with a copy to Baker & Hostetler LLP, 3200 National City Center, 1900 East 9th Street, Cleveland, OH 44114, Attention: Albert T. Adams, and if mailed to the Executive, shall be addressed to him at his home address in accordance with Company records or at such other address or addresses or to such other persons as either the Company or the Executive may hereafter designate in writing to the other. 13. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Ohio, without regard to its conflicts of laws provisions. -9- 14. Assignment. Neither this Agreement nor any rights or duties hereunder may be assigned by the Executive without the prior written consent of the Company. The Company shall have the right at any time to assign this Agreement to its successors and assigns; provided, however, that the assignee or transferee is the successor to all or substantially all of the business and assets of the Company and such assignee or transferee expressly assumes all of the obligations, duties and liabilities of the Company set forth in this Agreement. 15. Amendments. No provisions of this Agreement shall be altered, amended, revoked or waived except by an instrument in writing, signed by each party to this Agreement. 16. Binding Effect. Except as otherwise provided herein, this Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective legal representatives, heirs, successors and assigns. 17. Execution in Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 18. Arbitration. Any dispute, controversy or question arising under, out of, or relating to this Agreement (or the breach thereof), or, the Executive's employment with the Company or termination thereof, shall be referred for arbitration in Cleveland, Ohio, to a neutral arbitrator selected by the Executive and the Company and this shall be the exclusive and sole means for resolving such dispute. Such arbitration shall be conducted in accordance with the National Rules for Resolution of Employment Disputes of the American Arbitration Association. The arbitrator shall have the discretion to award reasonable attorneys' fees, costs and expenses to the prevailing party. Judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. Nothing in this Section 18 shall be construed so as to deny the Company the right and power to seek and obtain injunctive relief in a court of equity for any breach or threatened breach by the Executive of any of his covenants in Section 8. 19. Entirement Agreement. This Agreement sets forth the entire agreement and understanding of the parties and supersedes all prior understandings, agreements or representations by or between the parties, whether written or oral, which relate in any way to the subject matter hereof. 20. Survivorship. The provisions of this Agreement necessary to carry out the intention of the parties as expressed herein shall survive the termination or expiration of this Agreement. 21. Waiver. Except as provided herein, the waiver by either party of the other party's prompt and complete performance, or breach or violation, of any provision of this Agreement shall not operate nor be construed as a waiver of any subsequent breach or violation, and the failure by any party hereto to exercise any right or -10- remedy which it may possess hereunder shall not operate nor be construed as a bar to the exercise of such right or remedy by such party upon the occurrence of any subsequent breach or violation. 22. Captions. The captions of this Agreement are for convenience and reference only and in no way define, describe, extend or limit the scope or intent of this Agreement or the intent of any provision hereof. 23. Construction. The parties acknowledge that this Agreement is the result of arm's-length negotiations between sophisticated parties, each afforded representation by legal counsel. Each and every provision of this Agreement shall be construed as though both parties participated equally in the drafting of the same, and any rule of construction that a document shall be construed against the drafting party shall not be applicable to this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. By: /s/ Jeffrey L. Rutherford ------------------------------------ Jeffrey L. Rutherford LESCO, Inc. By: /s/ J. Martin Erbaugh ------------------------------------ Martin J. Erbaugh Chairman of the Board -11- EX-10.K 5 l18240aexv10wk.txt EXHIBIT 10(K) LONG-TERM SUPPLY AGREEMENT EXHIBIT 10(k) CONFIDENTIAL TREATMENT The material marked by ({REDACTED}) on the attached pages has been omitted from the filed copy of this agreement in connection with a confidential treatment request filed with the Securities and Exchange Commission by Lesco, Inc. (the "Company"). LONG-TERM SUPPLY AGREEMENT This LONG-TERM SUPPLY AGREEMENT ("Agreement") is entered into effective as of October 1, 2005 ("Contract Date"), by and between Turf Care Supply Corp., a Delaware corporation ("Supplier"), and LESCO, Inc., an Ohio corporation ("LESCO"). Additional defined terms are set forth in Section 1 hereof. RECITALS A. Prior to the Purchase and Sale Closing Date, LESCO used the Purchased Assets to manufacture and distribute the Products for its own account. Pursuant to the Purchase Agreement, effective as of the Purchase and Sale Closing Date, Supplier acquired from LESCO the Purchased Assets and will now commence to manufacture and distribute the Products for LESCO (and other products for others) pursuant to this Agreement. B. LESCO and Supplier have entered into this Agreement, effective as of the Contract Date, to establish the terms and conditions for LESCO's ongoing purchase from Supplier of Existing Products (and such New Products as Supplier may make available pursuant to this Agreement). NOW, THEREFORE, for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, LESCO and Supplier agree as follows: 1. ACCOUNTING TERMS; DEFINITIONS. Except as otherwise expressly provided herein, all terms of an accounting or financial nature shall be construed in accordance with GAAP, as in effect from time to time; provided that, if LESCO notifies Supplier that LESCO requests an amendment to any provision hereof to eliminate the effect of any change occurring after the date hereof in GAAP or in the application thereof on the operation of such provision, regardless of whether any such notice is given before or after such change in GAAP or in the application thereof, then such provision shall be interpreted on the basis of GAAP as in effect and applied immediately before such change shall have become effective until such notice shall have been withdrawn or such provision amended in accordance herewith. Defined terms used in this Agreement shall have the meaning ascribed thereto as follows: "Agreement" is defined in the introductory paragraph hereof. "Basic Warranty" is defined in Section 9(a) hereof. "Basic Warranty Period" is defined in Section 9(a) hereof. "Business Day" means any day other than a Saturday, Sunday or day on which commercial banks are authorized to close under the laws of the State of Ohio. "CAS" means cost accounting standards as applied in the United States of America and on a basis consistent with LESCO's historical practices, except as otherwise modified or set forth in Attachments D and/or E to this Agreement. "Confidential Information" is defined in Section 15 hereof. "Conforming Goods" means Products that are manufactured or sourced by Supplier for or on behalf of LESCO that meet or exceed the Specifications and Quality Standards; provided, however, that fertilizer blends produced with the existing Ranco blenders at the Sebring, Florida facility will not be considered non-conforming until such time as Supplier modifies, upgrades, replaces or no longer uses the Ranco blenders. "Conforming PO" means either a Conforming Seasonal PO or a Conforming Non-Seasonal Replen PO, as applicable. "Conforming Non-Seasonal Replen PO" means any Non-Seasonal Replen PO delivered by LESCO to Supplier which: (i) orders a quantity of Products not in excess of the amount provided for such month in the Locked Non-Seasonal Purchase Forecast (as defined in Attachment C), (ii) provides for between seven and fourteen days to deliver the applicable Non-Seasonal Product (to be adjusted by LESCO and Supplier based on actual experience during the Transitional Period, but not to exceed 14 days), and (iii) contains the items set forth in subsections (i) through (v) of Section 3(c) hereof. "Conforming Seasonal PO" means any Seasonal PO delivered by LESCO to Supplier which: (i) orders a quantity of Products not in excess of the amount provided for such month in the Locked PO Forecast (as defined in Attachment C), (ii) is delivered on or before the first day of the applicable month specified in the PO Forecast, (iii) provides for seven to fourteen days' delivery time (to be adjusted by LESCO and Supplier based on actual experience during the Transitional Period, but not to exceed 14 days), (iv) provides for the delivery location and SKU that is specified in the PO Forecast, and (v) contains the items set forth in subsections (i) through (v) of Section 3(b). A PO (an "In-Month Conforming Seasonal PO") will also be considered a Conforming Seasonal PO if: (i) the quantity of the SKU ordered by such PO, when taken together with the quantities of such SKU ordered by other Conforming Seasonal PO's and In-Month Conforming Seasonal PO's issued within the same month, does not exceed an amount equal to 10% of the quantity of SKU forecasted in the Locked PO Forecast (as defined in Attachment C) for such month, (ii) provides for seven to fourteen days' delivery time (to be adjusted by LESCO and Supplier based on actual experience during the Transitional Period, but not to exceed 14 days), and (iii) contains the items set forth in subsections (i) through (v) of Section 3(b). "Contract Date" is defined in the introductory paragraph hereof. "Contract Term" is defined in Section 8(a) hereof. "Customer" means any person who purchases any Product from LESCO, whether -2- through a Store, through LESCO's golf sales representatives network, through Internet sales or otherwise. "Environmental Protection Agency" means the U.S. Environmental Protection Agency, and any successor agency or agencies that may exist from time to time. "Existing Products" means those certain fertilizers, seed, control products and related products specifically listed by SKU and described in Attachment A attached hereto and made a part hereof. "Force Majeure" is defined in Section 11 hereof. "Forecast" means a Non-Seasonal Purchase Forecast, a PO Forecast or a Seasonal Purchase Forecast. "GAAP" means generally accepted accounting principles as applied in the United States of America and on a basis consistent with LESCO's historical practices, as in effect as of the pertinent measurement or testing date, unless otherwise modified or set forth in this Agreement. "Last Leg Transportation Costs" is defined in Attachment D. "LESCO" is defined in the introductory paragraph hereof. "LESCO Purchase Order" means LESCO's purchase order issued in electronic, written or other format to Supplier; provided, however, that in the event of any inconsistency between a LESCO Purchase Order and this Agreement, the terms hereof shall control. "Lost Gross Profit" is defined in Attachment B hereof. "Major Make-Whole Payment" is defined in Attachment B hereof. "Maintenance Capital" means all capital expenditures (as defined and determined in accordance with GAAP) made by Supplier in connection with the assets acquired for purposes of manufacturing or sourcing Products for LESCO. "Margin" means the Margin on A/R and the Margin on Maintenance Capital, as applicable. "Margin on A/R" is defined in Attachment F hereof. "Margin on Maintenance Capital" is defined in Attachment F hereof. "Minor Make-Whole Payment" is defined in Attachment B hereof. "New Products" is defined in Section 3(e) hereof. "Non-Seasonal Products" means all Products other than Seasonal Products. -3- "Non-Seasonal Purchase Forecast" is defined in Attachment C hereof. "Non-Seasonal Replen PO" is defined in Section 3(c) hereof. "Owner" is defined in Section 15 hereof. "parties" means LESCO and Supplier, and their permitted successors and permitted assigns, and "party" means LESCO or Supplier (and their respective permitted successors and permitted assigns). "person" means any individual, corporation, partnership, joint venture, association, limited liability company, joint stock company, trust, unincorporated organization, government, or any agency or political subdivision thereof, or any other form of entity. "PO Forecast" is defined in Attachment C hereof. "Products" means Existing Products and New Products, collectively, that are manufactured or sourced for or on behalf of LESCO by Supplier pursuant to this Agreement. "Purchase Agreement" means that certain Asset Purchase Agreement executed as of July 26, 2005 by Supplier and LESCO but effective as of the Purchase and Sale Closing Date. "Purchase and Sale Closing Date" means the closing date of the purchase and sale transaction contemplated by the Purchase Agreement. "Purchased Assets" means the assets purchased by Supplier from LESCO pursuant to the Purchase Agreement. "Recipient" is defined in Section 15 hereof. "Seasons" means the various time periods set forth in Attachment A to this Agreement with respect to the Seasonal Products set forth opposite such time periods, and "Season" shall mean any one of them. "Seasonal PO" is defined in Section 3(b). "Seasonal Products" means, for each Season (and only with respect to the period of such Season), the applicable category (i.e., Pre-emergent; Post-emergent; Fertilizer; Insecticide; Fungicide; Seed; or Ice Melt) of Product set forth opposite the name of the applicable Season in Attachment A hereof). A Seasonal Product shall be considered a Non-Seasonal Product for all time periods other than such Seasonal Product's Season(s) as set forth on Attachment A. "Seasonal Purchase Forecast" is defined in Attachment C hereof. "SEC" means the U.S. Securities and Exchange Commission, and any successor agency or agencies that may exist from time to time. "Semi-Annual Forecast" is defined in Section 3(a) hereof. -4- "SKU" means stock-keeping unit. "Specifications and Quality Standards" means the specifications and quality standards for manufacturing, packaging and labeling the products, which shall be provided by LESCO to Supplier in written and/or electronic format through LESCO's bill of materials system, as updated from time to time; provided that to the extent the Specification and Quality Standards change from those in existence today, any additional costs or savings resulting therefrom will adjust the Historical Metrics in Attachment E appropriately. "Standard Cost" is defined in Section 4(a) hereof "Store" means any LESCO Stores-On-Wheels(R), LESCO Service Center(R) or other LESCO owned or leased sales outlet. "Supplier" is defined in the introductory paragraph hereof. "Transitional Period" means the Transitional Period as defined in the TSA. "TSA" means that certain Transitional Services Agreement dated as of October 1, 2005, by and between LESCO and Supplier. 2. SALE AND PURCHASE OF PRODUCTS. (A) Agreement to Sell and Purchase Products. Supplier shall sell to LESCO, and LESCO shall purchase from Supplier, Products pursuant to the terms hereof. At all times during the Contract Term, Supplier shall maintain the capacity and resources necessary to permit Supplier to satisfy each Conforming PO, within agreed upon lead times and meeting all Specifications and Quality Standards and the other terms and conditions contained in this Agreement, which capacity and resource levels shall be at least equal to those of or related to the Purchased Assets immediately prior to the Contract Date. This Agreement constitutes a requirements contract with regard to all Products, meaning that (i) Supplier hereby grants LESCO a first call on Supplier's manufacturing capacity and resources to the extent required to satisfy one hundred and five percent (105%) of each June Capacity Forecast and December Capacity Forecast (subject to the provisions of Section 3(a) hereof and provided that Supplier shall not be obligated to possess capacity and resources beyond that available with the Purchased Assets immediately prior to Closing), and that Supplier will manufacture products for other customers only to the extent that fulfilling one hundred and five percent (105%) of the June Capacity Forecast and December Capacity Forecast (subject to the provisions of Section 3(a) hereof) does not require such capacity and resources and (ii) LESCO shall purchase all Products that it requires from Supplier except (A) that, to the extent Supplier informs LESCO that it is unable to produce the volume of the applicable Product indicated in a Forecast or LESCO Purchase Order, LESCO may acquire any shortfall from third party suppliers; (B) that, to the extent LESCO acquires certain Products (including, for avoidance of doubt, branded products) from third party manufacturers as of the date hereof, LESCO may continue to source those Products from such manufacturers if Supplier is not able to manufacture or source such Products on a basis at least as favorable to LESCO; (C) that nothing in this Agreement shall be construed to prohibit or limit LESCO from acquiring Product(s) from any other person to the extent -5- Supplier is unable to comply with any of its obligations under this Agreement or to the extent delivery costs to any Store or Customer make any purchase(s) of Product(s) from Supplier more costly to LESCO than from any other source; and (D) pursuant to Section 3(b) hereof. (B) Product Specifications. Supplier will manufacture or source all Products to the Specifications and Quality Standards. As required by applicable law but normally once per fiscal year, Supplier shall deliver to LESCO (i) for any Product sold to LESCO hereunder that is registered with the EPA, a specification sheet and a certificate of analysis in the form submitted to the EPA for such Product, and (ii) for any Product sold to LESCO hereunder that is not registered with the EPA, a specification sheet and a certificate satisfactory to LESCO certifying that such Product conforms with the Specifications and Quality Standards applicable thereto. (C) LESCO's Resale of Products. LESCO is permitted to resell the Products to any person anywhere in the world at any price and in any manner whatsoever including, but not limited to, from a Store, through LESCO's golf sales representatives network or through Internet sales. For avoidance of doubt, Supplier acknowledges and agrees that (i) LESCO may receive co-operative advertising payments from vendors (for, among other things, advertising, slotting and spiffs) in connection with LESCO's sales of the Products, and (ii) all such payments are not covered by this Agreement, do not impact in any manner whatsoever the price to be paid by LESCO hereunder for Products, and may be retained by LESCO without any accounting whatsoever to Supplier. (D) Special Provisions Relating to Turfgrass Seed. Pursuant to the Purchase Agreement, Supplier has acquired LESCO's turfgrass seed facilities and personnel in Silverton, Oregon. However, LESCO is retaining all contracts and licenses relating to the manufacture and purchase of turfgrass seed ("Turfgrass Seed Contracts"). (i) LESCO will arrange to have the turfgrass seed purchased pursuant to the Turfgrass Seed Contracts delivered to Supplier's facility in Silverton, Oregon (as elsewhere, as the Parties may agree from time to time). LESCO shall sell to Supplier, and Supplier shall purchase from LESCO, such turfgrass seed upon delivery thereof to Supplier's facility. The terms of purchase/sale shall be identical to the terms of purchase/sale, including payment terms, between LESCO and its turfgrass seed vendors pursuant to the applicable Turfgrass Seed Contracts (for avoidance of doubt, LESCO shall sell such turfgrass seed to Supplier at LESCO's cost thereof, and TCS shall remit payment (equal to what LESCO must pay its turfgrass seed vendor(s)) to LESCO at least one (1) Business Day before LESCO pays its turfgrass seed vendor(s)). (ii) All turfgrass seed sold to Supplier shall be held solely and exclusively for LESCO, and LESCO shall purchase all of such Product as needed. LESCO shall designate from time to time whether a particular quantity of such seed shall be delivered to it under LESCO's "variety specific" names and labels or under a "non-variety specific" name and label. If Supplier must have a license or other permission to re-sell such turfgrass seed to LESCO, the parties shall cooperate in good faith in order for Supplier to obtain such license/permission. (iii) Supplier shall use its commercially reasonable best efforts to assist LESCO in maintaining good relationships with its turfgrass seed vendors in the manner historically maintained by LESCO prior to the Contract Date. -6- (iv) Except as otherwise set forth in this Section 2(d), turfgrass seed purchased by Supplier from LESCO shall, upon such purchase, be treated like any other Product hereunder. 3. QUANTITIES AND ORDERING (A) Forecasting; Production Scheduling; Ordering. As set forth in Attachment C, LESCO or Supplier shall prepare (and, as specified on such attachment, LESCO and Supplier shall agree on): (i) with respect to Seasonal Products (including the seasonal allocations of Non-Seasonal Products), (A) monthly forward 12-month Seasonal Purchase Forecasts, (B) monthly forward 12-month Seasonal Production Schedules and (C) monthly forward 12-month Seasonal PO Forecasts and (ii) with respect to Non-Seasonal Products, a monthly forward 12-month Non-Seasonal Purchase Forecast, in each case all as set forth in Attachment C hereto. (The 12-month Seasonal Purchase Forecasts and the 12-month Non-Seasonal Purchase Forecasts that are delivered in June and December are referred to herein, respectively, as the "June Capacity Forecast" and the "December Capacity Forecast" and the first six months of each of the June Capacity Forecast and the December Capacity Forecast are referred to herein collectively as the "Semi-Annual Forecasts" and each as a "Semi-Annual Forecast."). The June Capacity Forecast and the December Capacity Forecast shall be considered final for purposes of determining capacity and resources that must be reserved for LESCO pursuant to Section 2(a) hereof and for purposes of Section 8; provided that where the June Capacity Forecast and the December Capacity Forecast overlap, the forecast first provided shall govern with respect to such six month period and the capacity and resources required under Section 2(a) hereof and provided, further, that Supplier shall make available to LESCO all excess capacity and resources in excess of such June and December Capacity Forecasts to the extent not otherwise committed to other customers. For example, if (1) the December Capacity Forecast delivered in December 2005 requires 1000 tons between January 1, 2006 and June 30, 2006 and 1,500 tons between July 1, 2006 and December 31, 2006 and (2) the June Capacity Forecast delivered in June 2006 requires 2,000 tons between July 1, 2006 and December 31, 2006 and 2,500 tons between January 1, 2007 and June 30, 2007, then Supplier is required to reserve capacity and resources to LESCO to produce (a) 1,575 tons from July 1, 2006 to December 31, 2006 and (b) 2,625 tons between January 1, 2007 and June 30, 2007 provided that Supplier shall make available to LESCO all excess capacity and resources in excess of such June and December Capacity Forecasts to the extent not otherwise committed to other customers. The parties acknowledge that Supplier need not begin production (other than sourcing of raw materials) of Seasonal Products (including the seasonal allocations of Non-Seasonal Products) until Supplier receives a Conforming PO. (B) Ordering of Seasonal Products. A LESCO Purchase Order for Seasonal Products (including the seasonal allocations of Non-Seasonal Products) (a "Seasonal PO") will be issued by LESCO to Supplier pursuant to the PO Forecast or Section 3(d) hereof. Issuance of a Seasonal PO will commit LESCO to purchase from Supplier the Products ordered on the Seasonal PO. LESCO will endeavor to deliver all Seasonal POs (other than In-Month Seasonal PO's) on or before the first day of the month specified in the PO Forecast. Each Seasonal PO will contain: (i) the SKU of the ordered Product; -7- (ii) the quantity and Standard Price per SKU; (iii) the address or delivery site of the Store or Customer where the Product is to be delivered or the service area containing the Store where the Product will ultimately be delivered with sufficient specificity so that Supplier can determine the appropriate distribution center and manufacturing plant; (iv) the date of delivery to the Store or Customer; and (v) any mutually-agreed special delivery requirements. (C) Ordering of Non-Seasonal Products. LESCO Purchase Orders for Non-Seasonal Products may be issued by LESCO to Supplier from time to time for the replenishment of Non-Seasonal Products (a "Non-Seasonal Replen PO"). Issuance of a Non-Seasonal Replen PO will commit LESCO to purchase from Supplier the Products ordered on such PO. Each Non-Seasonal Replen PO will contain the following information: (i) Product SKU, (ii) the address or delivery site of the Store or Customer where the Product is to be delivered, (iii) the quantity and Standard Price per SKU, (iv) the date of delivery to the Store or Customer, and (v) any mutually-agreed special delivery requirements. (D) Changes in Need for any Product. LESCO will promptly advise Supplier in writing if LESCO has placed any Product SKU on "watch" or "phase-out" status, or if LESCO has any other reason to anticipate any increase or decrease in its need for any Product not otherwise reflected in any Forecast. In any such event, Supplier shall use all commercially reasonable best efforts (including, but not limited to, the running of additional production shifts, if necessary) to fulfill LESCO's revised needs with respect to any Product ordered pursuant to a LESCO Purchase Order as soon as practicable after receipt of a revised LESCO Purchase Order reflecting an increased or decreased order for such Product; provided that Supplier shall not be subject to any penalties or any other liabilities if it is unable to deliver the increased volume of Products in accordance with the revised LESCO Purchase Order. If Supplier determines that it will be unable to deliver an increased volume of Products to comply with LESCO's revised needs, it shall promptly so notify LESCO of such fact and the reason(s) therefor, and LESCO shall be free to purchase from any other supplier or suppliers the quantities that Supplier is unable to deliver. (E) New Products. (i) Supplier will keep LESCO fully informed as to the development status of all proposed new fertilizer, combination fertilizer, seed, ice melt, pesticide, pest control products and/or related product(s) (collectively, "New Products" and individually, a "New Product") being developed by or on behalf of Supplier and, to the extent known, by any other person; provided, however, that the foregoing provision shall not require Supplier to violate any written or oral contractual confidentiality obligation to a third party, any trade secrets of a third party or any applicable law (so long as such written or oral contractual confidentiality obligation was not created in order to circumvent such foregoing provision). As soon as Supplier determines that a New Product to be manufactured or sourced by Supplier is commercially viable, it shall so notify LESCO in writing, describing the New Product(s) to be manufactured or sourced, the anticipated -8- availability schedule therefor and the quantities thereof that are anticipated to be available for delivery. For any New Product(s) being developed or sold by a person other than Supplier, Supplier shall keep LESCO apprised of any information relating thereto that becomes known to Supplier, and Supplier shall, at the request of LESCO, either obtain, at LESCO's cost, sufficient rights to allow Supplier to manufacture or source such New Product(s) for the benefit of LESCO and its Customers or permit LESCO to purchase such New Products(s) for distribution to LESCO and/or LESCO's Customers through Supplier's distribution network. Any intellectual property related to New Product(s) developed by Supplier pursuant to this paragraph shall be the property of Supplier, subject to the license rights granted to LESCO in Section 7(c) hereof. (ii) LESCO may from time to time propose to Supplier the development and/or manufacture of a New Product (including, but not limited to, derivatives of Existing Products) and, subject to Section 3(e)(iv) hereof, Supplier shall proceed with such development. In the event that Supplier does not proceed with such development as a result of such Section 3(e)(iv), LESCO shall be free to proceed with such development as LESCO proposes. Supplier shall so notify LESCO in writing, describing the New Product(s) to be manufactured or sourced, the anticipated availability schedule therefor and the quantities thereof that are anticipated to be available for delivery. If, as a result of such development, a patentable invention, technology or other protectable intellectual property right is created, LESCO and Supplier shall cooperate with one another to register or otherwise protect such intellectual property at LESCO's cost. Any such intellectual property related to New Product(s) proposed by LESCO pursuant to this paragraph shall be the property of LESCO, subject to the license rights granted to Supplier in Section 7(b) hereof. (iii) Any New Product purchased by LESCO under this Section 3(e) shall be deemed to be one of the "Products" for purposes hereof, and Attachment A shall be updated from time to time to reflect any New Product(s) that become Existing Products. (iv) If the manufacture of a New Product would result in a material increase in Standard Cost pursuant to Section 6(a)(iv) hereof, then Supplier and LESCO shall cooperate in good faith to reset the metrics set forth in Attachment E hereof in order to take such change into account. If the parties are unable to agree on such new metrics, then Supplier may refuse to manufacture such New Product(s). (F) Information Transmission Process. Supplier and LESCO shall cooperate in good faith to establish and thereafter utilize, as soon as is reasonably practicable and cost effective, an electronic data transmission process to support data transmission and communication between LESCO and Supplier including, but not limited to, forecasts, production schedules and any other information mutually desired by the parties. (G) Bar Coding. Supplier and LESCO shall cooperate in good faith to establish and thereafter utilize, as soon as is reasonably practicable and cost effective, a Product bar-coding system mutually acceptable to the parties. 4. PRODUCT PRICING. (A) Product Pricing. For each Product purchased by LESCO from Supplier hereunder (including pursuant to Section 5(b) and 5(c)), LESCO shall pay to Supplier Supplier's cost, as -9- determined in accordance with Attachments D and E to this Agreement, to provide such Product to or on behalf of LESCO ("Standard Cost") plus (without duplication of any costs included in Standard Costs) Last Leg Transportation Costs (as provided in Attachment D). At all times during the Contract Term, Supplier shall use all commercially reasonable efforts to minimize the costs payable by LESCO hereunder. (b) Competitive Pricing. Any other provision hereof to the contrary notwithstanding, Supplier covenants and guarantees that it will not offer or sell products to any of its direct or indirect customers (that are buying products similar to the Products at quantity levels similar to or less than LESCO's levels) at a purchase price (after taking into account all discounts, allowances, incentives, rebates or other concessions, no matter the type or form) that yields to Supplier a profit margin less than the profit margin earned by Supplier from the sale to LESCO hereunder of the same or substantially similar products. 5. PRODUCT DELIVERY AND ACCEPTANCE; PRODUCT RETURNS; MANDATORY ACCEPTANCES. (A) Delivery and Acceptance; Returns. Supplier shall deliver Conforming Goods to LESCO or its Customers at such locations (and quantities per location) as are specified in a Conforming PO. If Supplier fails to do so, Supplier shall pay to LESCO the Minor Make-Whole Payments and the Major Make-Whole Payments on the terms and subject to the conditions set forth in Attachment B to this Agreement (for avoidance of doubt, Minor Make-Whole Payments and the Major Make-Whole Payments are designed to reasonably compensate LESCO for Supplier's failure to perform in accordance with its obligations under this Agreement and shall be construed as liquidated damages and not as penalties). Except as otherwise provided in this Section 5(a) or Section 12 hereof, any return of Product must be approved in advance by Supplier, and must be accompanied by a return authorization from Supplier. LESCO shall notify Supplier of any obvious defects in the Products or packaging therefor that are apparent from visual inspection thereof within five (5) Business Days of the date of delivery to a LESCO Store. LESCO shall notify Supplier of any alleged defects in the Products or packaging therefor within six (6) months of LESCO's (or, if direct-shipped by Supplier to a Customer, such Customer's) receipt thereof. LESCO shall endeavor to return to Supplier at least one (1) unopened bag of any allegedly non-conforming Product so that it may undergo appropriate testing. LESCO reserves the right to refuse and/or to return to Supplier any non-Conforming Goods (or Conforming Goods delivered) in excess of the quantities, or delivered significantly before or after the times, specified in the applicable Conforming PO. (B) Forced Sale and Delivery of Seasonal Products (excluding the seasonal allocation of Non-Seasonal Products) and Certain Other Products. At any time during the 13th to 18th days of the last month of any Season, Supplier shall have the right, by giving notice to LESCO during such period, to sell to LESCO any Product consisting of Inventory included within the Purchased Assets and any Seasonal Product (but not including any seasonal allocation of Non-Seasonal Products) produced, sourced or manufactured for LESCO or a LESCO Customer pursuant to a Seasonal PO relating to the Season in which such notice is given. LESCO shall be obligated to purchase such Product within three (3) Business Days of receipt of such notice. Such notice shall contain the Product and volume that Supplier will sell to LESCO (and that LESCO will purchase from Supplier) pursuant to this Section 5(b). Within two (2) Business Days after LESCO's -10- receipt of such notice, LESCO shall advise Supplier of the location to which such Product will be delivered. Absent such agreement, Supplier will use its reasonable judgment in delivering such Product to the most cost-effective Stores. (C) Forced Sale of Fertilizer and Certain Other Products and Forced Non-Seasonal Products PO. If, at any time, Supplier determines that it is carrying an amount of Non-Seasonal Product (based on SKU), or an amount of the Seasonal Product "Fertilizer" (based on SKU), or any Product consisting of Inventory included within the Purchased Assets (based on SKU), that was produced or sourced for LESCO pursuant to a Non-Seasonal Purchase Forecast (or, in the case of such Fertilizer, a Seasonal PO) but is then greater than LESCO's forecasted demand for the next six (6) months (per the most recent Non-Seasonal Purchase Forecast or Seasonal Purchase Forecast), or if Supplier has not received a Non-Seasonal Replen PO in six (6) months for a particular Non-Seasonal Product SKU that was produced or sourced for LESCO pursuant to a Non-Seasonal Purchase Forecast, then Supplier has the right to cease further production of such Product and, on five (5) Business Days notice, sell to LESCO (and LESCO shall purchase from Supplier) in accordance with Section 4 hereof all such Product in excess of such six months forecasted demand. 6. INVOICING AND PAYMENT. (A) Payment of Standard Cost and Margin. (i) Payment of Standard Costs and Last Leg Transportation Costs. Supplier will deliver to LESCO an invoice identifying the types, quantities and applicable Standard Costs, by SKU, as well as Last Leg Transportation Costs at each time that Products are shipped from Supplier's manufacturing plant or Supplier's distribution center (whichever is the last point in Supplier's shipment) to a Store, to a Customer or to such other delivery location (other than a Supplier distribution center) as is specified in a Seasonal PO or Non-Seasonal Replen PO, FOB such manufacturing plant or distribution center, with freight paid. All payments for Standard Costs are due:
For Products Shipped Within the Period: Payment Terms - --------------------------------------- ------------- To and including December 31, 2006 Within 45 days From January 1, 2007 to December 31, 2007 Within 42 days From January 1, 2008 to December 31, 2008 Within 39 days From January 1, 2009 to December 31, 2009 Within 36 days From January 1, 2010 to December 31, 2010 Within 33 days From and after January 1, 2011 Within 30 days
-11- in each case after date of shipment of the Product to a Store, to a Customer or to such other delivery location as is specified in the applicable LESCO Purchase Order. If LESCO fails to pay the invoiced cost (i.e. Standard Cost plus Last Leg Transportation Cost) when due, it shall pay Supplier simple interest, accrued daily, on the overdue amount at the rate of 1.5% per month accrued daily. (ii) Payment of Margin on A/R. Supplier will calculate Margin on A/R pursuant to Attachment F to this Agreement. If the annual aggregate Margin on A/R for such calendar year (which shall be prorated for the period from the Contract Date through December 31, 2005, and for any other period that is less than 12 months) is less than {REDACTED}, LESCO shall pay to Supplier the amount of such shortfall. If LESCO fails to pay such shortfall Margin on A/R to Supplier when due for such year, it shall pay Supplier simple interest on the overdue amount at the rate of {REDACTED}% per month, accrued daily. (iii) Payment of Margin on Maintenance Capital. Supplier will calculate the Margin on Maintenance Capital pursuant to Attachment F to this Agreement. For such calculation, the annual Maintenance Capital shall not be more than ${REDACTED} (provided that any amount thereof unused in any one year may be carried over to one (1) succeeding year and provided that Supplier may use 2007's allocation of ${REDACTED} in whole or in part in 2006). If LESCO fails to pay the Margin on Maintenance Capital to Supplier when due, it shall pay Supplier simple interest on the overdue amount at the rate of {REDACTED}% per month, accrued daily. (iv) Cost Savings; Cost Cap. Section 1 of Attachment E hereof sets forth the mechanics and methodologies for determining and allocating savings that will, if realized, be shared by the parties as provided therein. Section 2 of Attachment E hereof sets forth the mechanics and methodologies for establishing the maximum aggregate annual costs that may be charged to LESCO. (v) Vendor Rebates. By December 15 of each year, Supplier will provide LESCO with a reasonable estimate of anticipated third party vendor or supplier rebates, refunds or similar payments for the immediately succeeding year. In accordance with CAS, Supplier's Standard Cost shall be net of such estimated rebates, refunds or payments. On the 15th of each month of such succeeding year, LESCO shall pay Supplier 1/12th of such estimated annual rebates. LESCO shall pay simple interest at the rate of {REDACTED}% per month, accrued daily, in the event it fails to pay on such date. Subject to Section 6(d) hereof, within 15 days of Supplier's receipt of any such vendor or supplier rebates, refunds or similar payments (to the extent such rebates, refunds or payments have been netted from Standard Cost), it shall pay such amounts to LESCO. Any amounts that remain unpaid by Supplier when due under this subsection shall accrue simple interest at the rate of {REDACTED}% per month, accrued daily. To the extent that actual vendor or supplier rebates, refunds or similar payments are greater or less than the amount netted from Standard Costs, such amounts shall be trued-up at the end of each year in connection with the true-up of actual costs relative to Standard Costs as provided in Attachment D. -12- (b) Audit Rights. LESCO shall have the right to audit Supplier's books and records annually to ensure compliance with this Agreement by Supplier in its calculation of the Margin, Cost Savings (as defined on Schedule 1 of such Attachment E) and Cost Cap (as defined on Schedule 1 of such Attachment E). LESCO shall have until the end of the third (3rd) full month following receipt of Schedule 1-A from Supplier (as provided in Attachment E) to complete any audit of Supplier's books and records. If at any time it is determined that Supplier has overcharged LESCO, Supplier immediately shall pay to LESCO (A) the amount of such overcharge plus the Margin improperly paid by LESCO to Supplier on account of such overcharge plus (B) simple interest thereon equal to {REDACTED}% per month beginning on the date LESCO has paid the Margin, the Cost Savings Amount (as defined on Schedule 1 of such Attachment E) or costs in excess of the Cost Cap, as applicable, for the applicable period plus (C) LESCO's costs and expenses incurred in conducting such an audit. (c) Sales Tax Exemptions. LESCO shall provide Supplier with appropriate sales tax exemption and/or resale exemption certificates. If LESCO fails to provide any such certificates, then Supplier shall add applicable sales tax(es) to the invoices described in Section 6(a)(i) hereof, and the Historical Metric shall be adjusted upward under Schedule E to reflect such sales tax. (d) Financial Standards. i. LESCO shall: A. During the period commencing with the Contract Date to and including December 31, 2007, distribute to its shareholders (whether in the form of dividends or distributions or through the repurchase of its shares, in each case whether for cash or other property) no more than an aggregate of Twenty-Five Million Dollars ($25,000,000); B. During the period commencing with the Contract Date to and including December 31, 2007, make no more than Two Million Dollars ($2,000,000) per annum of Capital Expenditures for capital needs other than to finance new Stores or the remodeling of existing Stores; C. During the period commencing with the Contract Date to and including December 31, 2007, maintain minimum EBITDA, calculated on a trailing twelve-month basis as of the end of each fiscal month, as follows: an amount equal to the sum of x) 1) $6,000,000 to and including June 30, 2006, and 2) $12,000,000 from July 1, 2006 to and including December 31, 2007 plus y) the amount by which Capital Expenditures for the given period exceed $3,000,000; D. During the period commencing on January 1, 2008 and continuing through the Contract Term, maintain a Fixed Charge Coverage Ratio of at least 1.0 to 1.0, determined on a trailing twelve-month basis as of the end of each fiscal month; E. During the Contract Term, maintain a Senior Debt Ratio not to exceed the applicable ratio set forth in the following table: -13-
Maximum Determination Date Senior Debt Ratio - ------------------ ----------------- At all times from (i) the Contract 0.60 to 1.00 Date to and including June 30, 2006 and (ii) January 1 of each subsequent Contract Year to and including June 30 of each subsequent Contract Year Commencing July 1, 2006, at all 0.40 to 1.00 times from July 1 of each Contract Year to and including December 31 of each Contract Year
In addition, aggregate Senior Debt shall not exceed $30,000,000 at any time following the Contract Date to and including June 30, 2006. F. During the Contract Term, maintain Tangible Net Worth equal to, or greater than $20,000,000 though and including June 30, 2006 (and $25,000,000 thereafter) less, i) to and including June 30, 2006, the amount of dividends, distributions, or stock buybacks in excess of $10,000,000 incurred between the Contract Date and the date of calculation, or ii) from July 1, 2006 to and including December 31, 2006, the amount of dividends, distributions, or stock buybacks in excess of $17,500,000 incurred between the Contract Date and the date of calculation; and G. Have issued to Supplier under LESCO's senior credit facility a stand-by letter of credit in the original face amount of Ten Million Dollars ($10,000,000) (the "L/C"), the costs of issuance of which, up to 125 basis points of the face amount, are to be paid, and recognized as interest expense, by Supplier with the remainder, if any, to be paid by LESCO. ii. If LESCO fails to maintain any of the financial standards set forth in Section 6(d)(i), then effective immediately upon such failure (but not before): A. Supplier shall be permitted to reduce the then-effective payment terms (as specified in Section 6(a) hereof) by up to one-half, in Supplier's sole discretion, rounding down to the next whole number (e.g., if the payment terms are then 45 days, the revised payment terms would be 22 days); provided, however, that: 1. No more than once in any twelve month period, such payment terms shall be modified as specified in this sub-section at such time as the failure under section 6(d)(ii) is cured within 5 days (and, if the L/C is drawn, it is replaced to the full amount at no cost to Supplier), as determined on a pro forma basis (excluding any funded Senior Debt incurred in order to fund any payment required by Section 6(d)(ii)(B) hereof ("New Senior Debt"), and there are then no other failures under Section 6(d)(ii). Payment terms shall increase (rounding up to the next whole number) on a basis directly proportionate with LESCO's ability to maintain the retirement of the New Senior Debt, as determined by Supplier in good faith, to the extent that such retirement is not funded by additional Senior -14- Debt (but not in excess of the applicable level that would otherwise be applicable pursuant to Section 6(a) hereof); 2. Such reduced payment terms immediately shall revert to the original levels that would apply had such failure not occurred, if and when LESCO is in compliance with the standards set forth in Section 6(d)(i) hereof at all times for two (2) consecutive months (and, if the L/C is drawn, it is replaced to the full amount at no cost to Supplier). B. If Supplier so reduces the then-effective payment terms, then LESCO shall make a payment to Supplier equal to the dollar amount of the accounts payable from LESCO to Supplier that become past due on account of such reduction. Such payment shall be funded: 1. First, by a set-off against the vendor rebate amount payable by Supplier to LESCO pursuant to Section 6(a)(v) hereof, so long as Supplier is legally entitled to collection of such vendor rebate (subject to the no offset letter attached to the Purchase Agreement as Exhibit E); 2. Second, by a payment in immediately available funds, whether from cash on hand, a draw upon LESCO's senior secured credit facility or otherwise; and 3. Third, by a draw against the L/C. iii. Supplier is hereby granted a second priority security interest in all of LESCO's money, accounts, deposit accounts, inventory, equipment, goods, fixtures, investment property, documents, instruments, chattel paper, commercial tort claims, letters of credit, letter-of-credit rights, general intangibles, and supporting obligations, each as defined in the Uniform Commercial Code, intellectual property (and proceeds of each of the foregoing) (collectively, the "Collateral"), subject to the express condition subsequent that Supplier and LESCO's senior secured lender, PNC Bank, National Association, negotiate and enter into an intercreditor agreement that provides that Supplier may not take any enforcement action(s) against the Collateral with regard to such security interest (other than the filing of appropriate financing statements) unless and until all of LESCO's Senior Debt has been indefeasibly repaid in full, but that Supplier may accept and retain all payments required under this Agreement. Supplier is hereby authorized to file all financing statements necessary or appropriate to perfect the foregoing security interest. NOTWITHSTANDING ANYTHING HEREIN TO THE CONTRARY, THE LIEN AND SECURITY INTEREST GRANTED TO SUPPLIER PURSUANT TO THIS AGREEMENT AND THE EXERCISE OF ANY RIGHT OR REMEDY BY THE SUPPLIER HEREUNDER ARE SUBJECT TO THE PROVISIONS OF THE INTERCREDITOR AGREEMENT, DATED AS OF ___________, 2005 (AS AMENDED, SUPPLEMENTED OR OTHERWISE MODIFIED FROM TIME TO TIME, THE "INTERCREDITOR AGREEMENT"), AMONG SUPPLIER, LESCO, THE OTHER BORROWERS (AS DEFINED THEREIN) PARTY THERETO, AND PNC BANK, NATIONAL ASSOCIATION AS CREDIT AGENT. IN THE EVENT OF ANY CONFLICT BETWEEN THE TERMS OF THE INTERCREDITOR AGREEMENT AND THIS AGREEMENT, THE TERMS OF THE INTERCREDITOR AGREEMENT SHALL GOVERN. iv. During the Contract Term, at no time will Supplier and LESCO permit the aggregate amount of trade payables owing from LESCO to Supplier pursuant to this Agreement to exceed Fifty Million Dollars ($50,000,000) (or such other amount as Supplier and LESCO may otherwise mutually agree in writing) (or such lower amount that results from payment terms being reduced in accordance with Section 6(d)(ii)(A) hereof). v. For purposes of this Section 6(d): -15- A. "Capital Expenditures" means, without duplication, any expenditure for any purchase or other acquisition of any asset, including by way of stock purchase, merger or other reorganization, which would be classified as a fixed or capital asset on a consolidated balance sheet of LESCO and its subsidiaries prepared in accordance with GAAP. B. "EBITDA" means Net Income plus, to the extent deducted from revenues in determining Net Income, without duplication (1) Interest Expense, (2) expense for taxes paid or accrued net of tax refunds, (3) depreciation, (4) amortization and other non-cash charges (other than non-cash losses (as determined in accordance with GAAP) incurred in the ordinary course of business), (5) non-cash losses (as determined in accordance with GAAP) incurred other than in the ordinary course of business and (6) one-time transaction costs incurred in accordance with the consummation of the transactions contemplated by this Agreement and the Purchase Agreement up to $6,000,000, minus, to the extent included in Net Income, gains (as determined in accordance with GAAP) realized other than in the ordinary course of business, all calculated for LESCO and its subsidiaries on a consolidated basis. C. "Fixed Charge Coverage Ratio" means the ratio of (1) EBITDA to (2) Fixed Charges, all calculated for LESCO and its subsidiaries on a consolidated basis in accordance with GAAP. D. "Fixed Charges" means, with reference to any period, without duplication, cash Interest Expense, plus income taxes paid in cash during such period, plus Capital Expenditures made during such period, plus dividends, distributions and stock repurchases, in each case whether funded in cash or other property. E. "Interest Expense" means, with reference to any period, the interest expense (including that attributable to capital lease obligations) of LESCO and its subsidiaries for such period with respect to all outstanding monetary indebtedness of LESCO and its subsidiaries, calculated on a consolidated basis for LESCO and its subsidiaries for such period in accordance with GAAP. F. "Net Income" means, for any period, the consolidated net income (or loss) of LESCO and its subsidiaries, determined on a consolidated basis in accordance with GAAP. G. "Senior Debt" means, without duplication, (1) the aggregate outstanding principal amount of all of LESCO's indebtedness for borrowed money, plus interest accrued thereon, evidenced by notes, bonds, debentures, guaranties, letters of credit or similar evidences of indebtedness that has a lien priority senior to the lien for indebtedness of LESCO to Supplier hereunder, and (2) all obligations under capital leases; provided, that Senior Debt shall include neither letters of credit issued on behalf of LESCO up to a maximum aggregate face amount of $3,000,000 nor the L/C. H. "Senior Debt Ratio" means the ratio of (1) Senior Debt to (2) Senior Debt plus Tangible Net Worth. I. "Tangible Net Worth" means all amounts which would be included under shareholders' equity (less goodwill and other intangible assets) on a balance sheet calculated on a consolidated basis for LESCO and its subsidiaries for such period in accordance with GAAP. 7. RAW MATERIALS AND PACKAGING. (A) Purchasing of Raw Materials and Packaging. During the Transitional Period, to the extent available, Supplier will manufacture or source Products utilizing raw material supply lines and purchase orders in place for LESCO as of the Contract Date. In any event, Supplier -16- shall be responsible for obtaining all raw materials and packaging in quantities sufficient to allow it to manufacture Products in conformity with the Forecasts, and may do so in such a manner as Supplier determines would be more commercially reasonable. Title and risk of loss with respect to all raw materials and packaging shall be with Supplier. In the event that LESCO's existing supply agreements and/or purchase orders require that LESCO be the purchaser and/or recipient of the subject raw materials, Supplier and LESCO will work out a mutually agreeable arrangement with respect to Supplier's payment therefor and receipt thereof consistent with the terms hereof. For Products manufactured or sourced for LESCO hereunder, Supplier shall use commercially reasonable efforts to enter into forward contracts on terms and conditions (including lengths), and with suppliers, reasonably acceptable to LESCO and on a basis consistent with each Semi-Annual Forecast in order to fix the price of raw materials for prices and time frames mutually acceptable to the parties. In addition, the parties shall discuss acquiring raw materials on the spot market and/or establishing other hedging mechanisms under mutually beneficial circumstances. Seller and LESCO shall cooperate in the timing and quantity of raw material purchases in order to maximize vendor rebates. So long as such raw materials are being acquired solely for Products manufactured or sourced for LESCO, Supplier will endeavor to have all supply agreements include LESCO as a party (or indicate that LESCO is a third-party beneficiary thereof). (B) LESCO Branded Products; License to Use Certain of LESCO's Intellectual Property. All Products shall be packaged by Supplier and private-labeled under the LESCO(R) name or as otherwise directed by LESCO. During the Contract Term, LESCO grants to Supplier a non-exclusive, royalty-free, limited term license to use, without the right to sublicense, assign or otherwise convey, LESCO's trademarks, service marks and/or trade dress for the sole purpose of manufacturing or sourcing the Products, or displaying LESCO's intellectual property on such Products and/or packaging for Products in a manner that will cause it to be identified as LESCO's intellectual property. LESCO shall provide Supplier with facsimiles of the approved form of LESCO's intellectual property and packaging, and only LESCO-approved packaging may be used. During the Contract Term, LESCO hereby grants to Supplier a non-exclusive, royalty-free, limited-term license, with the right to make derivative works, to use LESCO's patent no. 5,478,375 - "Sealants for fertilizer compositions containing natural waxes" in the manufacture or distribution of the Products or the operations ancillary thereto. Upon termination hereof pursuant to Section 8, and subject to Supplier's payment to LESCO of a royalty equal to ${REDACTED} per ton produced (the "Royalty Fee"), LESCO hereby grants to Supplier a non-exclusive, perpetual license, with the right to make derivative works, to use LESCO's patent no. 5,478,375 - "Sealants for fertilizer compositions containing natural waxes" in the manufacture or distribution of the Products or the operations ancillary thereto (the "Patent"); provided however that so long as Supplier is producing or sourcing Products for LESCO, the Royalty Fee will be waived. In the event this Agreement is terminated pursuant to Section 8, Supplier is not otherwise producing or sourcing Products for LESCO and Supplier does not license the Patent from LESCO, LESCO shall reimburse Supplier for all reasonable costs and expenses incurred by Supplier, up to a maximum of {REDACTED}, to convert its manufacturing facilities to enable Supplier to produce substantially similar products as those produced with the Patent using an alternative process or technology. -17- (C) License to Use Certain of Supplier's Intellectual Property. During the Contract Term, Supplier grants to LESCO a non-exclusive, royalty-free, limited term license to use, without the right to sublicense, assign or otherwise convey, (i) Supplier's Intellectual Property developed pursuant to Section 3(e)(i) hereof and (ii) Supplier's trademarks, service marks and/or trade dress which shall be used to identify the Products as being "manufactured for LESCO [or its designee] by [Supplier]." 8. TERM AND TERMINATION. (A) Contract Term. The term hereof shall be perpetual, commencing on the Contract Date (the "Contract Term"), subject to termination as provided in this Section 8. (B) Termination Upon Three Years' Prior Notice. At any time on or after the second anniversary of the Contract Date, either party may give the other party written notice of its desire to terminate this Agreement (the "Termination Notice"), provided that the desired effective date of termination (the "Effective Termination Date") may not be less than three (3) years after the giving of such notice. Upon giving of a Termination Notice, this Agreement shall, except as modified by Section 8(e) hereof, continue in its then-present form for the duration of such three-year notice period (the "Run Off Period") and shall terminate on the Effective Termination Date specified in the Termination Notice. (C) Termination by LESCO. LESCO may terminate this Agreement immediately by written notice to Supplier (i) if, pursuant to Section 11, there is a Force Majeure period continuing for more than sixty (60) calendar days, or (ii) if there is an event triggering the right by LESCO to collect the payment of a Major Make-Whole Payment of {REDACTED} or more (either alone or cumulative with all other Minor Make-Whole Payments and Major Make-Whole Payments paid or payable to LESCO at any time during under this Agreement), provided that LESCO is not then in material breach hereof. (D) Termination by Either Party Without Notice. A party may terminate this Agreement immediately, without notice: (i) if the other party becomes insolvent; (ii) is generally not paying its material debts as they become due; (iii) if the other party makes a general assignment for the benefit of creditors; (iv) if the other party is the subject of any voluntary or involuntary case or proceedings under the federal bankruptcy laws or other applicable laws of any jurisdiction regarding bankruptcy, insolvency, reorganization, adjustment of debt or other forms of relief for debtors; (v) if the other party has a receiver, trustee, liquidator, assignee, custodian or similar official appointed for it or for any substantial part of its property; (vi) takes any action to liquidate, dissolve or cease doing business; or (vii) so long as the terminating party is not then in material breach hereof, if the other party sells, assigns or transfers a substantial part of its assets, or undergoes any merger, consolidation or other substantial change, direct or indirect, in its ownership or control, the effect of which would be a violation of the provisions on non-assignability set forth in Section 18(a) hereof. (E) Effect of Termination. (i) As of the Effective Termination Date (as opposed to the date of giving of Termination Notice) hereof (if terminated pursuant to Section 8(b) hereof), or immediately upon termination hereof (if pursuant to Sections 8(c) or 8(d) hereof), all amounts due from one party to the other shall, at the option of the non-terminating party, become immediately due and payable, together with interest thereon from the Effective Termination Date, at the simple -18- interest rate of {REDACTED}% per month, accrued daily. Termination shall not affect the parties' respective rights and obligations or any amounts payable by such party established or relating to periods prior to the Effective Termination Date. (ii) Supplier Termination - LESCO Purchase Option. In addition to the amounts payable under Section 8(e)(i) hereof, in the event that Supplier provides a Termination Notice or if LESCO terminates this Agreement pursuant to Section 8(c), LESCO shall have the right (the "Purchase Option"), by providing notice to Supplier within 180 days (the "Option Notice Period") of LESCO's receipt (or giving) of a Termination Notice (the "Option Exercise Notice"), to acquire and assume within an additional sixty (60) days (such 240 day period, the "Option Period"),: (1) all of Supplier's plant, property and equipment used to produce and distribute Products to or for LESCO (and, if LESCO so desires, all of Supplier's other plant, property and equipment) for an amount equal to the higher of (a) the aggregate undepreciated portion of all Maintenance Capital on the date of the Termination Notice determined in accordance with CAS and (b) the fair market value of such assets as of the date of such Termination Notice; (2) all of Supplier's inventory (including raw material, work in process and finished Products) purchased or produced for LESCO pursuant to or for the purpose of fulfilling the PO Forecast or Non-Seasonal Purchase Forecast (and, if LESCO so desires, all of Supplier's other inventory), for an amount equal to Supplier's actual costs to produce such inventory plus distribution costs (but subject to the Cost Cap) as of the date of such Termination Notice; (3) all of Supplier's employees, contracts, and other assets required for or used primarily in the manufacture or distribution of the Products (and, if LESCO so desires, all of Supplier's other employees, contracts, and other assets) (and LESCO shall assume all related obligations and liabilities thereto or thereunder (other than any obligations arising due to Supplier's breach)). LESCO's Purchase Option shall be completed at the end of the Option Period and shall be exercisable only in whole or not at all. If LESCO fails to exercise and complete such Purchase Option by the end of the Option Period, Supplier shall be free to continue to hold its assets and/or inventory or sell them to any third party in Supplier's discretion. Upon consummation of the Purchase Option, this Agreement will terminate. The Purchase Option is freely assignable by LESCO. For purposes of this Section 8(e)(ii), the fair market value of the property, plant and equipment and other assets acquired under this subsection shall be an amount agreed upon by the parties, provided that if the parties are not able to agree upon a fair market value within 30 days of the beginning of the Option Period, the parties shall retain a qualified independent investment banking firm mutually acceptable to the parties to determine the fair market value of such assets, which fair market value shall be determined by reference to the capacity of such assets and the most recent Seasonal Purchase Forecast, Non-Seasonal Purchase Forecast and any other customer relationships of Supplier that will be acquired by LESCO. -19- (iii) Supplier Termination - No Exercise of Purchase Option. In the event that Supplier issues a Termination Notice and LESCO does not exercise the Purchase Option within the Option Notice period or otherwise complete the Purchase Option within the Option Period, then: (1) upon termination of the Option Period, LESCO shall have the right to approve all of Supplier's purchasing of raw materials and all production and sourcing of Products; (2) the parties must mutually agree as to the need for any Maintenance Capital and, if so, the funding thereof; (3) during the last six (6) months of the Run Off Period, the parties will work together to wind down the purchase of, and to liquidate, all inventory; and (4) in addition to any other amounts payable hereunder, LESCO shall purchase, by or before the Effective Termination Date hereof, all of Supplier's inventory (including raw material, work in process and finished Products) purchased or produced for LESCO pursuant to or for the purpose of fulfilling a Forecast, for an amount equal to Supplier's actual costs to produce such inventory plus distribution costs (but subject to the Cost Cap) as of the Effective Termination Date. (iv) LESCO Termination. In the event that LESCO issues a Termination Notice, then, in addition to any other amounts payable hereunder, LESCO shall purchase all of Supplier's inventory (including raw material, work in process and finished Products) purchased or produced for LESCO pursuant to or for the purpose of fulfilling the PO Forecast or Non-Seasonal Purchase Forecast, on or before the date that is three (3) months before the Effective Termination Date, for an amount equal to Supplier's actual costs to produce such inventory plus distribution costs (but subject to the Cost Cap) as of the Effective Termination Date. In addition, LESCO shall pay Supplier an amount (the "Termination Payment") equal to:
Termination Notice Given by LESCO Within the Period: Payment - --------------------------- ----------- After the second anniversary of the Contract Date to and including the third anniversary of the Contract Date ${REDACTED} After the third anniversary of the Contract Date to and including the fourth anniversary of the Contract Date ${REDACTED} After the fourth anniversary of the Contract Date to and including the fifth anniversary of the Contract Date ${REDACTED} After the fifth anniversary of the Contract Date to and including the sixth anniversary of the Contract Date ${REDACTED} After the sixth anniversary of the
-20- ~~Contract Date to and including the seventh anniversary of the Contract Date ${REDACTED} After the seventh anniversary of the Contract Date ${REDACTED}~~

The Termination Payment shall be paid in three equal installments, each payable at the end of each successive twelve (12) month period following the date that LESCO provides the Termination Notice. In addition: (1) LESCO shall have the right to approve all of Supplier's purchasing of raw materials and all production and sourcing of Products; (2) the parties must mutually agree as to the need for any Maintenance Capital and, if so, the funding thereof; and (3) during the last six (6) months of the Run Off Period, the parties will work together to wind down the purchase of, and to liquidate, all inventory. 9. LIMITED WARRANTIES. (A) Warranties. Supplier warrants that it will convey to LESCO (i) Conforming Goods and (ii) subject to Section 6(d) hereof, marketable title to all Products delivered to LESCO, free from all liens and encumbrances created by or arising through Supplier. To the extent that any of Supplier's suppliers offer warranties, Supplier will endeavor to have such warranties flow through to and cover LESCO and its Customers. (B) Warranty Disclaimer. EXCEPT AS EXPRESSLY SET FORTH IN THIS SECTION 9, SUPPLIER MAKES NO WARRANTIES, EXPRESS OR IMPLIED, WITH RESPECT TO THE PRODUCTS, OR THEIR CONDITION, EFFECTIVENESS, QUALITY OR PERFORMANCE. (C) Indemnification. Any provision hereof to the contrary notwithstanding, Supplier agrees to indemnify, defend and hold harmless LESCO, its subsidiaries, affiliates, successors and assigns, and their respective directors, officers, employees, agents and representatives (collectively, the "LESCO Indemnified Parties"), from and against any and all losses, claims, costs and expenses of any nature arising from third party claims against LESCO or the LESCO Indemnified Parties (including without limitation attorneys' fees) arising out of or relating to or resulting in any way from any actual or alleged personal injury (including death), injury or damage to property (including, but not limited to, consequential damages arising from damaged turf or lost profits due to an end-customer's lawn being unusable during repair of same) that results, or is claimed to result, in whole or part, from any actual or alleged (i) claims for infringement of any patent or intellectual property right with respect to the Products or any trademarks, trade names or other intellectual property claimed to be owned by or licensed to Supplier (other than those licensed to Supplier by or through LESCO or otherwise acquired by Supplier from -21- LESCO), (ii) breach of the warranties made by Supplier pursuant to Section 9(a) hereof, or (iii) failure of Supplier to fully and completely perform its obligations under this Agreement. (D) Limitation of Liability. OTHER THAN AS SET FORTH HEREIN, UNDER NO CIRCUMSTANCES WILL SUPPLIER BE LIABLE TO ANY PERSON INCLUDING LESCO FOR ANY INCIDENTAL, SPECIAL, INDIRECT, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES OF ANY KIND, INCLUDING WITHOUT LIMITATION, LOSS OF REVENUES, BUSINESS OR PROFITS, REGARDLESS OF THE FORM OF ACTION, WHETHER IN CONTRACT, TORT, STRICT PRODUCT LIABILITY, OR OTHERWISE, EVEN IF SUPPLIER HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. 10. REMEDIES AND LIMITATIONS. (A) General Remedies. Subject to the limitations in this Agreement (including the limitations in Attachment B hereto), all rights and remedies provided herein or permitted by law or in equity are cumulative, not exclusive, and may be enforced concurrently or individually from time to time. (B) Attorney's Fees. In the event of a dispute arising out of or in connection with this Agreement, the party prevailing in such dispute shall be entitled to its reasonable costs and attorneys' fees, in addition to all other proper relief. 11. EXCUSED DELAYS. Neither party shall be responsible to the other for any failure or delay, in whole or in part, to perform any obligations hereunder, to the extent and for the length of time, that performance is rendered impossible due to an event or occurrence beyond the reasonable control of such party, including such things as acts of God, actions by any government authority (whether valid or invalid), riots, public insurrections, wars, sabotage, terrorism, floods, fires, windstorms, natural disasters, explosions, failure of or interruptions in transportation, telecommunications or data transmission systems, and other circumstances of substantially similar character beyond the control of, and not reasonably foreseeable by, the affected party (collectively, "Force Majeure"). Any party so affected shall (i) use all reasonable efforts to minimize the effects thereof and (ii) promptly notify the other party in writing of the Force Majeure, the effect of the Force Majeure on such party's ability to perform its obligations hereunder, and the prospects for that party's future performance, and shall respond promptly and fully in writing to the other party's requests for information about such matters. The affected party shall promptly resume performance after it is no longer subject to Force Majeure. 12. PRODUCT RECALLS. Unless the Product(s) subject to recall were Conforming Goods: (a) in the event any Product becomes subject to a corrective action plan, consent agreement or order, whether voluntary or by mandate of any final order of any federal, state or local government agency, requiring recall, replacement, cancellation or suspension of registration, stop sale, stop use, removal, seizure of the Product or the refund of purchase price of the Product, or any final action similar to the foregoing actions, Supplier agrees to accept return -22- of all Products to which such actions apply or would apply and to credit LESCO with the invoice cost of such Products plus the expenses of shipment; (b) each affected Product shall be replaced or refunded by Supplier regardless of ownership, and regardless of whether the units have been sold to customers; and (c) all freight, packaging and shipping charges shall be borne by Supplier. In the event of any judicial or administrative action or proceeding (voluntary or involuntary), Supplier will provide LESCO with a form of the bulletin or notice of such proceeding and LESCO shall assist in identifying such purchasers and make a reasonable effort to notify purchasers of the affected Products. 13. MAINTENANCE OF PRODUCTION ASSETS. During the Contract Term, (i) except as otherwise agreed by LESCO, Supplier shall use the Purchased Assets only for commercial or industrial purposes and shall not make any material change in or to the character, nature or use of the Purchased Assets that will or might have a material adverse impact on LESCO, and (ii) except to the extent the provisions of Section 8(e)(iii)(2) or 8(e)(iv)(2) apply, Supplier shall maintain the Purchased Assets (or such other assets as are being utilized to manufacture the Products) in reasonable condition (subject to ordinary wear and tear) sufficient to manufacture the Products in accordance with the Specifications and Quality Standards. 14. INSURANCE. Supplier agrees to maintain at least the following insurance under this Agreement which, in each case, shall include insurer's waiver of subrogation and an endorsement naming LESCO, its subsidiaries, affiliates, successors and assigns, and their respective officers, directors and employees, as additional insured(s). The following minimum insurance will be procured and maintained in force and will not be cancelled or not renewed nor restrictive modifications added, until at least thirty (30) calendar days prior written notice has been given to LESCO: (A) Comprehensive General Liability Insurance (including, without limitation, bodily injury, personal injury liability, property damage liability, products liability and completed and operations liability coverage): ~~Each Occurrence $1,000,000 General Aggregate $2,000,000~~

(B) Umbrella Liability Insurance: ~~Each Occurrence $25,000,000 General Aggregate $25,000,000~~

(C) Excess liability (over and above Comprehensive General Liability Insurance and Umbrella Liability Insurance): ~~Each Occurrence $10,000,000 General Aggregate $10,000,000~~

-23- Prior to the commencement hereof and at least annually thereafter, Supplier shall provide a Certificate of Insurance to LESCO evidencing the coverage required by this provision. 15. CONFIDENTIAL INFORMATION. In the course hereof, either party may disclose information that is (a) stamped or otherwise marked as being confidential, or (b) if disclosed in oral form, identified as confidential at the time of oral disclosure, or (c) whether disclosed orally or in writing, is information that a reasonable person would consider to be proprietary or confidential in nature, including any information concerning such party's customers, products, dealers, prices, suppliers, security procedures or business processes ("Confidential Information"). Each party ("Recipient") shall hold the Confidential Information of the other party ("Owner") in strict confidence, and except as previously authorized in writing by the Owner, shall not publish or disclose the Confidential Information to anyone other than Recipient's employees or agents on a need-to-know basis, and shall use the Owner's Confidential Information solely for performance hereof. This requirement shall not apply to any part of the Confidential Information that: (i) becomes generally known to the public through no wrongful act or omission on the Recipient's part; (ii) is approved for release by Owner's written authorization; (iii) is clearly demonstrated by Recipient to have been independently developed by Recipient after the date hereof without access to the Owner's Confidential Information; or (iv) is required to be disclosed by order of a court or governmental body or by applicable law, provided that the Recipient shall promptly notify Owner of such intended disclosure in order to allow Owner to seek a protective order or other remedy (in which case Recipient shall fully cooperate with and assist Owner in obtaining such a protective order or other remedy). Any provisions of this Section 15 to the contrary notwithstanding, LESCO shall have the right to file a copy hereof with any applicable commission or governmental agency to the extent necessary, in Seller's good faith opinion, to comply with the disclosure laws or regulations thereof (including any reporting requirement of the SEC), or any listing requirement of any stock exchange, including NASDAQ, applicable to LESCO; provided that LESCO shall also file a redacted document (redacting such information pertaining to the Margin as is, in the opinion of LESCO's counsel, reasonable), and file a confidential treatment request with respect to such redacted document as part of any such filing. 16. NOTICES. All notices and communications required under this Agreement shall be in writing and shall be sent by hand, by registered or certified mail return receipt requested, by overnight courier service maintaining records of receipt, or by facsimile transmission with confirmation of successful transmission of such facsimile, and shall be effective on the earlier of receipt or (a) the date delivered by hand, or (b) the third Business Day after being mailed, or (c) the following Business Day if sent by overnight courier service, or (d) upon receipt of successful transmission confirmation, if sent by facsimile. All notices shall be addressed to the parties at the addresses set forth with the signatures to this Agreement, until changed by notice pursuant to this Section 16. 17. CERTAIN PERSONNEL MATTERS. (A) Employees on Supplier's Premises. At its own cost and expense, LESCO may upon 72 hours prior notice during business hours, reasonably inspect any or all of Supplier's locations and production lines. -24- (B) Non-Solicitation and Non-Hire of Employees. Neither party nor their respective representatives shall, without the prior written consent of the other party, directly or indirectly solicit for employment, or employ, any person who was or is an employee of the other party within twelve (12) months of the date of the desired employment commencement date for such person; provided that this Section 17(b) shall not apply with respect to the Transferred Employees (as defined in the Purchase Agreement) or to Steve O'Block. The foregoing provision shall survive for one (1) year beyond the date hereof. (C) Engineering Personnel. During the Contract Term, LESCO will provide to Supplier up to 20 hours per week of services and support from LESCO's engineering personnel. In exchange therefore, during the Contract Term, Supplier will provide to LESCO up to 12 hours per week of services and support from Supplier's environmental health and safety personnel. The provision of such services shall not have any effect on the pricing or payments charged to or made by either party hereunder. 18. MISCELLANEOUS. (A) Assignment. Neither party may assign its rights and/or obligations under this Agreement, nor may Supplier sub-contract the production of the Products to be delivered by it hereunder, without the express prior written consent of the other party, which consent may be withheld in its sole discretion. The foregoing notwithstanding: (i) either party may assign its rights and/or obligations under this Agreement (including collateral assignments) to a financing source (if Supplier is the assignor, it will ensure that any and all financing arrangements with its secured creditors contain an express grant to LESCO of the first right to buy such creditor's secured position in Supplier upon a default giving rise to acceleration of such indebtedness or upon foreclosure (or sale in lieu of foreclosure) by such creditor); (ii) either party may assign its rights and/or obligations under this Agreement in connection with a sale, assignment or transfer of a substantial part of its assets, or if the assignee undergoes a merger, consolidation or other substantial change, direct or indirect, in its ownership or control or is involved in any other extraordinary corporate event, so long as the assignee expressly agrees in a writing addressed to the non-assigning party that it assumes all of the assigning party's obligations under this Agreement. In the event of such a permitted assignment, this Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties and their respective successors and permitted assigns. This Agreement is for the sole benefit of the parties hereto, and their successors and permitted assigns, and shall not be construed as conferring any rights on any other persons. (B) Survival of Obligations. The parties' respective rights and obligations under Sections 4, 5, 6, 7, 8, 9, 12, and 15 shall survive the expiration or termination hereof until the then obligations thereunder are complete. The last sentence of Section 7(b) shall survive any termination hereof. Section 17(b) shall survive for one year after expiration or termination hereof. (C) Governing Law; Jurisdiction; Venue. This Agreement shall be governed by and construed in accordance with the laws of the State of Ohio (without regard to its rules on -25- conflicts of laws), and the United States of America. The Convention on the International Sale of Goods shall not apply. (D) General Construction, Defined Terms, Etc. The captions in this Agreement are for convenience only, and in no way limit or amplify the provisions hereof. All Attachments attached hereto are by reference made a part hereof, and this Agreement governs in case of any conflict. The terms "includes" and "including" and words of similar import are inclusive and not exclusive terms, and are not intended to create any limitation. The words "hereof", "herein" and "hereunder" and words of similar import in this Agreement refer to this Agreement as a whole and not to any particular provision hereof, and references to Sections, subsections and Attachments are to this Agreement unless otherwise specified. All defined terms apply to both singular and plural forms, and all references to any gender include all other genders. All defined terms and references as to any agreements, notes, instruments, certificates or other documents shall be deemed to refer to such documents as they may from time to time be amended, modified, renewed, extended, replaced, restated, supplemented or substituted. Unless otherwise provided, all references to statutes and related regulations shall include any amendments thereof and any successor statutes and regulations. (E) Invalid Provisions. If any provision hereof is held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision hereof unless it materially impairs the ability of the parties to consummate the transactions contemplated by this Agreement. (F) Amendments and Waivers. This Agreement can only be amended by a written agreement signed by both parties, and its terms can only be waived by a writing signed by the party to be charged. No waivers of either party's rights or remedies hereunder shall be implied, whether from any custom or course of dealing or any delay or failure in the exercise of a party's rights and remedies hereunder or otherwise. Any waiver granted by a party shall be specifically limited to the particular circumstances, and shall not obligate such party to grant any further, similar, or other waivers. (G) Relationship of the Parties. The relationship of Supplier and LESCO established by this Agreement is that of independent contractor, and nothing contained in the Agreement shall be deemed or construed by the parties or by any third party as creating the relationship of principal and agent, a franchise, a "Business Opportunity" as that term is used in Ohio Rev. Code, Title 13, Section 1334.01 et seq., a partnership or joint venture or exclusive dealing between the Parties. LESCO acknowledges that it has its own marketing plan for the Products and that it is not adopting any business format of Supplier except the use of Supplier's display units and other miscellaneous marketing materials. (H) Counterparts. This Agreement may be executed in multiple counterparts (including by facsimile), in which event this Agreement shall be effective as of the Contract Date when both parties have executed and delivered separate conforming counterparts. Both counterparts shall together constitute a single agreement. 19. ENTIRE AGREEMENT. This Agreement and the Purchase Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede all prior proposals, communications, negotiations, understandings and agreements, written or oral, between the parties with respect to the subject matter hereof. No different or additional terms in -26- any LESCO Purchase Order, invoice, acceptance or other writing sent by either party shall become part hereof unless the parties so agree in a signed writing. [Remainder of page intentionally left blank. Signatures on next page.] -27- This Long-Term Supply Agreement is made and entered into by Supplier and LESCO, effective as of the Contract Date. SUPPLIER: LESCO: TURF CARE SUPPLY CORP. LESCO, INC. By: /s/ Mary Ann Sigler By: /s/ Jeffrey L. Rutherford --------------------------------- ------------------------------------ Title: Vice President Title: Chief Financial Officer Date: October 1, 2005 Date: October 1, 2005 Supplier's Notice Address: LESCO's Notice Address: Turf Care Supply Corp. LESCO, Inc. 360 N. Crescent Blvd, South Building 1301 East 9th Street Beverly Hills, CA 90210 Suite 1300 Attention: Eva Kalawski, Esq. Cleveland, Ohio 44114-1849 Telecopy No: (310) 712-1863 Attention: Jeffrey Rutherford, CFO Telephone No: (310) 712-1850 Telecopy No: (216) 706-5163 Telephone No: (216) 706-9250 WITH COPY TO: LESCO, Inc. 1301 East 9th Street Suite 1300 Cleveland, Ohio 44114-1849 Attention: Legal department Telecopy No: (216) 706-5163 Telephone No: (216) 706-9250 -28- ATTACHMENT A EXISTING PRODUCTS LIST OF SEASONS AND APPLICABLE SELLING PERIODS:
SEASON SELLING PERIOD - ------ -------------- Fertilizer February 1 - November 30 Pre - Emergent February 1 - May 31 Post - Emergent February 1 - July 31 (Atrazine season: September 1 - April 30) Insecticides April 1 - August 31 Seed March 1 - June 30 and August 1 - November 30 Ice Melt November 1 - March 31 Fungicide May 1 - September 30 and November 1 - December 31
Products in all seasons listed above are non-seasonal with seasonal allocation with the exception of Ice Melt which is purely seasonal. Current list of Seasonal Products and seasonal allocation of Non-Seasonal Products - see attachment A.1. PURCHASE ORDER (INITIAL STORE ALLOCATION) SCHEDULE FOR SEASONAL PRODUCTS: Fertilizer (considered in-season purchase orders) Pre - Emergent October 1 Post - Emergent November 1 (Atrazine - considered in season purchase orders) Insecticides December 1 Seed Spring - January 1; Fall - June 1 Ice Melt September 1 Fungicide Spring - April 1; Fall Early Order - October 1

-29- [ATTACHMENT A.1 TO ATTACHMENT A FOLLOWS] -30- ATTACHMENT B PENALTIES 1. MAJOR MAKE-WHOLE PAYMENT. A "Major Make-Whole Payment" shall arise if Conforming Goods are not delivered in accordance with a Conforming Seasonal PO for an initial store allocation. In the event of a "Major Make-Whole Payment," Supplier shall pay a penalty to LESCO for each day, up to a maximum of 6 days, that such Conforming Goods are not delivered in accordance with a Conforming Seasonal PO. The daily penalty shall be equal to {REDACTED}% of the dollar amount (based on invoice price to LESCO) of the Product that was not delivered in accordance with an applicable Conforming Seasonal PO. Notwithstanding the foregoing, LESCO agrees that Supplier shall not be subject to penalties during the Transitional Period. 2. MINOR MAKE-WHOLE PAYMENTS. LESCO and Supplier shall work together, in good faith, to determine the appropriate service level criteria indicated as being "to be determined" ("[TBD]") prior to the end of the Transitional Period. LESCO agrees that Supplier shall not be subject to the following penalties during the Transitional Period. However, if the parties can't determine the appropriate service level criteria prior to the end of the Transitional Period, then the service level criteria shall be deemed to be 85%, meaning that Supplier must thereafter be in compliance with 85% of Conforming PO's (and if Supplier has failed to deliver in accordance with 85% of Conforming PO's, then Supplier shall be responsible for the Minor-Make Whole Payments specified below, using an 85% service level criterion). Min/Max Products (Non-Seasonal Replen POs and replenishment of certain Seasonal Products) The Products (other than initial store allocations) designated in Attachment A hereof have been further designated thereon as an Inventory Class X, A, B or C. The parties have agreed that the targeted average daily LESCO Service Center(R) and/or Stores-on-Wheels(R) in-stock percentage of Conforming Goods ("Targeted In-Stock Percentage") for each such Inventory Class in each LESCO Service Center(R) and/or Store-on-Wheels(R) is as follows (measured by SKU for Inventory Class X, and measured by units of Inventory Class for Inventory Classes A, B and C):
Inventory Class Targeted In-Stock Percentage - --------------- ---------------------------- ~~X [TBD] A [TBD] B [TBD] C [TBD]~~
-31- A. Class X Inventory. LESCO has identified Products in Class X as essential to LESCO's operations, and the parties have agreed that the Targeted In-Stock Percentage in each LESCO Service Center(R) and/or Store-on-Wheels(R) is [TBD] (measured by SKU) for Class X. A "Minor Make-Whole Payment" shall be due from Supplier to LESCO if, in any one (1) month, the actual average daily LESCO Service Center(R) and Stores-on-Wheels(R) in-stock percentage (exclusive of any stock outs not caused by Supplier's failure to deliver Conforming Goods in accordance with a valid Non-Seasonal PO or Seasonal Replen PO) of Conforming Goods in each LESCO Service Center(R) and/or Store-on-Wheels(R) ("Actual In-Stock Percentage") in Class X falls below [TBD] percent. LESCO will provide Supplier with a schedule which includes the following information: - Store location - Out of Stock SKU - Date SKU was Out of Stock - PO number of replenishment order delivered late In such an event, Supplier will pay a late delivery fee equal to {REDACTED}% of the inventory cost associated with the Products that Supplier has failed to deliver in accordance with a Conforming Non-Seasonal Replen PO or a replenishment Seasonal PO, as applicable. B. Class A, B and C Inventory. The parties have agreed to the applicable Targeted In-Stock Percentage in each LESCO Service Center(R) and/or Store-on-Wheels(R) (measured by units of Inventory Class) set forth in the table above for Class A, B and C inventory. The parties have also agreed that it is not in either party's best interest for Actual In-Stock Percentages to be too far above or too far below the Targeted In-Stock Percentages. Thus, the parties agree that they will collaboratively monitor the Actual In-Stock Percentages of each Class A, B and C and maintain Actual In-Stock Percentages within the following ranges ("Targeted In-Stock Range"):
Inventory Class Targeted In-Stock Range - --------------- ----------------------- ~~A [TBD] or higher B [TBD] or higher C [TBD] or higher~~
A "Minor Make-Whole Payment" shall be due from Supplier to LESCO if, in any one (1) month, the aggregate Actual In-Stock Percentage of conforming goods in Class A, B or C in a LESCO Service Center(R) and/or Store-on-Wheels(R) falls below the low end of the applicable Targeted In-Stock Range (exclusive of any stock outs not caused by Supplier's failure to deliver conforming goods in accordance with a Conforming Non-Seasonal Replen PO). LESCO will provide Supplier with a schedule which includes the following information: - Store location - Out of Stock SKU -32- - Date SKU was Out of Stock - PO number of replenishment order delivered late In such an event, Supplier will pay a late delivery fee equal to {REDACTED}% of the inventory cost associated with the Products that Supplier has failed to deliver in accordance with a Conforming Non-Seasonal Replen PO. Delivery Service Levels. - LESCO and Supplier have agreed to the following specified delivery service levels: a. Store Pick-up (includes local delivery through LESCO) - In the case where a Customer orders Product for its pick-up at Store or for local delivery to it through LESCO, the agreed-upon shipping time is [TBD] days from order placement. This applies to all selling SKUs and quantities. b. Direct Ship: FTL - In the case where a Customer orders Product for delivery directly to it from Supplier's plant/hub or from third-party vendors via "Full Truck Load", the agreed-upon shipping time is [TBD] days from order placement. This applies to all selling SKUs and quantities of 20,000 pounds or more (10 or more pallets). c. Direct Ship: LTL - In the case where a Customer orders Product for delivery directly to it from Supplier's plant/hub or from third-party vendors via "Less than Truck Load", the agreed-upon shipping time is [TBD] days from order placement. This applies to all selling SKUs and quantities less than 20,000 pounds (9 or fewer pallets). d. Custom Blends - In the case where LESCO offers its customer the option to purchase custom blended fertilizer, combination products and/or seed that is not sold as part of LESCO's normal stocking assortment, lead times for these items are different because they are produced on a one-time basis and shipped directly to the customer. LESCO will accept any delivery of Custom Blend orders that are within a 7% variance to the order quantity. The agreed-upon shipping time is as set forth below, and applies to all quantities: - Fertilizer - Minimum item order 12 tons; [TBD] days delivery - Fertilizer (Florida Only) - Minimum item order 6 tons; [TBD] days delivery - Combos - Minimum item order 18 tons; [TBD] days delivery for "in season" products - Seed - Minimum item order 2,000 pounds; [TBD] days delivery e. Additionally, LESCO and Supplier have agreed that for all order types a. through d., above, the delivery service goal will be to meet the specified service levels with conforming goods at a [TBD] rate. Supplier will track compliance with this rate on a monthly basis. A "Minor Make-Whole Payment" shall be due from -33- Supplier to LESCO if, in any month, the service level for any of such order types a. through d. falls below [TBD]. In such event, LESCO's "Lost Gross Profit" shall be equal to an estimated Sales Shortfall multiplied by {REDACTED}%. - "Sales Shortfall" equals the product of the Percentage Shortfall multiplied by actual Sold Order Type sales for the month - "Percentage Shortfall" equals the remainder of [TBD] service level goal minus actual percentage service level. For clarity, any Products delivered pursuant to the Delivery Service Levels noted above must be pursuant to Conforming PO's for penalties to apply thereto. THE FOREGOING MAJOR MAKE-WHOLE PAYMENTS AND MINOR MAKE-WHOLE PAYMENTS SHALL NOT APPLY AT ANY TIME (BUT ONLY FOR SUCH PERIOD OF TIME THAT) THAT LESCO'S PAYMENTS TO SUPPLIER UNDER SECTION 6(A)(I) HEREOF ARE MORE THAN 10 DAYS BEYOND THE THEN APPLICABLE PAYMENT TERMS. FOR EACH MONTH FOLLOWING THE CONTRACT DATE THAT LESCO FAILS TO PROVIDE A TIMELY SEASONAL PURCHASE FORECAST, THE WAIVER OF PENALTIES DURING THE TRANSITIONAL PERIOD UNDER THIS ATTACHMENT B SHALL BE DEEMED TO BE EXTENDED BY A MONTH. -34- ATTACHMENT C PLANNING AND SCHEDULING GUIDELINES SEASONAL PRODUCTS LESCO Seasonal Purchase Forecast - By the 20th day of each month (which the parties agree to change appropriately following the Transitional Period and if the parties can not agree within 30 days following the Transitional Period, it shall be changed to the 17th day of each month) (or the first succeeding Business Day if such day falls on a non-Business Day), LESCO will deliver to Supplier an updated 12 month forward forecast for the purchase of Seasonal Products (including the seasonal allocation of Non-Seasonal Products) ("Seasonal Purchase Forecast"). - Each Seasonal Purchase Forecast will provide: - Product SKU - The service area containing the Store or Customer to which the Product will eventually be delivered - Quantity by Product SKU - Season Code and Inventory Class - Month of delivery Supplier Seasonal Production Schedule - Within 3 Business Days after receipt of LESCO's Seasonal Purchase Forecast, Supplier will deliver to LESCO an updated 12 month forward production/sourcing schedule based on the Seasonal Purchase Forecast. - Each Seasonal Production Forecast will provide: - Product SKU - Quantity by Product SKU - Month of production/sourcing - Production location (where applicable) - Based on the Seasonal Production Schedule, Supplier and LESCO will agree on the last date by which LESCO must issue purchase orders so as to provide sufficient cycle time based on SKU, quantity, capacity and anticipated delivery location. - Supplier will endeavor to schedule production/sourcing to minimize inventory investment while ensuring product availability for LESCO PO Forecast - Within 2 Business Days after LESCO's receipt of Supplier's Seasonal Production Schedule, LESCO and Supplier will in good faith reasonably agree (based on reasonable pre-build times taking into account the SKU, quantity, capacity, anticipated delivery locations and other applicable factors) on an updated 12 month forward Seasonal -35- Purchase Forecast for Seasonal Products (including the seasonal allocations of Non-Seasonal Products) ("PO Forecast") based on the Seasonal Production Schedule setting forth the last date (as agreed to by Supplier and LESCO) by which LESCO must submit a Seasonal PO to purchase the desired Product. - The PO Forecast will provide: - Product SKU - The month in which the Seasonal PO will be issued ("PO Issue Date") - The service area containing the Store or Customer to which the Product will eventually be delivered - Quantity of Product SKU - The month in which such quantity will be delivered - Once agreed, the PO Forecast can not be changed within the three month period prior to the start of an applicable Season with respect to Seasonal Products for such Season; (at such time prior to the start of the Season, the PO Forecast with respect to such Season shall be deemed a "Locked" PO Forecast"). For example, if the Season for ice-melt begins October 1, 2005 and ends February 28, 2006 the PO Forecast for ice-melt Product to be delivered during such Season can not be changed following the PO Forecast to be agreed on or around June 26. For clarity, the PO Forecast will not imply any purchasing commitment on the part of LESCO. Such purchasing commitment will only arise once LESCO has issued a Seasonal PO. - LESCO and Supplier will mutually agree on three year strategic planting forecast for seed by July 1 of each year, at which point the seed Forecast for the following year will be deemed to be a "Locked PO Forecast." The seed Forecast should include: - The seed variety - Quantity (in pounds or acres) - Year in which the seed is to be harvested NON-SEASONAL PRODUCTS LESCO Non-Seasonal Purchase Forecast - By the 20th day of each month (which the parties agree to change appropriately following the Transitional Period and if the parties can not agree within 30 days following the Transitional Period, it shall be changed to the 17th day of each month) (or the first succeeding Business Day if such day falls on a non-Business Day), LESCO will deliver to Supplier an updated 12 month forward forecast (not to exceed 120% of purchase forecast) for the purchase of Non-Seasonal Products ("Non-Seasonal Forecast"). The updated Forecast for the following month will be deemed a "Locked" Non-Seasonal Forecast. - Each Non-Seasonal Forecast will provide: -36- - Product SKU - Quantity by Product SKU - Month of delivery - The service area containing the Store or Customer to which the Product will eventually be delivered -37- ATTACHMENT D COST ACCOUNTING STANDARDS Supplier will utilize cost accounting practices consistent with LESCO's historical cost accounting practices, including: 1. All direct costs incurred in the blending of fertilizer, combination products and seed are included in standard costs and are capitalized to inventory. 2. Procurement, warehousing and distribution costs are capitalized to inventory and expensed when the inventory is sold. 3. Variances - LESCO recognizes certain variances including: a. Purchase price b. Material usage c. Manufacturing The portions of variances applicable to inventory on hand are capitalized to inventory. 4. Supplier rebate programs from vendors - LESCO earns product discounts under various supplier rebate programs, which are recorded as accounts receivable and as reductions of inventory cost when earned. 5. Inventory shrink - LESCO performs cycle counts of inventory at each of its blending and distribution facilities and records the adjustments to inventory and cost of sales when the counts are performed. Costs of product damaged or used by blending or distribution facilities are included in shrink. In addition to the above historical cost accounting practices, Supplier will charge to LESCO as inventory cost the following: 1. Margin on A/R and Margin on Maintenance Capital 2. General and administrative (G&A) costs - including executive management, accounting, human resources, insurance premiums and deductibles on insurance coverage (but not losses in excess of policy limits), and other reasonable and proper headquarters related costs. Only direct G&A costs can be charged to LESCO, that is, there will be no general allocations from any third parties included in the costs charged to LESCO. Charges from third parties relative to outsourced functions can be included, but those costs must relate to direct functions required for the operation of Supplier. For clarity, all depreciation expense that is chargeable to LESCO hereunder will be calculated assuming a 5 year life of the applicable asset. 3. Planning, scheduling and transportation management costs - certain functions previously performed by LESCO including the planning, scheduling and transportation management functions, will move to Supplier and will be included in inventory costs. 4. All other costs and expenses incurred by Supplier other than Last Leg Transportation costs (the actual costs of which will be billed separately from standard/inventory cost) and those costs and expenses outlined in the following paragraph. "Last Leg -38- Transportation Costs" shall mean the actual transportation costs of shipping Products direct from either a distribution center to a Store or Customer or direct from a manufacturing plant to a Store or Customer. Costs that cannot be included in inventory/standard cost or charged to LESCO are as follows: 1. Any product margin except the margin specifically addressed in the Margin on A/R or the Margin on Maintenance Capital. 2. Any general cost allocation from any third party other than with respect to specific services provided to or on behalf of Supplier. 3. Depreciation related to capacity expansion not being utilized by LESCO production. However, Supplier and LESCO can agree through a separate arrangement to modify this restriction for specific purposes, e.g., SCU expansion, etc. 4. Insurable losses - because LESCO has agreed that Supplier may include insurance premiums and deductibles on insurance coverage required pursuant to this Agreement in inventory costs, losses in excess of policy limits cannot be charged to LESCO where Supplier would reasonably be expected to have obtained insurance for such loss based on companies in a similar business and of similar size as Supplier and with reference to Section 14 hereof. 5. Any Major Make-Whole Payments or Minor Make-Whole Payments. 6. Any other unusual, abnormal or extraordinary cost or loss outside of the ordinary course of Supplier's business resulting from Supplier's negligence. Because LESCO has indemnified for all environmental costs prior to the transaction with Supplier, any environmental liability post-transaction (other than routine expenditures to comply with environmental laws and permits (but not costs, expenses or penalties arising due to Supplier's non-compliance with environmental laws)) will be the responsibility of Supplier and cannot be charged to LESCO. The parties will true-up on an annual basis actual costs (inclusive of the Margin) relative to invoiced costs, and will make payments of any amount due within three Business Days of reaching agreement thereon. Supplier will review standard costs at least on an annual basis and update standards costs from time to time in good faith. When Supplier secures additional business, all general costs charged to LESCO will be proportionately reduced based upon manufacturing capacity utilization and/or throughput utilized by such new customers. These costs include, but are not limited to: 1. Procurement and warehousing costs. 2. Inventory shrink. 3. G&A. 4. Planning, scheduling and transportation management. -39- ATTACHMENT E COST SAVINGS AND COST CAP SECTION 1 - COST SAVINGS LESCO and Supplier to agree to establish Baseline Metrics, as follows: 1. Conversion cost per ton (which shall exclude the cost of raw materials) - a. Martins Ferry i. SCU ii. Blended fertilizer iii. Blended combination products b. Sebring i. Blended fertilizer ii. Blended combination products c. Hatfield i. Blended fertilizer ii. Blended seed d. Silverton - blended seed 2. Distribution cost per pallet (Distribution Center operating cost plus inbound freight divided by the number of fertilizer, combination fertilizer and seed pallets shipped) - a. Columbus b. Sebring c. Westfield d. Silverton e. Other 3. Transportation cost per pallet (total outbound transportation cost for delivery of product to Service Centers or customers (but without duplication of costs included in Distribution cost per pallet, above) divided by the total number of fertilizer, combination fertilizer and seed pallets shipped) (adjusted for fuel surcharge charges) - a. Martins Ferry/Columbus b. Sebring c. Hatfield d. Silverton e. Other -40- 4. Non-standard cost metrics - a. Variance (excluding purchase price variance) plus shrink charged to LESCO divided by the number of tons produced for LESCO - i. Martins Ferry ii. Sebring iii. Hatfield iv. Silverton v. Other b. Non-production cost charged to LESCO (G&A and planning, scheduling and transportation management cost) divided by the total number of tons produced for LESCO. By April 20, July 20 and October 20 of each year, Supplier will prepare a schedule in conformity with Schedule 1-A setting forth the actual cost metrics for the items for the preceding fiscal quarter. Upon delivery of Schedule 1-A to LESCO, the parties will jointly review the schedule. Upon request by LESCO, Supplier will deliver reasonable documentation or explanations for any Specific Adjustments made to the Historical Metric due to events or conditions outside of Supplier's reasonable control. The Historical Metric will not be modified for conditions that are within Supplier's reasonable control. For clarity, it is Supplier's understanding that it shall be able to benefit from LESCO volume increases. Supplier and LESCO will, if requested by LESCO, jointly discuss whether such Specific Adjustments are warranted. If the parties cannot agree as to the appropriate Specific Adjustments (and, accordingly, the New Metric) each company must document what it believes the New Metric should be in terms of dollars/(ton or pallet). On a calendar quarterly basis, such disputed metrics will be reviewed, discussed, and documented but no further action will occur. Once a New Metric is modified, the New Metric becomes the Historical Metric for future application and survives until modified in the future. Within 30 calendar days following LESCO's year-end, Supplier will deliver Schedule 1-A to LESCO unless given permission to delay by LESCO. Upon delivery of Schedule 1-A, the parties will meet within three Business Days to perform the previously outlined review for the fourth calendar quarter. The meeting cannot end until each variance is addressed and documented as discussed above. Determination of "Cost Savings": If there are no disputed metrics and the total Cost Savings (column (h) from Schedule 1-A) is greater than $0, the Cost Savings calculation will result in a payment (the "Cost Savings Amount") from LESCO to Supplier determined as follows: - Cost Savings < or = ${REDACTED} Under the "First ${REDACTED}" privilege, the entire savings is Supplier's, resulting in a payment from LESCO to Supplier. -41- - Cost Savings > ${REDACTED} Cost Savings X 50% Supplier share of Net Cost Savings + ${REDACTED} LESCO payment to Supplier The LESCO payment to Supplier will occur within five Business Days of the scheduled meeting. Unless waived by Supplier, failure to make the payment will result in penalties to LESCO of 1.5% simply interest per month, accrued daily. If there are any disputed metrics, the parties will utilize the documentation from the review meeting to summarize the difference per Schedule 1-B. Depending on the net balance of variance per LESCO or Supplier, the following procedures will be followed - - - Net variance < or = $100,000 - no further action can be taken. Schedule 1-A will prevail. - - Net variance > $100,000 but < or = $1 million - The Chief Executive Officers (or equivalent) of LESCO and Supplier must together review the Schedules 1-A and 1-B and, in good faith, attempt to resolve the variance and reach a compromise. If the CEO's cannot reach a compromise within 60 days, the matter immediately proceeds to arbitration, as follows ("Arbitration"): - The matter will be submitted to Deloitte & Touche LLP (or if Deloitte & Touche LLP cannot or is unwilling to serve in such capacity, a nationally recognized, independent public accounting firm selected by mutual agreement of the parties, or if they cannot agree, selected by mutual agreement of the independent public accounting firms regularly used by the parties in the conduct of their respective businesses) (the "Arbitrator"), who shall be engaged to provide a final and conclusive resolution of all unresolved disputes within ninety (90) days after such engagement. The Arbitrator shall act as an arbitrator to determine only those issues that remain in dispute, and such determination shall be based solely on a review of the factual materials presented by the parties, either on their own initiative or at the specific request of the Arbitrator, and such accounting principles and literature as the Arbitrator shall deem appropriate. No Federal or state Rules of Civil Procedure or Rules of Evidence shall apply. The determination of the Arbitrator shall be final, binding and conclusive on the parties. - Cost to be allocated in reverse proportion to final award. - - Net variance > $1 million - The Chief Executive Officers (or equivalent) of LESCO and Supplier must together review the Schedules 1-A and 1-B and, in good faith, attempt to resolve the variance and reach a compromise. If the CEO's cannot reach a compromise within 60 days, the matter immediately proceeds to Arbitration. -42- - Costs are split 50/50%. For purposes of Schedules 1-A, 1-B, 2-A and 2-B to this is Attachment E, "PPI" means the Producers Price Index, Finished Goods Index, Simple Percent Method, Base Year 2005 (to the extent an entire year of information is not available, the parties shall determine the PPI based on the average of the information available as of the date of the calculation of the price adjustment). Such PPI shall serve as the base year hereunder, and measurements based thereon shall be on a simple interest basis, computed annually thereafter. -43- SCHEDULE 1-A
(F) (H) (A) (B) (C) (D) (E) EXPECTED (G) COST HISTORICAL SPECIFIC NEW METRIC ACTUAL ACTUAL COST ACTUAL COST SAVINGS METRIC ADJUSTMENTS [A+B] RESULTS VOLUME [C*E] [D*E] [F-G] ---------- ----------- ---------- ------- ------ -------- ----------- ------- 1. Conversion Cost per Ton - a. Martins Ferry i. SCU ii. Fertilizer iii. Combo b. Sebring i. Fertilizer ii. Combo c. Hatfield i. Fertilizer ii. Seed d. Silverton - seed 2. Distribution Cost per Pallet a. Columbus b. Sebring c. Westfield d. Silverton e. Other 3. Transportation Cost per Pallet a. Martins Ferry/Columbus b. Sebring c. Hatfield/Westfield d. Silverton e. Other 4. Non-Standard Costs per Ton a. Variance/shrink i. Martins Ferry ii. Sebring iii. Hatfield iv. Silverton v. Other b. Non-production costs --- TOTALS $-- $-- $-- ===
-44- SCHEDULE 1-B
METRIC $ CHANGES ----------------------------------------- ------------------------ METRIC AND DESCRIPTION OF DISPUTED VARIANCE PER SCHEDULE A PER LESCO PER SUPPLIER PER LESCO PER SUPPLIER - ------------------------------------------- -------------- --------- ------------ --------- ------------
-45- SECTION 2 - COST CAP In conjunction with the Cost Savings processes, LESCO and Supplier will track Historical Metrics, as follows: 1. Conversion cost per ton (which shall exclude the cost of raw materials) - a. Martins Ferry i. SCU ii. Blended fertilizer iii. Blended combination products b. Sebring i. Blended fertilizer ii. Blended combination products c. Hatfield i. Blended fertilizer ii. Blended seed d. Silverton - blended seed 2. Distribution cost per pallet (Distribution Center operating cost plus inbound freight divided by the number of fertilizer, combination fertilizer and seed pallets shipped) - a. Columbus b. Sebring c. Westfield d. Silverton e. Other 3. Transportation cost per pallet (total outbound transportation cost for delivery of product to Service Centers or customers (but without duplication of costs included in Distribution cost per pallet, above) divided by the total number of fertilizer, combination fertilizer and seed pallets shipped) (adjusted for fuel surcharge charges) - a. Martins Ferry/Columbus b. Sebring c. Hatfield d. Silverton e. Other 4. Non-standard cost metrics - a. Variance (excluding purchase price variance) plus shrink charged to LESCO divided by the number of tons produced for LESCO - i. Martins Ferry ii. Sebring iii. Hatfield iv. Silverton v. Other b. Non-production cost charged to LESCO (G&A and planning, scheduling and transportation management cost) divided by the total number of tons produced for LESCO. On a calendar quarterly basis within 20 days of each quarter end, Supplier will prepare a schedule in conformity with Schedule 2-A setting forth the actual cost metrics for the items. Upon delivery of Schedule 2-A to LESCO, the parties will jointly review the schedule. Upon request by LESCO, Supplier will deliver reasonable documentation or explanations for any Specific Adjustments made to the Historical Metric due to events or conditions outside of Supplier's reasonable control. For clarity, any LESCO volume decreases shall serve as Specific Adjustments to the Historical Metric. The Historical Metric will not be modified for conditions that are within Supplier's reasonable control. Supplier and LESCO will, if requested by LESCO, jointly discuss whether such Specific Adjustments are warranted. If the parties cannot agree as to the appropriate Specific Metrics (and, accordingly, the New Metric) each company must document what it believes the New Metric should be in terms of dollars/(ton or pallet). On a calendar quarterly basis, such disputed metrics will be reviewed, discussed, and documented but no further action will occur. Once a Historical Metric is modified, the resulting New Metric becomes the Historical Metric for future application and survives until modified in the future. Thirty days following LESCO's year-end, Supplier will deliver Schedule 2-A to LESCO unless given permission to delay by LESCO. If Supplier fails to deliver Schedule 2-A to LESCO within such thirty day period, any cost savings due Supplier as provided in Section 1 of Attachment E hereof shall be reduced by $10,000 for each day that the schedule is late. Upon delivery of Schedule 2-A, the parties will meet within three Business Days to perform the previously outlined review for the fourth calendar quarter. The meeting cannot end until each variance is addressed and documented as discussed above. Determination of "Cost Cap": If there are no disputed metrics, the parties will proceed accordingly with Schedule 2-A. If there are disputed metrics, the parties will prepare Schedule 2-B. If Schedule 2-B is not necessary, and 1. The total Difference (Column (i) of Schedule 2-A) is greater than $0, no payment is required. 2. The total Difference is less than $0, Supplier must pay LESCO the amount of the difference as a credit to LESCO's next scheduled payment(s). If Schedule 2-B is necessary, and - - The Difference is greater than $0, no payment is required. - - The Difference is less than $0 and the variance between the LESCO and the Supplier Cost Caps are a. Variance < or = $100,000 - no further action can be taken. Supplier Cost Cap will prevail. b. Variance > $100,000 but < or = $1 million i. The Chief Executive Officers (or equivalent) of LESCO and Supplier must together review the Schedules 2-A and 2-B and, in good faith, attempt to resolve the variance and reach a compromise. If the CEO's cannot reach a compromise within 60 days, the matter immediately proceeds to Arbitration. - Cost to be allocated in reverse proportion to final award. c. Variance > $1 million i. The Chief Executive Officers (or equivalent) of LESCO and Supplier must together review the Schedules 2-A and 2-B and, in good faith, attempt to resolve the variance and reach a compromise. If the CEO's cannot reach a compromise within 60 days, the matter immediately proceeds to Arbitration. - Costs are split 50/50%. APPLICATION OF THE COST CAP WILL BE SUSPENDED UNTIL THE END OF THE TRANSITIONAL PERIOD. THE INITIAL HISTORICAL METRICS FOR THE COST CAP WILL BE DETERMINED BASED ON COSTS DETERMINED DURING THE TRANSITIONAL PERIOD. SCHEDULE 2-A
(B) (A) 1+ GREATER OF (C) (D) (E) (F) (G) (H) (I) HISTORICAL (I) {REDACTED}% SPECIFIC NEW METRIC ACTUAL ACTUAL COST CAP ACTUAL COST DIFFERENCE METRIC OR (II) PPI ADJUSTMENTS [A*B+C] RESULTS VOLUME [D*F] [E*F] [G-H] ---------- --------------- ----------- ---------- ------- ------ -------- ----------- ---------- 1. Conversion Cost per Ton - a. Martins Ferry i. SCU ii. Fertilizer iii. Combo b. Sebring i. Fertilizer ii. Combo c. Hatfield i. Fertilizer ii. Seed d. Silverton - seed 2. Distribution Cost per Pallet a. Columbus b. Sebring c. Westfield d. Silverton e. Other 3. Transportation Cost per Pallet a. Martins Ferry/Columbus b. Sebring c. Hatfield/Westfield d. Silverton e. Other 4. Non-Standard Costs per Ton a. Variance/shrink i. Martins Ferry ii. Sebring iii. Hatfield iv. Silverton v. Other b. Non-production costs --- TOTALS $-- $-- $-- ===
SCHEDULE 2-B
NEW METRIC NEW METRIC X VOLUME PER SCHEDULE A ----------------------------------- ----------------------------------- DESCRIPTION OF ACTUAL PER ACTUAL PER METRIC DISPUTED VARIANCE SCHEDULE A PER LESCO PER SUPPLIER SCHEDULE A PER LESCO PER SUPPLIER - ------ ----------------- ---------- --------- ------------ ---------- --------- ------------ 1. Conversion Cost per Ton - a. Martins Ferry i. SCU ii. Fertilizer iii. Combo b. Sebring i. Fertilizer ii. Combo c. Hatfield i. Fertilizer ii. Seed d. Silverton - seed 2. Distribution Cost per Pallet a. Columbus b. Sebring c. Westfield d. Silverton e. Other 3. Transportation Cost per Pallet a. Martins ferry/Columbus b. Sebring c. Hatfield/Westfield d. Silverton e. Other 4. Non-Standard Costs per Ton a. Variance/shrink i. Martins Ferry ii. Sebring iii. Hatfield iv. Silverton v. Other b. Non-production costs --- --- --- Total Prior Year Costs 0 0 0 === === ===
ATTACHMENT F MARGIN 1. "Margin on A/R" means, for each quarterly period, the product obtained by multiplying {REDACTED}% by Average A/R in such period; provided that where DSO is less than Target DSO for such period, then for purposes of determining the Margin on A/R for such period, Average A/R will be increased up to an amount so that DSO equals Target DSO for such period. For purposes of determining Margin: a. "Average A/R" means, with respect to any period, an amount equal to the quotient of the sum of the daily balance of accounts receivable owing to Supplier under this Agreement for such period, divided by the number of days in such period; b. "DSO" means, with respect to any period, the product obtained by multiplying (a) the number of days in such period by (b) the amount obtained by dividing (i) Average A/R in such period by (ii) Sales in such period; c. "Sales" means, with respect to any period, the amount invoiced by Supplier to LESCO for Products shipped hereunder during such period; d. "Target DSO" means:
During the Period: DSO - ------------------ --- To and including December 31, 2006 Within 45 days From January 1, 2007 to December 31, 2007 Within 42 days From January 1, 2008 to December 31, 2008 Within 39 days From January 1, 2009 to December 31, 2009 Within 36 days From January 1, 2010 to December 31, 2010 Within 33 days From and after January 1, 2011 Within 30 days
2. "Margin on Maintenance Capital" means, for each quarterly period, the product obtained by multiplying {REDACTED}% by the undepreciated portion of all Maintenance Capital with Maintenance Capital deemed to be made on the date the applicable asset was put into service or the date the applicable repair was made. For purposes of determining Margin on Maintenance Capital, all Maintenance Capital shall be deemed to have a depreciable life of five (5) years. SOLICITORS, 31168, 94002, 101243664.2, Final LTSA with Turf Care 2 EX-10.L 6 l18240aexv10wl.txt EXHIBIT 10(L) AMENDMENT OF EMPLOYMENT AGREEMENT EXHIBIT 10(l) AMENDMENT THIS AMENDMENT is entered into as of the 20th date of October, 2005, between Lesco, Inc., an Ohio corporation ("Lesco"), and Michael P. DiMino ("Executive"). WITNESSETH: WHEREAS, Lesco and Executive entered into an employment agreement dated as of February 23, 2004 (the "Employment Agreement," capitalized terms used herein shall have the respective meanings ascribed thereto in the Employment Agreement); and WHEREAS, Lesco and Executive desire to amend the Employment Agreement in certain respects as set forth in this Amendment; NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. For all purposes of the Employment Agreement, the voluntary resignation on or before October 20, 2005, by Executive of his employment with Lesco shall be treated as if his employment were terminated without Cause. 2. On and after the date of this Amendment, each reference in the Employment Agreement to "this Agreement," "hereunder," "hereof," or words of like import referring to the Employment Agreement shall mean the Employment Agreement as amended by this Amendment. The Employment Agreement, as amended by this Amendment, is and shall continue to be in full force and effect and is hereby in all respects ratified and confirmed. 3. This Amendment shall be governed by and construed according to the laws of the State of Ohio. IN WITNESS WHEREOF, the parties have executed this Amendment as of the day and year previously set forth. LESCO, INC. By: /s/ Jeffrey L. Rutherford ------------------------------------ Authorized Officer /s/ Michael P. DiMino ------------------------------------ Michael P. DiMino EX-10.M 7 l18240aexv10wm.txt EXHIBIT 10(M) SEPARATION AGREEMENT EXHIBIT 10(m) SEPARATION AGREEMENT AND RELEASE THIS SEPARATION AGREEMENT AND RELEASE ("Separation Agreement") is made and entered into this 16th day of November, 2005 by and between LESCO, Inc., an Ohio Corporation ("Lesco") and MICHAEL P. DIMINO ("Executive"). WHEREAS, Lesco and Executive entered into an Employment Agreement dated February 23, 2004 pursuant to which Executive became an employee of Lesco; and WHEREAS, Lesco and Executive subsequently amended said Employment Agreement by the Amendment dated October 20, 2005 pursuant to which Executive voluntarily resigned his employment with Lesco, said resignation to be treated as a termination without Cause under the Employment Agreement (the Employment Agreement and the Amendment hereafter collectively referred to as the "Employment Agreement, as amended"); and WHEREAS, Lesco and Executive now desire to set forth the specific terms of said termination without Cause and to otherwise conclude Executive's employment on an amicable and mutually agreeable basis. NOW THEREFORE, the parties to this Separation Agreement, in consideration of the mutual premises contained herein and other good and valuable consideration, agree as follows: 1. Resignation. Executive's last day of employment was October 20, 2005 and said date (hereinafter referred to as "Resignation Date") shall be the effective date of Executive's resignation as an employee of Lesco. 2. Base Salary and Annual Bonus. In accordance with the Employment Agreement, as amended, and its terms governing termination without Cause, Lesco shall pay Executive the following amounts and in the following manner: (a) On May 1, 2006, Lesco shall pay Executive a lump sum of $250,000.00. Thereafter, beginning June 1, 2006, Lesco shall pay Executive, on a monthly basis, six (6) equal payments of $41,666.67, said monthly payments totaling $250,000.00. The total of said lump sum payment and monthly payments shall be $500,000.00 representing one (1) year of Executive's Base Salary as of the Resignation Date. (b) On May 1, 2006, Lesco shall pay Executive a lump sum of $150,000.00. Thereafter, beginning June 1, 2006, Lesco shall pay Executive, on a monthly basis, six equal payments of $25,000.00, said monthly payments totaling $150,000.00. The total of said lump sum payment and monthly payments shall be $300,000.00 representing Executive's Annual Bonus Target as of the Resignation Date. 3. Health Insurance. For one year following with the Resignation Date, Lesco shall continue health insurance benefits for the Executive and his eligible dependents at no additional cost to the Executive other than that which was in effect as of the Resignation Date. Thereafter, Executive shall be eligible to continue said health insurance benefits for himself and his eligible dependents in accordance with COBRA. To cover Executive's portion of the costs for these benefits from October 22, 2005 through November 30, 2005, the following sum must be paid by Executive: ~~Medical: $261.34 Dental: $ 50.43 Vision: $ 18.00 Medical FSA: $275.53 Total: $605.30~~

Beginning December 1, 2005, Executive's monthly payment will be as follows: ~~Medical: $197.60 Dental: $ 38.13 Vision: $ 13.61 Medical FSA: $208.33 Total: $457.67~~

Checks should be made payable to LESCO sent to the attention of Siobhan Arnould by the first of the month for coverage for such month. -2- 4. Vacation. Lesco already has paid Executive for all earned but unused vacation days as of the Resignation Date, and nothing further is due and owing to Executive. 5. Outplacement. Lesco shall pay the cost of executive level outplacement services by an outplacement firm selected by Executive, consistent with Section 6(f)(D) of the Employment Agreement. 6. Options and Stock Awards. Lesco shall cooperate with and assist Executive in his exercise of stock options and other Lesco stock ownership matters awarded to him under the Employment Agreement as amended, consistent with Section 6(f)(D) of the Employment Agreement as amended. 7. Indemnification. Notwithstanding the provisions of Section 8 of this Separation Agreement, Section 7 of the Employment Agreement as amended shall remain in effect in accordance with its terms. 8. Release. Except for claims alleging breach of this Separation Agreement, Executive does hereby release and forever discharge Lesco, including its parent companies, divisions, subsidiaries, affiliates, predecessors, successors, assigns, directors, officers, employees and agents and each of them (the "Released Parties") from any and all claims, demands, actions, causes of action or suits at law or in equity of whatsoever kind or nature which Executive, his heirs or his personal representatives may now or hereafter assert against the Released Parties and each of them growing out of or resulting from Executive's employment by Lesco, the termination of his employment from Lesco, and the circumstances surrounding his termination, arising from the beginning of time up to and including the date Executive signs this Separation Agreement including, but not limited to, claims arising under any federal, state or local statute, ordinance or regulation dealing in any respect with employment and discrimination in -3- employment, including, but not limited to, claims under Title VII of the Civil Rights Act of 1964, as amended, 42 U.S.C. Section 2000e, et seq., the Age Discrimination In Employment Act, as amended, 29 U.S.C. Section 621, et seq., the Americans With Disabilities Act, 42 U.S.C. Section 12111, et seq. claims for compensation, vacation pay or benefits beyond that provided herein, and in addition thereto, from any claims demands or actions brought on the basis of any contract, express or implied, including the Employment Agreement as amended, or tort or on the basis of alleged wrongful discharge under the common law of any state. Executive further covenants and agrees never to institute any suit, complaint, proceeding or action at law, in equity or otherwise, in any court of the United States or any State thereof of either the United States or any state, county or municipality thereof or before any tribunal, public or private, against the Released Parties, or in any way voluntarily aid in the institution or prosecution of any claim of any sort seeking any kind of relief, in any way arising from or relating to Executive's employment with Lesco and the termination of his employment. It is the intention of Executive in executing this Release that it shall be an effective bar to each and every claim, demand and cause hereinabove described. 9. Notwithstanding any other provision of this Agreement to the contrary, the parties agree expressly that the terms and obligations of Section 8 of the Employment Agreement shall continue in full force and effect as if rewritten herein in their entirety. 10. Non-Admissions. Executive and Lesco acknowledge and agree that the considerations exchanged herein are not pursuant to any existing Lesco policy and do not constitute an admission of liability, wrongdoing, or guilt on the part of either party, but merely result from the desire of the parties of expeditiously terminate the employment relationship and resolve any possible disputed issues of law or fact. -4- 11. Severability. Each of the terms and provisions of this Separation Agreement is to be deemed severable in whole or in part and, if any term or provision or the application thereof in any circumstances should be invalid, illegal or unenforceable, the remaining terms and provisions or the application thereof to circumstances other than those as to which it is held invalid, illegal or unenforceable, shall not be affected thereby and shall remain in full force and effect. 12. Controlling Law and Jurisdiction. This Separation Agreement shall be governed by and interpreted and construed according to the laws of the State of Ohio. 13. Effectiveness and Revocation. Executive acknowledges that he has been given the opportunity to consider this Separation Agreement for twenty-one (21) days and has consulted with legal counsel of his choosing before signing it. Executive understands that he shall have seven (7) days from the date on which he executes this Separation Agreement (as indicated by the date below his signature) to revoke his signature and agreement to be bound hereby by providing written notice of revocation to Lesco, addressed to Maureen Thompson, within such seven (7) day period. Executive further understands and acknowledges that this Separation Agreement shall become effective, if not sooner revoked, on the eighth day after the execution hereof by Executive (the "Effective Date"). /s/ Michael P. DiMino /s/ Jeffrey L. Rutherford - ------------------------------------- ---------------------------------------- MICHAEL P. DIMINO LESCO, INC. 11/14/05 11/16/05 DATE DATE SOLICITORS, 31168, 00040, 101113470.3, Dimino Separation Agreement-DUP 11-11-05 -5- EX-10.V 8 l18240aexv10wv.txt EXHIBIT 10(V) FORM OF RESTRICTED STOCK AWARD AGREEMENT Exhibit 10(v) [LESCO LOGO] RESTRICTED STOCK AWARD AGREEMENT ================================================================================ [Date] [Name of Grantee] [Address] [Address] Dear [Grantee]: You have been selected as one of a very limited number of management-level associates to be granted a Restricted Stock Award (the "Award") by the Board of Directors of LESCO, Inc. (the "Company") of [grant #] common shares (the "Shares") of the Company, under The LESCO, Inc. 2000 Stock Incentive Plan (the "Plan") effective [Date]. As a key member of LESCO's management team, we want to keep you focused on our strategic business objectives over the next three years (i.e., the RESTRICTION PERIOD). The Restriction Period with respect to the Shares will end on [Date]. The certificate for the Shares will be legended pursuant to the provisions of the Plan and will be held by the Company for your benefit until the expiration of the Restriction Period. During the Restriction Period, you will be entitled to full voting rights and all dividends, if and to the extent paid by the Company, with respect to the Shares. Upon the expiration of the Restriction Period, the Company will cause the removal of the legend from the certificate representing the Shares and release the Shares to you. The granting of the Award and your ownership of the Shares shall not interfere with or limit in any way the right of the Company or any Subsidiary to terminate your employment at any time, nor does the Plan confer upon you any right to continued employment with the Company or any Subsidiary. The Award and the Shares are subject to all terms, conditions and limitations of the Plan, which are hereby incorporated by reference into this Restricted Stock Award Agreement. This Restricted Stock Award Agreement shall be governed by and construed in accordance with the laws of the State of Ohio. By accepting this Award and the Shares and signing below, you acknowledge receipt of a copy of the Plan and you agree to be bound by its terms and conditions. You are receiving two originals of this Restricted Stock Award Agreement. Please sign both. You must return a signed original to David Ratajczak in the Human Resources Department to indicate your acceptance of the Award. You should retain the other original for your records. You will not be deemed to have become a Participant, or to have any rights with respect to the Award, until and unless you have executed and returned this Restricted Stock Award Agreement and otherwise complied with the applicable terms and conditions of the Plan. LESCO, INC. - ------------------------------- ------------------------------ [Grantee] Jeffrey L. Rutherford President and Chief Executive Officer EX-10.W 9 l18240aexv10ww.txt EXHIBIT 10(W) FORM OF STOCK OPTION AWARD AGREEMENT Exhibit 10(w) LESCO, INC. NONQUALIFIED STOCK OPTION AGREEMENT This Nonqualified Stock Option Agreement (the "Agreement") is made by LESCO, Inc., an Ohio Corporation (the "Company"), and _______________ (the "Optionee"), this ______ day of ________________, _______. RECITALS 1. The Company believes it is desirable to grant to certain employees options to purchase the Company's common shares, without par value (individually a "Share" and collectively the "Shares"), in accordance with the terms and conditions of this Agreement. 2. On ____________, _________ (the "Grant Date"), the Committee (as hereafter defined) determined that it is advantageous and in the interests of the Company to grant the option provided for herein to the Optionee as an inducement to him or her to become employed by the Company or a subsidiary of the Company as a part of his agreement to become employed by the Company, and to promote the best interests of the Company, its subsidiaries and stockholders. NOW, THEREFORE, the parties hereto agree as follows: 1. Grant of Option. Subject to the terms and conditions hereinafter set forth, the Company, with the approval and at the direction of the Committee, hereby grants to the Optionee the option to purchase __________ Shares (the "Option") at a price of ___________________ ($_________) per share (the "Option Price"). The Option is subject to all the terms, conditions, and limitations as provided by the Committee and set forth in this Agreement. 2. Term of Option. The Option and any part thereof must be exercised within ten (10) years of the date hereof (the "Term"), unless terminated prior to that date by the provisions of this Agreement. 3. The Committee. The Committee means the Compensation, Governance and Nominating Committee of the Board of Directors of the Company (the "Board") (or any successor committee with responsibility for executive compensation). The Committee has conclusive authority to interpret and construe, as well as prescribe, all provisions of this Agreement, and make all other determinations deemed necessary or advisable for the administration of this Agreement, and has such other authority as the Board may from time to time deem necessary or desirable. Page 1 of 8 Exhibit 10(w) 4. Exercise of Option. A. Schedule of Right to Exercise Option. The Optionee may not exercise the Option in whole or in part prior to _______________, except in the case of a Change in Control of the Company (as hereafter defined) in which case the Option shall become exercisable in its entirety upon the occurrence of such Change in Control. The Option shall vest on _________, _________. The Optionee may exercise the Option granted hereby, to the extent vested, in whole or in part, in accordance with the terms and conditions of this Agreement at any time for a period of ten (10) years from the date hereof as to all Shares subject to the Option. B. Method of Exercise. The option may be exercised, in whole or in part, by the Optionee delivering a written notice in person or by certified mail to the Company at 1301 East 9th Street, Suite 1300, Cleveland, OH 44114-1849, Attention: _________________, Secretary. Such notice shall: (i) State (a) the election to exercise all or part of the Option granted hereunder; (b) the number of Shares with respect to which such Option is being exercised; (c) the Optionee's address and Social Security Number; (ii) Contain such representations and agreements as to the holder's investment intent with respect to such Shares of stock as may be satisfactory to the Committee and its counsel; (iii) Be signed by the person or persons entitled to exercise the Option. If the Option is being exercised by any person or persons other than the Optionee, the notice shall be accomplished by proof, satisfactory to the Committee and its counsel, of the right of such person or persons to exercise the Option; and (iv) Comply with such other reasonable requirements as the Committee may establish. C. Payment. Full payment of the aggregate Option Price for the Shares to be acquired upon exercise of the Option shall accompany the notice of exercise. Payment shall be (i) in cash in an amount equal to the aggregate Option Price, (ii) that amount of Shares of the Company so that the fair market value of the Shares equals the aggregate Option Price, or (iii) a combination of cash and Shares such that Shares and the amount of cash equals the aggregate Option Price. All payments of cash shall be by certified or bank check. After receipt of full payment of the aggregate Option Price with respect to that portion of the Option being exercised, a certificate representing the Shares acquired upon such exercise shall be registered in the name of the person or persons exercising the Option and shall be delivered by the Company as soon as practicable; provided, however, that the Company may, if it deems advisable, postpone delivery of such certificate in order to comply with the prospectus delivery requirements or other requirements of the Securities Act of 1933 or any state securities law. A Page 2 of 8 Exhibit 10(w) partial exercise of the Option granted hereunder does not waive an Optionee's right to a later exercise of such Option as to remaining Shares pursuant to the terms hereof. D. Limitations. Notwithstanding anything to the contrary in this Agreement: (i) Continuous Employment or Service. The Optionee, if an employee of the Company or a subsidiary or a director of the Company at the date hereof, may exercise the Option only if, at all times during the period beginning on the date hereof and ending on the day three months prior to the date of exercise of the Option, he is or was an employee of the Company or any of its subsidiaries; provided, however, if the termination of the Optionee's employment by the Company or the Optionee's status as a director of the Company is caused by the Optionee's death or disability, then the Optionee or his legal representative may exercise the Option as provided herein. In the case of disability of the Optionee (within the meaning of Section 150(d)(4) of the Code) the three-month period set forth in the preceding sentence will be extended to one year. If Optionee were to die, and at the time of death Optionee was entitled to exercise the Option, such Option may be exercised within twelve months after the death of Optionee (but not later than the end of the Term of the Option) by Optionee's estate or by a person who acquired the right to exercise such Option by bequest or inheritance. In any event, the Option may be exercised only as to the number of Shares for which it could have been exercised on the date the employee or former employee ceased employment. The Committee may, in its sole discretion, accelerate the time in which the Option may be exercised as set forth in Section 4A hereof. (ii) Purchase of Option Following Death. Following the death of Optionee, who at the time of death was entitled to exercise the Option, the Company may, at its election, upon the request of the holder of the Option (the estate or legal representative or heir of the deceased Optionee, as the case may be), at any time prior to its exercise or termination, purchase the Option at an aggregate price equal to the excess of the Fair Market Value on the date of such request, over the Option Price, multiplied by the number of Shares as to which the Option was then subject to exercise. (iii) Compliance with Securities Laws. The Option shall not be exercisable unless the Shares subject to the Option are exempt from registration or are the subject of a currently effective registration statement under all applicable Federal and State securities laws and are not subject to any effective stop order. At the discretion of the Committee, the Option shall not be exercisable by the Optionee unless the Company shall have received a reasonable opinion from its counsel to the effect that the issuance of Shares upon such exercise would not violate Federal Page 3 of 8 Exhibit 10(w) or State securities laws. As a condition to his exercise of the Option, the Optionee may be required by the Company to make representations and warranties to the Company as may be required by any applicable securities law or regulation as to his investment intention and the transfer of the Shares. If, notwithstanding any other provisions of this Agreement, in the reasonable opinion of counsel for the Company issuance of Stock upon exercise of the Option would subject the Company or any director or officer of the Company to civil or criminal liability under Federal or State securities laws or under any other applicable rules or regulations, including, without limitation, rules and regulations of the Securities and Exchange Commission or any state securities regulatory or administrative body or subject the Company to delisting or any other sanction under any applicable listing agreement, rule or regulation of any securities exchange, the Company shall not be required to issue or deliver any certificate or certificates for the Shares hereunder until (a) the Company has taken all steps as may, in the reasonable opinion of counsel for the Company, be required by all applicable Federal and State laws, rules and regulations and listing requirements of any exchange in connection with the issuance or sale of the Shares and listing of such Shares on each securities exchange, if any, on which outstanding Shares of the same class may then be listed; and (b) such Shares have been listed (or authorized for listing upon official notice of issuance) on each securities exchange, if any, on which outstanding Shares of the same class may then be listed. The Company shall use its best efforts to take such steps. (iv) Evidence of Ownership. In the case of the exercise of the Option, the Committee may require reasonable evidence as to the ownership of the Option and may require such consents and releases of taxing authorities as the Committee may deem advisable. (v) Withholdings. The Company is authorized to withhold from any payments under this Agreement all withholding taxes due in respect of such payment hereunder and to take such other action as may be necessary in the opinion of the Company to satisfy all obligations for the payment of such taxes. E. Change in Control. The Option will become exercisable with respect to 100% of the Shares upon the occurrence of any Change in Control of the Company. For all purposes of the Agreement, a "Change in Control" will have occurred if any of the following events occurs: (i) The Company is merged, consolidated or reorganized into or with another corporation or other legal person, and immediately after such merger, consolidation or reorganization less than a majority of the combined voting power of the then-outstanding securities of such corporation or person immediately after such transaction are held in the aggregate by the holders of the then-outstanding securities of the Company entitled to vote generally in the election of directors of the Page 4 of 8 Exhibit 10(w) Company (the "Voting Stock") of the Company immediately prior to such transaction; (ii) The Company sells all or substantially all of its assets to any other corporation or other legal person, and less than a majority of the combined voting power of the then-outstanding securities of such corporation or person immediately after such sale are held in the aggregate by the holders of Voting Stock of the Company immediately prior to such sale; (iii) There is a report filed on Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report), each as promulgated pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), disclosing that any person (as the term "person" is used in Section 13(d)(3) or Section 14 (d)(2) of the Exchange Act) has become the beneficial owner (as the term "beneficial owner" is defined under Rule 13(d)(3) or any successor rule or regulation promulgated under the Exchange Act) of securities representing 20% or more of the Voting Stock; (iv) The Company files a report or proxy statement with the Securities and Exchange Commission pursuant to the Exchange Act disclosing in response to Form 8-K or Schedule 14A (or any successor schedule, form or report or item therein) that a Change in Control of the Company has or may have occurred or will or may occur in the future pursuant to any then-existing contract or transaction; or (v) If during any period of two consecutive years, individuals who at the beginning of any such period constitute the members of the Board cease for any reason to constitute at least a majority thereof; provided, however, that for purposes of this Section, each member of the Board who is first elected, or first nominated for election by the Company's stockholders, by a vote of at least two-thirds of the members of the Board or a committee thereof then still in office who were members of the Board at the beginning of any such period will be deemed to have been a member of the Board at the beginning of such period. Notwithstanding the foregoing provisions of Section (iii) or (iv) hereof, unless otherwise determined in a specific case by majority vote of the Board, a "Change in Control" will not be deemed to have occurred for purposes of the Agreement solely because (i) the Company, (ii) an entity in which the Company directly or indirectly beneficially owns 50% or more of the voting securities, or (iii) any employee stock ownership plan or any other employee benefit plan sponsored by the Company, either files or becomes obligated to file a report or a proxy statement under or in response to Schedule 13D, Schedule 14D-1, Form 8-K or Schedule 14A (or any successor schedule, form or report of item therein) under the Exchange Act, disclosing beneficial ownership by it of Shares, whether in excess of 20% or otherwise, or because the Company reports that a Change in Page 5 of 8 Exhibit 10(w) Control of the Company has or may have occurred or will or may occur in the future by reason of such beneficial ownership. 5. Non-Transferability of Option. The Option may not be transferred in any manner otherwise than by will or the laws of descent and distribution and (other than in the event of the Optionee's death or incapacity) may be exercised only by the Optionee. The terms of the Option granted hereunder shall be binding upon the executors, administrators, heirs, successors, and assigns of the Optionee. 6. Optionee Is Not a Shareholder. The Optionee shall not have any rights to dividends or any other rights of a shareholder with respect to any Shares subject to the Option until such Shares shall have been issued to him (as evidenced by the appropriate entry on the books of a duly authorized transfer agent of the Company and delivery of certificates representing such Shares to him, except as provided in Section 7B hereof). 7. Representations and Warranties of the Optionee. Optionee represents, warrants, and acknowledges as follows: A. The Company has not made and is not making any representation or warranty, either express or implied, concerning the Shares or any matter or thing relating to or affecting the Company or any of its affiliates except as specifically set forth in this Agreement and in any documents delivered to the Optionee pursuant to the requirements of Federal and/or State securities laws; and B. Optionee understands that sales or other dispositions of any Shares which are made in reliance upon Rule 144 under the Securities Act of 1933 will be subject to certain restrictions including holding periods and a limitation on the amount of Shares sold in accordance with the terms and conditions of such Rule 144. 8. Adjustment Provisions. A. If prior to the expiration of the Option, there shall be any reorganization, merger, consolidation, reclassification, recapitalization, combination or exchange of the Shares, a stock split, stock dividend, rights offering or other event affecting the Shares, other than the sale of additional Shares, the Shares subject to the Option and the Option Price shall be equitably adjusted by the Committee, in accordance with any applicable rules and regulations of the Commissioner of Internal Revenue or other regulatory body, as the Committee deems appropriate to reflect such change; provided, however, that the number of Shares will always be a whole number, and the purchase price per Share of the Option outstanding will, in the case of an increase in the number of Shares, be proportionately increased. B. If the Company grants to the holders of its Shares rights to subscribe for additional Shares or other securities, such rights shall not apply to the Shares subject to the Option except to the extent that written notice by the Optionee exercising the Option has been delivered to the Company on or before the date Page 6 of 8 Exhibit 10(w) fixed for determining the shareholders entitled to receive such rights. The date of exercise of the Option shall be deemed to be the date notice of exercise is received by the Company. C. No adjustment provided for in this Section 8 shall require the sale or issuance of a fractional share. 9. General Provisions. A. All certificates for Shares delivered hereunder will be subject to such stock transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Shares are then listed, and any applicable federal or state securities law, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. B. Nothing in this Agreement will interfere with or limit in any way the right of the Company or any subsidiary of the Company to terminate Optionee's employment at any time, nor does this Agreement confer upon Optionee any right to continued employment with the Company or any subsidiary of the Company. C. This Agreement will be applied and construed in accordance with and governed by the laws of the State of Ohio, excluding its conflict of laws rules. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] Page 7 of 8 Exhibit 10(w) IN WITNESS WHEREOF, the parties hereto have executed this Agreement. Date of Grant: ------------- -------------, ------- LESCO, Inc. By ------------------------------ Jeffrey L. Rutherford President and Chief Executive Officer You received two originals of this stock option agreement. Please sign both. You must return a signed original to the Human Resources Department by [30 DAYS] to indicate your acceptance of the award. You may retain the other original for your records. You will not be deemed to have become a Participant, or to have any rights with respect to the Award, until and unless you have executed and returned this Stock Option Agreement and otherwise complied with the applicable terms and conditions of the Plan. Optionee hereby agrees to accept as binding, conclusive, and final all decisions or interpretations by the Committee of any questions arising under this Agreement. DATED: ----------------- --------------------------------- (Optionee) --------------------- Page 8 of 8 EX-21 10 l18240aexv21.txt EX-21 SUBSIDIARIES OF THE REGISTRANT Exhibit 21 Subsidiaries of the Registrant Aim Lawn & Garden Products, Inc. LESCO Services, Inc. LESCO Technologies, LLC EX-23.A 11 l18240aexv23wa.txt EX-23(A) CONSENT Exhibit 23 (a) Consent of Independent Registered Public Accounting Firm The Board of Directors LESCO, Inc.: We consent to the incorporation by reference in the registration statements (Nos. 333-49884, 333-33292, 333-92961, 333-38118, 333-22685, 333-82490, and 333-103637) on Form S-8 of LESCO, Inc. of our reports dated March 16, 2006, with respect to the consolidated balance sheets of LESCO, Inc. and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2005, and related financial statement schedule, and management's assessment of, and the effective operation of, internal control over financial reporting as of December 31, 2005, which reports appear in the December 31, 2005 annual report on Form 10-K of LESCO, Inc. and subsidiaries. /s/ KPMG LLP Cleveland, Ohio March 16, 2006 EX-31.A 12 l18240aexv31wa.txt EXHIBIT 31(A) CERTIFICATION Exhibit 31 (a) CERTIFICATION PURSUANT TO RULE 13A-14(A)/15D-14(A) I, Jeffrey L. Rutherford, certify that: 1. I have reviewed this annual report on Form 10-K of LESCO, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 16, 2006 /s/ Jeffrey L. Rutherford ---------------------------------------- Jeffrey L. Rutherford President and Chief Executive Officer EX-31.B 13 l18240aexv31wb.txt EXHIBIT 31(B) CERTIFICATION Exhibit 31 (b) CERTIFICATION PURSUANT TO RULE 13A-14(A)/15D-14(A) I, Michael A. Weisbarth, certify that: 1. I have reviewed this annual report on Form 10-K of LESCO, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 16, 2006 /s/ Michael A. Weisbarth ---------------------------------------- Michael A. Weisbarth, Vice President, Chief Financial Officer and Treasurer EX-32.A 14 l18240aexv32wa.txt EXHIBIT 32(A) CERTIFICATION Exhibit 32 (a) March 16, 2006 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 I, Jeffrey L. Rutherford, President and Chief Executive Officer of LESCO, Inc. (the "Company"), certify, pursuant to 18 U.S.C. Section 1350, that: (1) The Annual Report on Form 10-K of the Company for the fiscal year ended December 31, 2005 which this certification accompanies fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in such Annual Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Jeffrey L. Rutherford - ------------------------------------ Jeffrey L. Rutherford Senior Vice President, Chief Financial Officer, Secretary and Treasurer EX-32.B 15 l18240aexv32wb.txt EXHIBIT 32(B) CERTIFICATION Exhibit 32 (b) March 16, 2006 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 I, Michael A. Weisbarth, Vice President, Chief Financial Officer and Treasurer of LESCO, Inc. (the "Company"), certify, pursuant to 18 U.S.C. Section 1350, that: (1) The Annual Report on Form 10-K of the Company for the fiscal year ended December 31, 2005 which this certification accompanies fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in such Annual Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Michael A. Weisbarth - ------------------------------------ Michael A. Weisbarth, Vice President, Chief Financial Officer and Treasurer -----END PRIVACY-ENHANCED MESSAGE-----


þ		Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

		For the fiscal year ended December 31, 2005

or

o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

		For the transition period from to


Ohio		34-0904517
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1301 East Ninth Street, Suite 1300		44114
Cleveland, Ohio		(Zip Code)
(Address of principal executive offices)


	For the Year Ended
	December 31,

	2005		2004		2003

(Dollars in millions)
Fertilizer & combination products	$	246.0	$	231.8	$	204.5
Control products		158.6		166.6		159.2
Equipment, parts & service		64.2		62.1		59.6
Turfgrass seed		77.2		68.6		67.0
Pest control		20.3		18.6		18.2
Other		16.6		17.8		17.5

Gross Sales	$	582.9	$	565.5	$	526.0


	•	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.


	•	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.


	•	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.


Location(1)	Principal Use	Square Feet		Status

Anaheim, CA	Closed distribution hub		14,780	Leased(2)
North Aurora, IL	Closed distribution hub		74,056	Leased(3)
Stockton, CA	Closed manufacturing facility for fertilizers and turf control products		32,000	Owned/ Leased(4)
Cleveland, OH	Corporate office		38,643	Leased(5)
Windsor, NJ	Asset held for sale — land previously used as a manufacturing and distribution center, approximately 17 acres		—	Owned


(1)	Does not include Service Centers or Stores-on-Wheels. As of December 31, 2005, we operated Service Centers in 305 leased facilities. These facilities range in size from 3,400 to 10,000 square feet. As of December 31, 2005, we owned or leased 111 vehicles for our Stores-on-Wheels.

(2)	Lease term expires in 2008. On December 24, 2005, approximately 3,000 square feet were subleased on a month-to-month basis.

(3)	Lease term expires in 2008.

(4)	These facilities consist of two buildings we own. The land is subject to ground leases, which expire in 2011. We have one, five-year renewal option.

(5)	Lease term expires in 2010. We have one, five-year renewal option.


Name	Age		Position

Jeffrey L. Rutherford		45	President and Chief Executive Officer
Bruce K. Thorn		39	Senior Vice President, Chief Operating Officer
Michael A. Weisbarth		41	Vice President, Chief Financial Officer and Treasurer
Kathleen M. Minahan		36	Vice President, General Counsel and Secretary


	2005				2004

(Quarter Ended)	High		Low		High		Low

March 31	$	14.85	$	12.51	$	13.66	$	10.40
June 30		15.50		12.11		13.60		11.15
September 30		16.05		12.35		14.05		12.20
December 31		17.10		14.75		13.48		11.25


		For the Year Ended December 31,

		2005			2004			2003			2002			2001

(Dollars in thousands, except per share data)
Net Sales		$	575,745		$	561,041		$	523,489		$	511,705		$	504,268
	Cost of product (including distribution costs)		(434,334	)		(422,617	)		(398,312	)		(394,694	)		(394,719	)

Gross profit on sales			141,411			138,424			125,177			117,011			109,549
	Selling expense		(98,837	)		(91,758	)		(86,043	)		(80,781	)		(77,131	)
	General & administrative expense		(26,739	)		(27,000	)		(28,612	)		(32,320	)		(29,620	)
	Merchant discounts and provision for doubtful accounts		(15,893	)		(10,757	)		(3,045	)		(2,363	)		(1,268	)
	Pre-opening expense		(1,607	)		(1,158	)		(609	)		—			—
	Early retirement of debt		—			—			(2,333	)		(4,550	)		—
	Loss from sale of accounts receivable		—			—			(4,626	)		—			—
	Asset rationalization		—			—			—			(12,044	)		—
	Corporate relocation expense		—			(6,878	)		—			—			—
	Hurricane/flood expense		—			(1,243	)		—			—			—
	Vendor contract termination		(474	)		(4,404	)		—			—			—
	Supply chain transaction expense		(24,039	)		—			—			—			—
	Other expense		(118	)		(272	)		(337	)		(104	)		(329	)
	Other income		470			508			1,521			812			53

Earnings (loss) before interest and taxes			(25,826	)		(4,538	)		1,093			(14,339	)		1,254
Interest expense, net			(856	)		(747	)		(4,730	)		(4,899	)		(6,098	)

Loss before taxes and cumulative effect of accounting change			(26,682	)		(5,285	)		(3,637	)		(19,238	)		(4,844	)
Income tax (provision) benefit			—			(340	)		(1,634	)		6,376			1,960

Loss before cumulative effect of accounting change			(26,682	)		(5,625	)		(5,271	)		(12,862	)		(2,884	)
Cumulative effect of accounting change for goodwill charge, net of tax benefit of $2,735			—			—			—			(4,597	)		—

Net loss		$	(26,682	)	$	(5,625	)	$	(5,271	)	$	(17,459	)	$	(2,884	)

Loss per common share before cumulative effect of accounting change:
	Diluted	$	(3.00	)	$	(0.65	)	$	(0.63	)	$	(1.52	)	$	(0.34	)
	Basic	$	(3.00	)	$	(0.65	)	$	(0.63	)	$	(1.52	)	$	(0.34	)

Cumulative effect of accounting change per basic and diluted common share			—			—			—			(0.54	)		—
Loss per common share
	Diluted	$	(3.00	)	$	(0.65	)	$	(0.63	)	$	(2.06	)	$	(0.34	)
	Basic	$	(3.00	)	$	(0.65	)	$	(0.63	)	$	(2.06	)	$	(0.34	)

Average number of common shares and common share equivalents outstanding:
	Diluted		8,887,024			8,696,356			8,550,414			8,519,789			8,496,681
	Basic		8,887,024			8,696,356			8,550,414			8,519,789			8,496,681


Item 7:	*Management’s Discussion and Analysis of Financial Condition and Results of Operations*


	•	Overview

	•	Business Segment Results — 2005 vs. 2004

	•	Business Segment Results — 2004 vs. 2003

	•	Liquidity and Capital Resources

	•	Contractual Obligations, Commitments and Off Balance Sheet Arrangements

	•	Critical Accounting Policies and Estimates

	•	Recently Issued Accounting Pronouncements


	1. Sale of Supply Chain Assets: The fourth quarter of 2005 marked the culmination of the Company’s strategic effort to sell its manufacturing and distribution assets. The assets were sold to TCS along with the related working capital for $34 million. Ultimately, the Company expects to harvest $25 million in cash after settling all requirements associated with the transaction including the accounts payable due to vendors for the inventory sold to TCS. The supply chain assets sold included all four of LESCO’s blending facilities and the majority of the Company’s warehouse and distribution centers. LESCO recorded a charge of $24.0 million related to the transaction for the loss on sale of assets, lease terminations and service fees including banking, legal and insurance costs. There were four distribution facilities that were not purchased by TCS and subsequently were closed by LESCO as of December 31, 2005. The Company recorded $2.2 million in closing costs and asset impairment expense for these facilities. Concurrently with the execution of the sale agreement, the Company entered into a long-term supply contract with TCS that includes, among other terms, negotiated pricing, access to blending capacity, service level requirements and built-in cost reduction incentives.

	In previous years, leading up to the sale to TCS, the Company began rationalizing its blending capacity and ceased operations at, and decided to sell, two manufacturing facilities (a methylene-urea facility in Disputanta, Virginia and a manufacturing facility in Stockton, California) and certain other properties. In conjunction with the shutdown of those operations, we recorded a reserve to provide for the remaining obligations associated with each site. At December 31, 2005, $0.5 million remained in the reserve pertaining to these properties, primarily representing future lease and real estate tax payments. For the assets shuttered in 2005, there is $1.6 million remaining in the reserve at December 31, 2005. All future costs incurred to prepare the various sites for sale, including environmental testing and environmental remediation costs, will be capitalized up to the realizable market value of each respective property.


	2. Stores Expansion and Segment Operating Model: We expanded the number of Service Centers and Stores-on-Wheels locations and modified our financial reporting to reflect the changes in our operating model after the sale of the supply chain assets to TCS.


	December 31,

	2005		2004		2003		2002		2001

(Dollars in thousands)
Balance Sheet Data:
Working capital, excluding current debt	$	34,396	$	48,185	$	58,843	$	107,642	$	87,660
Total assets	$	130,881	$	155,993	$	161,365	$	204,732	$	204,596
Long-term debt, net of current portion	$	—	$	—	$	5,875	$	10,227	$	11,390
Shareholder’s equity	$	42,758	$	66,523	$	71,270	$	76,933	$	93,916


		Twelve Months Ended December 31,

		2005												2004											% Change

		Service			Stores									Service			Stores								Service			Stores
(Dollars in millions)		Centers			on Wheels			Direct			Total			Centers			on Wheels			Direct		Total			Centers			on Wheels			Direct			Total

Lawn care		$	388.1		$	3.5		$	69.0		$	460.6		$	349.9		$	2.7		$	72.8	$	425.4			10.9	%		29.6	%		(5.2)	%		8.3	%
Golf			35.8			77.3			9.2			122.3			34.5			70.9			34.7		140.1			3.8			9.0			(73.5)			(12.7	)

Gross sales			423.9			80.8			78.2			582.9			384.4			73.6			107.5		565.5			10.3			9.8			(27.3)			3.1
Net sales adjustments(a)			(2.4	)		(2.8	)		(2.0	)		(7.2	)		(0.1	)		(5.5	)		1.1		(4.5	)		(2,300.0	)		49.1			(281.8)			(60.0	)

	Net sales	$	421.5		$	78.0		$	76.2		$	575.7		$	384.3		$	68.1		$	108.6	$	561.0			9.7	%		14.5	%		(29.8)	%		2.6	%


	*Sales:*


		Twelve Months Ended December 31,

		2005									2004									% Change

		Service			Stores						Service			Stores						Service			Stores
(Dollars in millions)		Centers			on Wheels			Total			Centers			on Wheels			Total			Centers			on Wheels			Total

Lawn care		$	388.1		$	3.5		$	391.6		$	349.9		$	2.7		$	352.6			10.9	%		29.6	%		11.1	%
Golf			35.8			77.3			113.1			34.5			70.9			105.4			3.8			9.0			7.3

Gross sales			423.9			80.8			504.7			384.4			73.6			458.0			10.3			9.8			10.2
Net sales adjustments			(2.4	)		(2.8	)		(5.2	)		(0.1	)		(5.5	)		(5.6	)		(2,300.0	)		49.1			(60.0	)

	Net sales	$	421.5		$	78.0		$	499.5		$	384.3		$	68.1		$	452.4			9.7	%		14.5	%		10.4	%


	a. New Service Center Program: LESCO did not open any new Service Centers from 1998 until 2003. Our analysis of Service Center Four-Wall Profit and Loss Statements (P&Ls) and Four-Wall Return on Invested Capital (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 43%. As a result, we performed a statistical analysis utilizing historical Service Center operating performance, published industry data and government data relative to the U.S. metropolitan statistical areas. This analysis 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 Centers in 2003, 27 new Service Centers in 2004, and 31 new Service Centers in 2005, with an expectation to open up to 40 additional Service Centers in 2006.

	b. Stores-on Wheels Expansion: During the first half of 2005, we expanded our fleet of Stores-on-Wheels vehicles by 52% to 111 units from a fleet of 73 units at the end of 2004. The rapid expansion of this sales channel created significant challenges, including employee turnover and asset deployment; however, we anticipate improved profitability levels in 2006 as efficiency gains are realized due to the condensed sales territories and downsized vehicle requirements (box truck versus tractor trailer). The cost-effective Stores-on-Wheels will service not only golf course customers, but will visit all locations with stationary turf superintendent functions including schools, universities, cemeteries, parks and municipalities. We currently anticipate placing three incremental units into service in 2006.

	Furthermore, in 2005 we expanded our field management organization to enhance the required infrastructure to support our future store growth, which will come predominantly from adding new Service Centers. The incremental $3.9 million incurred in 2005 for the expansion of our Stores-on-Wheels fleet and field management team is not expected to be replicated in 2006.

	c. Segment Reporting: Concurrently with the sale of its supply chain assets, the Company revised its segment reporting and now reports on two segments — Stores and Direct. The Stores Segment includes operating results of the Company’s Service Centers, Stores-on-Wheels vehicles and field management costs. The Direct Segment includes the operating results of all non-store transactions. The two operating segments are supplemented by Corporate costs, which include expenses for selling support functions such as customer service, bids processing, product registration and marketing expense. In addition, merchant discounts that are incurred for the extension of customer payment terms, general and administrative expense, new Service Center pre-opening expenses, and interest and taxes are all reported as Corporate costs.


	3. Refinancing: In conjunction with the sale of its supply chain assets to TCS, the Company amended its $50 million Facility. The Facility matures October 7, 2010 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 1.25%, and there is a facility fee of 0.25% on the unused portion. Availability under the Facility is determined by a borrowing base formula calculated on eligible inventory. As of December 31, 2005, there was $45.3 million available, based on the borrowing base formula. Letters of credit, up to a maximum of $20 million, are also available under the Facility and are considered outstanding borrowings when calculating the unused portion of availability. Letters of credit in the aggregate amount of $13.0 million were outstanding resulting in unused borrowing capacity of $32.3 million as of December 31, 2005. Letter of credit fees were fixed at 1.0% with an issuance fee fixed at 0.25%.

	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, 2005.


	4. Relocation of Corporate Headquarters: During 2004, we entered into agreements to relocate our corporate headquarters from our approximately 94,000-square-foot facility in Strongsville, Ohio to an approximately 39,000-square-foot facility in downtown Cleveland, Ohio. Relocation costs incurred during 2004 were $6.9 million and were related primarily to tenant and landlord inducements along with broker commissions and legal fees. In 2005, the financial effect of the relocation was accretive to earnings on a pre-tax basis by over $1.0 million. As part of the relocation, we reduced our lease commitment for corporate offices by five years as the lease on the Strongsville facility expires in 2015 while the current corporate headquarters lease expires in 2010.

	5. Vendor Contract Termination: In 2004, we notified KPAC Holdings, Inc. (KPAC), our supplier of methylene urea fertilizer, that we were terminating our performance under a five-year supply agreement. The agreement, signed in November 2002, required the Company to purchase annually 8,000 tons of methylene urea fertilizer at a fixed conversion cost of $500 per ton. Management estimated that terminating the supply agreement would generate an annual, pre-tax savings of more than $2 million over the remaining term of the agreement, which aggregate savings are expected to exceed the $5.7 million cost to exit the supply agreement.

	6. Other: Deferred Tax Asset Valuation Reserves — In assessing the realizability of deferred tax assets, we considered whether it is more likely than not that some portion or all of our 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, we considered historical earnings, the scheduled reversal of deferred tax assets and liabilities, projected future taxable income, and tax planning strategies. The recent cumulative losses, including those generated from the supply chain transaction and other strategic initiatives, 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 $15.6 million has been recorded to fully reserve for the Company’s net deferred tax assets as of December 31, 2005.


		Twelve Months Ended December 31,

		Stores						Direct Sales						Corporate						Total

		2005			2004			2005			2004			2005			2004			2005			2004
(Dollars in millions)
Net sales		$	499.5		$	452.4		$	76.2		$	108.6		$	—		$	—		$	575.7		$	561.0
	Cost of Product (including distribution costs)		(360.8	)		(329.4	)		(67.3	)		(92.4	)		(6.2	)		(0.8	)		(434.3	)		(422.6	)

Gross profit on sales			138.7			123.0			8.9			16.2			(6.2	)		(0.8	)		141.4			138.4
	% to Net Sales		27.8	%		27.2	%		11.7	%		14.9	%								24.6	%		24.7	%
	Selling expense		(82.8	)		(68.3	)		(5.6	)		(13.2	)		(10.4	)		(10.2	)		(98.8	)		(91.7	)
	% to Net Sales		(16.6	)%		(15.1	)%		(7.3	)%		(12.2	)%								(17.2	)%		(16.3	)%
	Merchant discounts		(8.4	)		(6.3	)		(1.9	)		(1.7	)		(5.6	)		(2.7	)		(15.9	)		(10.7	)
	% to Net Sales		(1.7	)%		(1.4	)%		(2.5	)%		(1.6	)%								(2.8	)%		(1.9	)%
	Pre-opening expense		—			—			—			—			(1.6	)		(1.2	)		(1.6	)		(1.2	)
	% to Net Sales		—			—			—			—									(0.3	)%		(0.2	)%
	General & administrative expense		—			—			—			—			(26.7	)		(27.0	)		(26.7	)		(27.0	)
	% to Net Sales		—			—			—			—									(4.6	)%		(4.8	)%
	Supply chain transaction expense		—			—			—			—			(24.0	)		—			(24.0	)		—
	% to Net Sales		—			—			—			—									(4.2	)%		—
	Vendor contract termination		—			—			—			—			(0.5	)		(4.4	)		(0.5	)		(4.4	)
	% to Net Sales		—			—			—			—									(0.1	)%		(0.8	)%
	Corporate relocation expense		—			—			—			—			—			(6.9	)		—			(6.9	)
	% to Net Sales		—			—			—			—									—			(1.2	)%
	Hurricane/flood expense		—			—			—			—			—			(1.2	)		—			(1.2	)
	% to Net Sales		—			—			—			—									—			(0.2	)%
	Other income (expense)		—			—			—			—			0.3			0.2			0.3			0.2
	% to Net Sales		—			—			—			—									0.1%			0.0%

Earnings (loss) before interest and taxes		$	47.5		$	48.4		$	1.4		$	1.3		$	(74.7	)	$	(54.2	)		(25.8	)		(4.5	)

	% to Net Sales		9.5	%		10.7	%		1.8	%		1.2	%								(4.5	)%		(0.8	)%
Interest expense, net																					(0.9	)		(0.8	)
	% to Net Sales																				(0.2	)%		(0.1	)%

Loss before taxes																					(26.7	)		(5.3	)
	% to Net Sales																				(4.6	)%		(0.9	)%
Income tax provision																					—			(0.3	)
	% to Net Sales																				—			(0.1	)%

Net loss																				$	(26.7	)	$	(5.6	)

	% to Net Sales																				(4.6	)%		(1.0	)%


(a)		Net sales adjustments include freight revenue reduced by agency sales, customer discounts, and rebates.


	Twelve Months
	Ended
	December 31,

	2005		2004

Class of 2005 (31 stores)	$	7.73	$	—
Class of 2004 (27 stores)	$	37.74	$	19.30
Class of 2003 (21 stores)	$	53.83	$	42.48
Prior to 2003 (226 stores)	$	81.98	$	76.51
Total per square foot leased	$	67.97	$	67.75


		Twelve Months Ended
		December 31,

		2005			2004		% Change
(Dollars in millions)
Lawn care		$	69.0		$	72.8		(5.2	)%
Golf			9.2			34.7		(73.5	)

Gross sales			78.2			107.5		(27.3	)
Net sales adjustments			(2.0	)		1.1		(281.8	)

	Direct Segment net sales	$	76.2		$	108.6		(29.8	)%


	Gross Profit
	Rate

	2005			2004
For the Quarter Ended:
March 31		9.6	%		15.2	%
June 30		11.5	%		14.6	%
September 30		9.2	%		14.0	%
December 31		19.2	%		16.2	%


	•	$3.1 million for product rationalization to eliminate certain under-performing SKU’s,

	•	$2.3 million for parts inventory to restructure the Company’s parts sourcing model, and

	•	$0.8 million for inventory disposed in conjunction with the supply chain transaction.


	Twelve Months
	Ended December
	31,

	2005			2004
(Dollars in millions)
Accounts payable	$	61.4		$	56.4

Inventory	$	80.3		$	100.6

Accounts payable leverage		76.5	%		56.1	%


				Less than						More than
		Total		1 Year		1-3 Years		3-5 Years		5 Years
(Dollars in millions)
Operating lease obligations		$	57.1	$	17.4	$	25.6	$	11.3	$	2.8
Purchase obligations
	Grass seed(a)		35.3		35.3		—		—		—
	Urea(b)		26.3		26.3		—		—		—
	Potash(c)		16.1		16.1		—		—		—
	Equipment(d)		104.2		31.7		72.5		—		—
	Other(e)		8.8		3.2		5.6		—		—

	Total purchase obligations		190.7		112.6		78.1		—		—

Total contractual obligations		$	247.8	$	130.0	$	103.7	$	11.3	$	2.8


(a)	For 2006, the Company is committed to purchase the grass seed crop from approximately 36,500 acres of land at prices to be determined by the prevailing market prices. For presentation purposes, this obligation is estimated based upon 2005 purchases of approximately $35.3 million and the assumption of a similar crop yield in 2006.

(b)	For 2006, the Company is committed to purchase 96,700 tons of urea at a fixed price reflecting market prices as of August 26, 2005. The contracted price is $271.50 per ton.

(c)	For 2006, the Company is committed to purchase 61,400 tons of potash at a fixed price reflecting market prices as of September 15, 2005. The contracted price is in the range of $251.00-$262.00 per ton, depending on which TCS facility is to receive the product.

(d)	In 2003, the Company sold its investment in Commercial Turf Products, Ltd. to MTD Consumer Group, Inc. Concurrently with the sale, the Company entered into a five-year supply agreement with CTP and MTD requiring minimum annual equipment purchases.

(e)	Other commitments include computer hardware and software maintenance commitments, hardware leases and telecommunications contracts.


Item 7A.	*Quantitative and Qualitative Disclosures about Market Risk*


Item 8.	*Consolidated Financial Statements and Supplementary Data*


Report of KPMG LLP, Independent Registered Public Accounting Firm		F-1
Consolidated Statements of Operations — Years ended December 31, 2005, 2004 and 2003		F-2
Consolidated Balance Sheets — December 31, 2005 and 2004		F-3
Consolidated Statements of Cash Flows — Years ended December 31, 2005, 2004 and 2003		F-4
Consolidated Statements of Shareholders’ Equity — Years ended December 31, 2005, 2004 and 2003		F-5
Notes to Consolidated Financial Statements		F-6
Schedule II — Valuation and Qualifying Accounts — Years ended December 31, 2005, 2004 and 2003		Item 15(a)


Item 10.	*Directors and Executive Officers of the Registrant*


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


(1)	See Note 9 to Consolidated Financial Statements.

(2)	Under the 2000 Stock Incentive Plan, the securities also may be issued as restricted shares.


COL. A	COL. B		COL. C			COL. D			COL. E

			Additions			Deductions

	Balance at		Charged to		Charged to				Balance
	Beginning		Costs and		Other Accounts —	Costs			at End
Description	of Period		Expenses		Describe	Incurred			of Period

Year Ended December 31, 2005:
Deducted from assets accounts — Reserve for discontinued inventory	$	1,707,000	$	7,250,000		$	(6,138,000	)(1)	$	2,819,000
Year Ended December 31, 2004:
Deducted from assets accounts — Reserve for discontinued inventory	$	327,000	$	1,919,000		$	(539,000	)(1)	$	1,707,000
Year Ended December 31, 2003:
Deducted from assets accounts — Reserve for discontinued inventory	$	1,034,000	$	484,000		$	(1,191,000	)(1)	$	327,000


(1)	Reserve is reduced as discontinued inventory is sold or is otherwise disposed. See Note 2 to Consolidated Financial Statements.