SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1999 OR [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [No Fee Required] Commission file number: 0-10546 LAWSON PRODUCTS, INC. -------------------------------------------------- (Exact Name of Registrant as Specified in Charter) Delaware 36-2229304 ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1666 East Touhy Avenue, Des Plaines, Illinois 60018 --------------------------------------------------- (Address of principal executive offices) Registrant's telephone number, including area code: (847) 827-9666 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of Each Class on which registered ------------------- ------------------- None None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $1.00 Par Value ----------------------------- (Title of class) Indicate by check mark whether the Registrant (l) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No As of March 1, 2000, 10,041,922 shares of Common Stock were outstanding. The aggregate market value of the Registrant's Common Stock held by nonaffiliates on March 1, 2000 was approximately $112,629,000. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The following documents are incorporated into this Form 10-K by reference: Proxy Statement for Annual Meeting of Stockholders to be held on May 16, 2000 Part III
PART I Item 1. Business. -------- Lawson Products, Inc. was incorporated in Illinois in 1952 and reincorporated in Delaware in 1982. Products - -------- The Company is a distributor of approximately 70,000 expendable maintenance, repair and replacement products. In addition, the Company distributes 12,000 production components (mostly fasteners) to the O.E.M. marketplace. It manufactures approximately 1,000 of these items. These products may be divided into three broad categories: Fasteners, Fittings and Related Parts, such as screws, nuts, rivets and other fasteners; Industrial Supplies, such as hoses and hose fittings, lubricants, cleansers, adhesives and other chemicals, as well as files, drills, welding products and other shop supplies; and Automotive and Equipment Maintenance Parts, such as primary wiring, connectors and other electrical supplies, exhaust and other automotive parts. The Company estimates that these categories of products accounted for the indicated percentages of its total consolidated net sales for 1999, 1998 and 1997 respectively: <TABLE> <CAPTION> Percentage of Consolidated Net Sales ------------------------ 1999 1998 1997 ---- ---- ---- <S> <C> <C> <C> Fasteners, Fittings and Related Parts........................................... 46% 45% 46% Industrial Supplies............................................................. 50 51 49 Automotive and Equipment Maintenance Parts...................................... 4 4 5 ------- --- ----- 100% 100% 100% </TABLE> All of the Company's maintenance and repair products are manufactured by others and must meet the Company's specifications. Approximately 90% of the Company's products are sold under the Company label. Substantially all maintenance and repair items which the Company distributes are purchased by the Company in bulk and subsequently repackaged in smaller quantities. The Company regularly uses a large number of suppliers but has no long-term or fixed price contracts with any of them. Most maintenance and repair items which the Company distributes are purchased from several sources, and the Company believes that the loss of any single supplier would not significantly affect its operations. No single supplier accounted for more than 4.8% of the Company's purchases in 1999. Production components sold to the O.E.M. marketplace may be manufactured to customers' specification or purchased from other sources. Marketing - --------- The Company's principal markets are as follows: Heavy Duty Equipment Maintenance. Customers in this market include operators of trucks, buses, agricultural implements, construction and road building equipment, mining, logging and drilling equipment and other off-the-road equipment. The Company estimates that approximately 31% of 1999 sales were made to customers in this market. In-Plant and Building Maintenance. This market includes plants engaged in a broad range of manufacturing and processing activities, as well as institutions such as hospitals, universities, school districts and government units. The Company estimates that approximately 45% of 1999 sales were made to customers in this market. Passenger Car Maintenance. Customers in this market include automobile service center chains, independent garages, automobile dealers, car rental agencies and other fleet operators. The Company estimates that approximately 12% of 1999 sales were made to customers in this market. Original Equipment Manufacturers. This market includes plants engaged in a broad range of manufacturing and processing activities. The Company estimates that approximately 12% of 1999 sales were made to customers in this market. The Company has approximately 222,000 customers, the largest of which accounted for less than one percent of net sales during 1999. Sales are made through a force of approximately 1,750 independent sales representatives of which 81 serve the O.E.M. marketplace. Included in this group are 196 district and zone managers, each of whom, in addition to his own sales activities, acts in an advisory capacity to other sales representatives in a designated area. The Company employs 40 regional managers to coordinate regional marketing efforts. Most sales representatives, including district and zone managers, are compensated on a commission basis and are responsible for repayment of commissions on their respective uncollectible accounts. In addition to the sales representatives and district, zone and regional managers discussed above, the Company has approximately 1,190 employees. The Company's products are sold in all 50 states, Mexico, Puerto Rico, the District of Columbia, Canada and the United Kingdom. The Company believes that an important factor in its success is its ability to service customers promptly. During the past five years, more than 99.5% of all items were shipped to the customer within 24 hours after an order was received by the Company. This rapid delivery is facilitated by computer controlled order entry and inventory control systems in each general distribution center. In addition, the receipt of customer orders at Lawson distribution facilities has been accelerated by portable facsimile transmission equipment and personal computer systems used by sales representatives. Customer orders are delivered by common carriers. The Company is required to carry significant amounts of inventory in order to meet its high standards of rapid processing of customer orders. The Company funds its working capital requirements internally. Distribution and Manufacturing Facilities - ----------------------------------------- Substantially all of the Company's maintenance products are stocked in and distributed from each of its seven general distribution centers in; Addison, Illinois; Reno, Nevada; Farmers Branch, Texas; Suwanee, Georgia; Fairfield, New Jersey; Mississauga, Ontario, Canada and Bradley Stoke (Bristol) England. Chemical products are distributed from a facility in Vernon Hills, Illinois and welding products are distributed from a facility in Charlotte, North Carolina. Production components are stocked in and distributed from five centers located in Decatur, Alabama; Burr Ridge, Illinois; Memphis, Tennessee; Lenexa, Kansas and Cincinnati, Ohio. Production components are manufactured in Decatur, Alabama. In the opinion of the Company, all existing facilities are in good condition and are well maintained. All are being used substantially to capacity on a single shift basis, except the manufacturing facility in Decatur, Alabama which operates two shifts and the inbound facility in Des Plaines, Illinois, which operates two shifts. Further expansion of warehousing capacity may require new warehouses, some of which may be located in new geographical areas. Canadian Operations - ------------------- Canadian operations are conducted at the Company's 40,000 square foot general distribution center in Mississauga, Ontario, a suburb of Toronto. These operations constituted less than 3% of the Company's net sales during 1999. United Kingdom Operations - ------------------------- Operations in the United Kingdom are conducted under the name of Lawson Products Limited from a 19,000 square foot general distribution center in Bradley Stoke (Bristol) England. These operations constituted less than 1% of the Company's net sales during 1999. Mexican Operations - ------------------ Operations in Mexico are conducted under the name of Lawson Products de Mexico S.A. de C.V. from a 10,000 square foot facility in Guadalajara, Mexico. These operations constituted less than 1% of the Company's net sales during 1999. Competition - ----------- The Company encounters intense competition from several national distributors and manufacturers and a large number of regional and local distributors. Due to the nature of its business and the absence of reliable trade statistics, the Company cannot estimate its position in relation to its competitors. However, the Company recognizes that some competitors may have greater financial and personnel resources, handle more extensive lines of merchandise, operate larger facilities and price some merchandise more competitively than the Company. Although the Company believes that the prices of its products are competitive, it endeavors to meet competition primarily through the quality of its product line, its response time and its delivery systems. Item 2. Properties. ---------- The Company owns two facilities located in Des Plaines, Illinois, (152,600 and 27,000 square feet, respectively). These buildings contain the Company's main administrative activities and an inbound warehouse facility that principally supports the Addison, Illinois facility and all Lawson distribution facilities. Additional administrative, warehouse and distribution facilities owned by the Company are located in Addison, Illinois (90,000 square feet); Fairfield, New Jersey (61,000 square feet); Reno, Nevada (97,000 square feet); Suwanee, Georgia (105,000 square feet); Farmers Branch, Texas (54,500 square feet); and Mississauga, Ontario, Canada (40,000 square feet). Chemical products are distributed from a 105,400 square foot owned facility in Vernon Hills, Illinois and welding products are distributed from a 40,000 square foot owned facility located in Charlotte, North Carolina. Administrative, warehouse and distribution facilities in Bradley Stoke (Bristol) England (19,000 square feet) are leased by the Company. Administrative and distribution facilities in Guadalajara, Mexico (10,000 square feet) are leased by the Company. Production components are distributed from leased facilities in Burr Ridge, Illinois (24,000 sq. ft.) Memphis, Tennessee, (40,000 sq. ft.), Lenexa, Kansas (40,500 sq. ft.) and Cincinnati, Ohio (16,800 sq. ft.). The Company owns a 54,000 square foot facility in Decatur, Alabama which manufacturers and distributes production components. From time to time, the Company leases additional warehouse space near its present facilities. See Item 1, "Business - Distribution Facilities" for further information regarding the Company's properties. Item 3. Legal Proceedings. ----------------- There is no material pending litigation to which the Company, or any of its subsidiaries, is a party or to which any of their property is subject. Item 4. Submission of Matters to a Vote of Security Holders. --------------------------------------------------- No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this Report.
PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. ------------------------------------------------------------- The Company's Common Stock is traded on the NASDAQ National Market System under the symbol of "LAWS." The approximate number of stockholders of record at December 31, 1999 was 1,005. The following table sets forth the high and low closing sale prices as reported on the NASDAQ National Market System during the last two years. The table also indicates the cash dividends paid by the Company during such periods. <TABLE> <CAPTION> 1999 1998 ----------------------------------- ------------------------------------ Cash Cash High Low Dividends High Low Dividends ---- --- --------- ---- --- --------- <S> <C> <C> <C> <C> <C> <C> First Quarter $23 1/8 $20 1/2 $.14 $31 1/4 $24 1/2 $.14 Second Quarter 27 1/4 20 7/8 .14 28 1/4 25 1/4 .14 Third Quarter 27 21 5/8 .14 27 1/4 20 9/16 .14 Fourth Quarter 23 3/4 22 .14 24 3/4 21 1/2 .14 </TABLE>
Item 6. Selected Financial Data. ----------------------- The following selected financial data should be read in conjunction with the Financial Statements of the Company and notes thereto included elsewhere in this Report. The income statement data and balance sheet data is for and as of the end of each of the years in the five-year period ended December 31, 1999, are derived from the audited Financial Statements of the Company. <TABLE> <CAPTION> 1999 1998 1997 1996 1995 ------ ------ ------ ------ ------ <S> <C> <C> <C> <C> <C> Net Sales $318,970,113 $292,523,475 $278,144,321 $250,289,124 $223,537,182 Income Before Income Taxes 40,269,981 33,590,229 35,723,277 33,884,637 34,815,029 Net Income - As Reported 23,927,981 19,474,229 21,350,277 19,994,637 21,120,029 Net Income, Exclusive of Special Items (1) 25,133,981 20,994,229 21,350,277 19,994,637 21,120,029 Total Assets 215,990,877 198,982,290 188,974,415 175,161,839 160,613,798 Return on Assets (percent) 11.1 9.8 11.3 11.4 13.1 Noncurrent Liabilities 27,525,033 25,246,269 24,577,547 22,065,583 19,292,794 Stockholders' Equity 150,039,989 142,934,735 139,925,387 128,746,212 122,810,577 Return on Equity (percent) 16.5% 13.5% 16.0% 15.8% 16.9% Per Share of Common Stock: Basic Net Income $2.29 $1.77 $1.91 $1.73 $1.75 Diluted Net Income 2.29 1.76 1.91 1.73 1.75 Stockholders' Equity (2) 14.37 12.97 12.55 11.13 10.17 Cash Dividends Declared (2) .57 .56 .54 .52 .51 Basic Weighted Average Shares Outstanding 10,444,076 11,023,934 11,153,091 11,563,052 12,072,668 Diluted Weighted Average Shares Outstanding 10,445,836 11,041,819 11,175,232 11,563,715 12,074,647 (1) In 1999 and 1998, the Company recorded special charges for compensation arrangements related to management personnel reductions and retirements. These charges reduced net income by $1,760,000 and $1,520,000 for 1999 and 1998, respectively. Additionally, in 1999, a gain of $554,000, net of income taxes, was recorded on the sale of marketable securities. (2) These per share amounts were computed using basic weighted average shares outstanding for all periods presented. </TABLE>
Item 7. Management's Discussion and Analysis of Results of Operation and Financial Condition -------------------------------------------- RESULTS OF OPERATIONS Net sales for 1999 and 1998 increased 9.0% and 5.2%, respectively, over the immediately preceding years. The sales gains for 1999 resulted from the addition of new customers, increased orders, a higher average order size throughout Lawson's businesses and from the acquisition of our newest subsidiary, ACS/SIMCO. The advance for 1998 reflected increased contribution from substantially all Lawson operations with our specialty chemical subsidiary spearheading the 1998 increase. Net income for 1999 rose 22.9% from 1998 to $23.9 million, while diluted net income per share in 1999 increased 30.1% to $2.29 from $1.76 in 1998. Sales gains, cost containment efforts and improved performance by our international subsidiaries were primarily responsible for the increase in net income in 1999 over 1998. Excluding a $1.8 million special charge, net of taxes, for compensation arrangements related to management personnel reductions and a gain of $600,000, net of income taxes, from the sale of marketable securities, net income was approximately $25.1 million ($2.41 per diluted share), an improvement of 19.7% over 1998 net income, exclusive of a special charge of $1.5 million, net of taxes. Net income in 1998 declined 8.8% from 1997 to $19.5 million, while diluted net income per share in 1998 decreased 7.9% to $1.76 from $1.91 in 1997. The decrease in net income from 1997 is primarily due to a $1.5 million special charge, net of taxes, for compensation arrangements related to management personnel reductions and retirements. Costs arising from the realignment of management in Lawson's domestic sales organization, as well as increased losses from our foreign operations and a higher effective tax rate also contributed to the decline in net income for 1998. These items more than offset the sales gains and gross profit improvements in 1998. Excluding the effect of the restructuring charge, 1998 net income was approximately $21 million ($1.90 per diluted share). Per share net income for 1999, 1998 and 1997 was positively affected by the Company's share repurchases discussed below. LIQUIDITY AND CAPITAL RESOURCES Cash flows provided by operations for 1999, 1998 and 1997 were $23.3 million, $16.1 million and $17.0 million, respectively. The increase in 1999 was due primarily to the gain in net income noted above, lower payments made under deferred compensation and security bonus plans and higher depreciation and amortization levels. The decline in 1998 resulted principally from the decrease in net income noted above, and increased payments made under deferred compensation and security bonus plans which more than offset the positive impact from higher operating liabilities. In addition to satisfying operating requirements, current investments and cash flows from operations are expected to finance the Company's future growth, cash dividends and capital improvements. Capital expenditures for 1999, 1998 and 1997, respectively, were $6.5 million, $5.4 million and $5.9 million. Consistent with prior years, capital expenditures were incurred primarily for new facilities, improvement of existing facilities, and for the purchase of related equipment. During the third quarter of 1999, construction of a new Lawson outbound facility in Suwanee, Georgia was substantially completed at a cost of approximately $7 million. The new facility will be used in place of the Norcross, Georgia facility, which was disposed of in a tax-free exchange as a component of the purchase price of the Suwanee facility. In 1998, construction was completed relative to the facilities expansion of the Company's specialty chemical subsidiary, at a cost of approximately $3 million. During the third quarter of 1999, the Company purchased, for cash, substantially all of the assets and liabilities of SunSource Inventory Management Company, Inc. (SunSource) and Hillman Industrial Division (Hillman), headquartered in Lenexa, Kansas, at a cost of approximately $10.5 million. SunSource and Hillman were distributors of fasteners in the original equipment marketplace. The former business operations of SunSource and Hillman are conducted by the Company's new subsidiary, ACS/SIMCO. During the fourth quarter of 1999, the Board of Directors authorized the purchase of up to 500,000 shares of the Company's common stock. As of December 31, 1999, no shares have been purchased relative to this authorization. In 1998, the Board of Directors authorized the purchase of up to 500,000 shares of the Company's common stock, of which 411,500 were purchased in 1999 for approximately $9.5 million. Additionally, during 1999, the remaining 48,500 shares relative to the 1996 stock repurchase authorization of up to 1,000,000 shares, were purchased for approximately $1 million. Relative to the 1996 stock repurchase authorization, 472,000 shares were purchased for approximately $10.3 million in 1998 and 187,500 shares were purchased for approximately $4.1 million in 1997. Funds to purchase these shares were provided by investments and cash flows from operations. IMPACT OF THE YEAR 2000 The Company did not experience any significant malfunctions or errors in its operating or business systems when the year changed from 1999 to 2000. Based upon operations since January 1, 2000, the Company does not expect any significant impact to its ongoing business as a result of the "Year 2000 issue." However, it is possible that the full impact of the date change, which was of concern due to computer programs that use two digits instead of four digits to define years, has not been fully recognized. The Company believes that such problems, if any, are likely to be minor and correctable. The Company could also still be negatively affected if its customers or suppliers are adversely impacted by the Year 2000 or similar issue. The Company is not currently aware of any significant Year 2000 or similar problems that have arisen for its customers or suppliers. The Company expended $600,000 on Year 2000 readiness efforts from 1997 to 1999. Those efforts included identifying and remediating Year 2000 problems and modification of Year 2000 non-complaint software. IMPACT OF INFLATION AND CHANGING PRICES The Company has continued to pass on to its customers most increases in product costs and, accordingly, gross margins have not been materially impacted. The impact from inflation has been more significant on the Company's fixed and semi-variable operating expenses, primarily wages and benefits, although to a lesser degree in recent years due to moderate inflation levels. Although the Company expects that future costs of replacing warehouse and distribution facilities will rise due to inflation, such higher costs are not anticipated to have a material effect on future earnings. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. The Company, through its foreign subsidiaries, distributes products in the United Kingdom, Canada and Mexico. As a result, the Company is from time to time exposed to market risk relating to the impact of foreign currency exchange rates; however, this exposure is minimal. In addition, the Company maintains a portfolio of marketable securities, the majority of which are debt securities. As a result, the Company is exposed to market risk relating to interest rate movements; however, a hypothetical 10% adverse movement in interest rates would have no material impact on net income of the Company.
Item 8. Financial Statements and Supplementary Data. ------------------------------------------- The following information is presented in this report: Report of Independent Auditors Consolidated Balance Sheets as of December 31, 1999 and 1998. Consolidated Statements of Income for the Years ended December 31, 1999, 1998 and 1997. Consolidated Statements of Changes in Stockholders' Equity for the Years ended December 31, 1999, 1998 and 1997. Consolidated Statements of Cash Flows for the Years ended December 31, 1999, 1998 and 1997. Notes to Consolidated Financial Statements. Schedule II
Report of Independent Auditors To the Shareholders and Board of Directors Lawson Products, Inc. We have audited the accompanying consolidated balance sheets of Lawson Products, Inc. and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and related schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Lawson Products, Inc. and subsidiaries at December 31, 1999 and 1998, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/Ernst & Young LLP Chicago, Illinois February 25, 2000
<TABLE> LAWSON PRODUCTS, INC. CONSOLIDATED BALANCE SHEETS <CAPTION> December 31, ----------------------------------------- 1999 1998 ---- ---- <S> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 11,974,611 $ 13,871,720 Marketable securities 12,282,229 13,815,692 Accounts receivable, less allowance for doubtful accounts (1999-$1,601,649; 1998-$1,450,067) 41,108,121 35,255,226 Inventories 55,484,532 46,670,162 Miscellaneous receivables 2,835,685 2,894,636 Prepaid expenses 5,193,621 4,638,406 Deferred income taxes 1,389,000 1,256,000 ----------------- ----------------- Total Current Assets 130,267,799 118,401,842 ----------------- ----------------- Property, plant and equipment, at cost, less allowances for depreciation and amortization (1999-$36,479,611; 1998-$32,450,023) 41,988,652 41,142,497 ----------------- ----------------- Other assets: Marketable securities 4,694,776 11,019,945 Investments in real estate 4,107,664 4,053,664 Cash value of life insurance 14,760,461 12,876,120 Deferred income taxes 8,784,000 6,747,000 Goodwill, less accumulated amortization (1999-$124,533) 3,611,447 -- Other 7,776,078 4,741,222 ----------------- ----------------- 43,734,426 39,437,951 ----------------- ----------------- $ 215,990,877 $ 198,982,290 ================= ================= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 8,248,929 $ 5,112,982 Accrued expenses and other liabilities 25,844,991 22,405,504 Income taxes 4,331,935 3,282,800 ----------------- ----------------- Total Current Liabilities 38,425,855 30,801,286 ----------------- ----------------- Non-current liabilities and deferred credits: Accrued liability under security bonus plans 16,494,190 15,314,813 Deferred compensation and other liabilities 11,030,843 9,931,456 ----------------- ----------------- 27,525,033 25,246,269 ----------------- ----------------- Stockholders' equity: Preferred Stock, $1 par value: Authorized-500,000 shares; Issued and outstanding-None -- -- Common Stock, $1 par value: Authorized-35,000,000 shares; Issued-1999-10,203,922 shares; 1998-10,663,822 shares 10,203,922 10,663,822 Capital in excess of par value 717,004 749,320 Retained earnings 140,200,567 132,208,664 ----------------- ----------------- 151,121,493 143,621,806 Foreign currency translation adjustment (1,053,504) (1,355,071) Unrealized (loss) gain on marketable securities (28,000) 668,000 ----------------- ----------------- Accumulated other comprehensive income (1,081,504) (687,071) ----------------- ------------------ 150,039,989 142,934,735 ----------------- ----------------- $ 215,990,877 $ 198,982,290 ================= ================= See notes to consolidated financial statements </TABLE>
<TABLE> LAWSON PRODUCTS, INC. CONSOLIDATED STATEMENTS OF INCOME <CAPTION> Year ended December 31, --------------------------------------------------------- 1999 1998 1997 ---------------- --------------- --------------- <S> <C> <C> <C> Net sales $ 318,970,113 $ 292,523,475 $ 278,144,321 Cost of goods sold 109,224,791 99,554,363 95,985,602 ---------------- --------------- --------------- Gross profit 209,745,322 192,969,112 182,158,719 Selling, general and administrative expenses 168,338,997 158,433,648 147,235,497 Special charges 2,932,365 2,621,124 - Provision for doubtful accounts 1,065,811 983,367 1,028,221 ---------------- --------------- --------------- Operating Income 37,408,149 30,930,973 33,895,001 ---------------- --------------- --------------- Interest and dividend income 1,312,312 1,458,548 1,285,809 Interest expense (7,351) (47,957) (31,280) Other income - net 1,556,871 1,248,665 573,747 ---------------- --------------- --------------- 2,861,832 2,659,256 1,828,276 Income Before Income Taxes 40,269,981 33,590,229 35,723,277 ---------------- --------------- --------------- Federal and state income taxes (benefit): Current 18,275,000 16,034,000 15,306,000 Deferred (1,933,000) (1,918,000) (933,000) ---------------- --------------- --------------- 16,342,000 14,116,000 14,373,000 ---------------- --------------- --------------- Net Income $ 23,927,981 $ 19,474,229 $ 21,350,277 ================ =============== =============== Net Income Per share of Common Stock Basic $ 2.29 $ 1.77 $ 1.91 ================ =============== =============== Diluted $ 2.29 $ 1.76 $ 1.91 ================ =============== =============== See notes to consolidated financial statements </TABLE>
<TABLE> Lawson Products, Inc. Consolidated Statements of Changes in Stockholders' Equity <CAPTION> Common Capital Accumulated Stock, in excess of Other $1 par par Retained Comprehensive Comprehensive value value Earnings Income Income --------------- ------------- ---------------- ---------------- ---------- <S> <C> <C> <C> <C> <C> Balance at January 1, 1997 $ 11,311,464 $ 512,008 $ 117,234,229 $ (311,489) $ - Net income 21,350,277 21,350,277 Other comprehensive income, net of tax: Unrealized gain on marketable securities 55,000 55,000 Adjustment for foreign currency translation (431,206) (431,206) -------------- Other comprehensive loss for the year (376,206) -------------- Comprehensive income for the year $ 20,974,071 ============= Cash dividends declared (6,010,507) Stock issued under employee stock plans 11,269 266,217 Purchase and retirement of common stock (187,500) (8,487) (3,865,888) -------------- ------------ --------------- --------------- Balance at December 31, 1997 11,135,233 769,738 128,708,111 (687,695) ------------- ----------- -------------- ---------------- Net income 19,474,229 $ 19,474,229 Other comprehensive income, net of tax: Unrealized gain on marketable securities 105,000 105,000 Adjustment for foreign currency translation (104,376) (104,376) -------------- Other comprehensive income for the year 624 ------------- Comprehensive income for the year $19,474,853 ============= Cash dividends declared (6,130,363) Stock issued under employee stock plans 589 12,738 Purchase and retirement of common stock (472,000) (33,156) (9,843,313) -------------- ------------ --------------- --------------- Balance at December 31, 1998 10,663,822 749,320 132,208,664 (687,071) ------------- ----------- -------------- ---------------- Net income 23,927,981 $ 23,927,981 Other comprehensive income, net of tax: (696,000) (696,000) Unrealized loss on marketable securities Adjustment for foreign currency translation 301,567 301,567 ------------- Other comprehensive loss for the year (394,433) -------------- Comprehensive income for the year $ 23,533,548 ============= Cash dividends declared (5,908,594) Purchase and retirement of common stock (459,900) (32,316) (10,027,484) -------------- ------------ --------------- ---------------- Balance at December 31, 1999 $ 10,203,922 $ 717,004 $ 140,200,567 $ (1,081,504) ============= =========== ============== ================ See notes to consolidated financial statements </TABLE>
<TABLE> LAWSON PRODUCTS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS <CAPTION> Year ended December 31, --------------------------------------------------- 1999 1998 1997 ---------------- --------------- --------- <S> <C> <C> <C> Operating activities: Net income $ 23,927,981 $ 19,474,229 $ 21,350,277 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 6,527,459 5,498,385 5,019,437 Provision for allowance for doubtful accounts 1,065,811 983,367 1,028,221 Deferred income taxes (1,933,000) (1,918,000) (933,000) Deferred compensation and security bonus plans 4,651,635 4,190,541 4,214,100 Payments under deferred compensation and security bonus plans (2,263,293) (3,414,210) (1,604,352) Losses from sale of property, plant and equipment - 627 108,079 Gains from sale of marketable securities (902,960) (50,776) (45,470) Income from investments in real estate (544,000) (763,000) (506,000) Changes in operating assets and liabilities (Exclusive of effect of acquisition): Accounts receivable (4,276,788) (2,524,428) (4,416,319) Inventories (2,886,074) (4,881,840) (4,741,208) Prepaid expenses and other assets (5,757,891) (6,121,144) (2,224,583) Accounts payable and accrued expenses 4,290,592 4,753,798 886,109 Income taxes payable 1,049,135 1,642,005 (852,139) Other 368,539 (798,646) (303,506) ---------------- ---------------- --------------- Net Cash Provided by Operating Activities 23,317,146 16,070,908 16,979,646 ---------------- --------------- --------------- Investing activities: Additions to property, plant and equipment (6,462,348) (5,378,660) (5,894,656) Purchases of marketable securities (122,774,913) (196,265,030) (143,028,547) Proceeds from sale of marketable securities 130,451,955 204,848,618 137,301,088 Proceeds from sale of property, plant and equipment - 1,000 2,308 Proceeds from life insurance policies - 438,819 - Acquisition of business, net of cash acquired of $4,850 (10,519,909) - - Other 490,000 440,000 80,000 ---------------- --------------- --------------- Net Cash Provided by (Used In) Investing Activities (8,815,215) 4,084,747 (11,539,807) ----------------- --------------- --------------- Financing Activities: Purchases of common stock (10,519,700) (10,348,469) (4,061,875) Proceeds from exercise of stock options - 13,327 277,486 Dividends paid (5,879,340) (6,196,361) (5,923,040) ----------------- ---------------- --------------- Net Cash Used in Financing Activities (16,399,040) (16,531,503) (9,707,429) ----------------- ---------------- --------------- Increase (Decrease) in Cash and Cash Equivalents (1,897,109) 3,624,152 (4,267,590) Cash and Cash Equivalents at Beginning of Year 13,871,720 10,247,568 14,515,158 ---------------- --------------- --------------- Cash and Cash Equivalents at End of Year $ 11,974,611 $ 13,871,720 $ 10,247,568 ================ =============== =============== See notes to consolidated financial statements </TABLE>
LAWSON PRODUCTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A-DESCRIPTION OF BUSINESS Lawson Products, Inc. and subsidiaries principally are distributors of expendable parts and supplies for maintenance, repair and operation of equipment. The Company has six operating units with which it conducts its business, however these units have been aggegrated into one reportable segment. The Company's principle operations are in the United States, however the Company does have foreign operations as follows: <TABLE> <CAPTION> YEARS ENDED DECEMBER 31 ------------------------------------------------------------ 1999 1998 1997 - --------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Revenues: Canada $6,967 $6,324 $6,212 United Kingdom 3,001 2,872 3,018 Mexico 2,335 2,276 1,912 Long-lived Assets: Canada 2,312 2,273 2,553 United Kingdom 693 693 714 Mexico 86 135 220 </TABLE> NOTE B-SUMMARY OF MAJOR ACCOUNTING POLICIES Principles of Consolidation: The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries, each of which is wholly owned. All inter-company accounts and transactions have been eliminated in consolidation. Revenue Recognition: Sales and associated cost of goods sold are recognized when products are shipped to customers. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. Investments in Real Estate: The Company's investments in real estate representing limited partnership interests are carried on the basis of the equity method. Marketable Securities: Marketable equity and debt securities are classified as available-for-sale and are carried at fair value, with the unrealized gains and losses, net of tax, recorded in stockholders' equity. Realized gains and losses, declines in value judged to be other-than-temporary, and interest and dividends are included in investment income. The cost of securities sold is based on the specific identification method. Inventories: Inventories (principally finished goods) are stated at the lower of cost (first-in, first-out method) or market. Property, Plant and Equipment: Provisions for depreciation and amortization are computed by the straight-line method for buildings using useful lives of 20 to 30 years and by the double declining balance method for machinery and equipment, furniture and fixtures and vehicles using useful lives of 4 to 10 years. Investment Tax Credits: Investment tax credits on assets leased to others (see Investments in Real Estate) are deferred and amortized over the useful life of the related asset. Cash Equivalents: The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Stock Options: Stock options are accounted for under Accounting Principles Board Opinion No. 25, "Accounting For Stock Issued to Employees." Under APB 25, no compensation expense is recognized because the exercise price of the stock options granted equals the market price of the underlying stock at the date of grant. Goodwill: Goodwill represents the cost of business acquisitions in excess of the fair value of identifiable net tangible assets acquired. Goodwill is amortized over 15 years using the straight-line method and the carrying value is reviewed for impairment annually. If this review indicates that goodwill is not expected to be recoverable based on the undiscounted cash flows of the entity acquired over the remaining amortization period, the Company's carrying value of the goodwill will be reduced. Foreign Currency Translation: The financial statements of foreign entities have been translated in accordance with Statement of Financial Accounting Standards No. 52 and, accordingly, unrealized foreign currency translation adjustments are reflected as a component of stockholders' equity. Realized foreign currency transaction gains and losses were not significant for the years ended December 31, 1999, 1998 and 1997. Income Per Share: Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution from the exercise or conversion of securities into common stock, such as stock options. Reclassifications: Certain amounts have been reclassified in the 1997 and 1998 financial statements to conform with the 1999 presentation. New Accounting Standards: In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." The Company expects to adopt the new Statement effective January 1, 2001. Statement 133 will require the Company to recognize all derivatives on the consolidated balance sheet at fair value. The Company does not anticipate that the adoption of Statement 133 will have a significant effect on its results of operations or financial position. NOTE C-BUSINESS COMBINATION On July 1, 1999, the Company purchased substantially all of the assets and liabilities of SunSource Inventory Management Company, Inc. (SunSource) and Hillman Industrial Division (Hillman), at a cost of approximately $10.5 million with certain contingent purchase price adjustment features based on future operating results. This all-cash transaction was accounted for as a purchase; accordingly, the accounts and transactions of the acquired company have been included in the consolidated financial statements since the date of acquisition. The purchase price exceeded tangible net assets acquired by approximately $3.7 million. This goodwill will be amortized over 15 years using the straight-line method. SunSource and Hillman are distributors of fasteners in the original equipment marketplace. The former business operations of SunSource and Hillman are being conducted through the Company's new subsidiary, ACS/SIMCO. Pro forma consolidated net sales, assuming the purchase had occurred as of January 1, 1998 would approximate $329.9 million and $315.4 million for 1999 and 1998, respectively; pro forma net income or net income per share would not differ materially from reported amounts. NOTE D-SPECIAL CHARGES In the second and fourth quarter of 1999, the Company recorded special charges of $2,053,000 and $879,000, respectively. These charges were for severance and early retirement benefits to several members of management. These benefits will be paid through 2004. Payments against these accruals of approximately $323,000 were made in 1999. In the fourth quarter of 1998, the Company recorded a special charge of $2,621,000 for severance and early retirement benefits for several members of management. These benefits will be paid through 2003. Payments of approximately $1,069,000 were made in 1999 against this accrual. In addition, an adjustment to reduce the accrual for approximately $129,000 was made in 1999 to reflect a change in the estimated total severance payments required.
NOTE E-MARKETABLE SECURITIES The following is a summary of the Company's investments at December 31 which are all classified as available-for-sale: <TABLE> <CAPTION> (In thousands) Gross Gross Unrealized Unrealized Estimated 1999 Cost Gains Losses Fair Value - ---------------------------------- ---------------- ---------------- ----------------- -------------- <S> <C> <C> <C> <C> Obligations of states and political subdivisions $ 10,268 $ 1 $ 44 $ 10,225 Foreign government securities 6,724 - - 6,724 Other debt securities 28 - - 28 ---------- ------- ----- --------- Total debt securities $ 17,020 $ 1 $ 44 $ 16,977 ========== ======= ===== ========= 1998 - ---------------------------------- Obligations of states and political subdivisions $ 16,723 $ 90 $ 4 $ 16,809 Foreign government securities 7,007 - - 7,007 Other debt securities 73 - - 73 ---------- ------- ----- --------- Total debt securities 23,803 90 4 23,889 Equity securities 6 947 6 947 ---------- ------- ----- --------- $ 23,809 $ 1,037 $ 10 $ 24,836 ========== ======= ===== ========= </TABLE> The gross realized gains on sales of marketable securities totaled: $992,000, $52,000 and $52,000 in 1999, 1998 and 1997, respectively, and the gross realized losses totaled $89,000, $1,000 and $7,000, respectively. The net adjustment to unrealized holding losses included as a separate component of stockholders' equity, net of taxes, totaled $696,000 in 1999, while in 1998 and 1997, the net adjustment to unrealized holding gains included as a separate component of stockholders' equity, net of taxes, totaled $105,000 and $55,000, respectively.
The amortized cost and estimated fair value of marketable securities at December 31, 1999, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because the issuers of certain securities have the right to prepay obligations without prepayment penalties. <TABLE> <CAPTION> Estimated (In thousands) Cost Fair Value - --------------------------------------------------------------------- ----------------- -------------------- <S> <C> <C> Due in one year or less $ 12,291 $ 12,282 Due after one year through five years 4,729 4,695 ------------ ------------- Total debt securities $ 17,020 $ 16,977 ============ ============= </TABLE> NOTE F-PROPERTY, PLANT AND EQUIPMENT The cost of property, plant and equipment consists of: <TABLE> <CAPTION> 1999 1998 ----------------- ----------------- <S> <C> <C> Land $ 6,683,222 $ 6,011,531 Buildings and improvements 38,863,186 38,290,080 Machinery and equipment 27,363,448 22,216,024 Furniture and fixtures 5,293,762 5,014,995 Vehicles 260,895 272,829 Construction in Progress 3,750 1,787,061 ----------------- ----------------- $ 78,468,263 $ 73,592,520 ================= ================= </TABLE> NOTE G-INVESTMENTS IN REAL ESTATE The Company is a limited partner in two real estate limited partnerships. An officer and member of the Board of Directors of the Company has a 1.5% interest and 5.5% interest, respectively, as a general partner in these partnerships, which interests are subordinated to the Company's interests in distributable cash. NOTE H-ACCRUED EXPENSES AND OTHER LIABILITIES Accrued expenses and other liabilities consist of the following: <TABLE> <CAPTION> 1999 1998 ----------------- ----------------- <S> <C> <C> Salaries, commissions and other compensation $ 8,051,216 $ 7,567,449 Accrued special charges 4,032,000 2,621,000 Accrued and withheld taxes, other than income taxes 2,196,971 2,080,204 Accrued profit sharing contributions 2,646,677 2,443,289 Accrued self-insured health benefits 1,574,878 1,318,356 Cash dividends payable 1,531,713 1,492,935 Other 5,811,536 4,882,271 ----------------- ----------------- $ 25,844,991 $ 22,405,504 ================= ================= </TABLE> NOTE I-STOCK PLAN The Company's Incentive Stock Plan, As Amended ("Plan"), provides for the issuance of shares of Common Stock to non-employee directors, officers and key employees pursuant to stock options, stock appreciation rights, stock purchase agreements and stock awards. At December 31, 1999, 647,777 shares of Common Stock were available for issuance under the Plan. The Plan permits the grant of incentive stock options, subject to certain limitations, with substantially the same terms as non-qualified stock options. Non-employee directors are not eligible to receive incentive stock options. Stock options are not exercisable within six months from date of grant and may not be granted at prices less than the fair market value of the shares at the dates of grant. Benefits may be granted under the Plan through December 16, 2006.
Additional information with respect to the Plan is summarized as follows: <TABLE> <CAPTION> Average Option Price Shares - ---------------------------------------------------------------------------------------------------------------- <S> <C> <C> Outstanding January 1, 1997 24.48 310,285 Granted 27.00 1,000 Exercised 24.62 (11,269) Canceled or expired 27.07 (9,737) - ---------------------------------------------------------------------------------------------------------------- Outstanding December 31, 1997 24.40 290,279 Granted 26.75 9,000 Exercised 24.19 (889) Canceled or expired 26.89 (27,500) - ---------------------------------------------------------------------------------------------------------------- Outstanding December 31, 1998 23.34 270,890 Granted 22.44 9,000 Exercised - - Cancelled or expired 23.63 (9,700) - ---------------------------------------------------------------------------------------------------------------- Outstanding at December 31, 1999 24.19 270,190 - ---------------------------------------------------------------------------------------------------------------- Exercisable options at December 31, 1999 $24.42 220,439 December 31, 1998 24.97 169,488 December 31, 1997 26.10 149,026 </TABLE> As of December 31, 1999, the Company had the following outstanding options: <TABLE> <CAPTION> Exercise Price $22.44-$23.25 $26.75 $27.00-$29.75 ------------- ------ ------------- <S> <C> <C> <C> Options Outstanding 179,440 9,000 81,750 Weighted Average Exercise Price $22.55 $26.75 $27.49 Weighted Average Remaining Life 6.5 8.4 .5 Options Exercisable 136,939 2,250 81,250 Weighted Average Exercise Price $22.56 $26.75 $27.50 </TABLE> Disclosure of pro forma information regarding net income and net income per share is required by FASB Statement No. 123, "Accounting for Stock-Based Compensation," and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value of these options was estimated at the date of grant using the Black-Scholes options pricing model. The Company's weighted average fair value of options granted and assumptions used were as follows: <TABLE> <CAPTION> 1999 1998 1997 ---- ---- ---- <S> <C> <C> <C> Risk-free interest rate 6.79% 4.97% 5.81% Dividend yield 2.00% 2.00% 2.00% Stock price volatility factor .18 .18 .19 Weighted-average expected life (years) 8 8 8 Weighted-average fair value of options granted $6.95 $6.80 $7.77 </TABLE> For purposes of pro forma disclosures, the estimated fair value of options granted is amortized to expense over the option's vesting period. The pro forma effect on net income is not representative of the pro forma effect on net income in future years because grants made in 1996 and later years have an increasing vesting period. The Company's pro forma information consisted of the following: <TABLE> <CAPTION> 1999 1998 1997 ---- ---- ---- <S> <C> <C> <C> Net income - as reported $23,927,981 $19,474,229 $21,350,277 Net income - pro forma 23,565,000 19,123,000 21,010,000 Basic earnings per share - as reported 2.29 1.77 1.91 Diluted earnings per share - as reported 2.29 1.76 1.91 Basic earnings per share - pro forma 2.26 1.73 1.88 Diluted earnings per share - pro forma 2.26 1.73 1.88 </TABLE> NOTE J-PROFIT SHARING AND SECURITY BONUS PLANS The Company and certain subsidiaries have a profit sharing plan for office and warehouse personnel. The amounts of the companies' annual contributions are determined by the respective boards of directors subject to limitations based upon current operating profits (as defined) or participants' compensation (as defined). The Company and its subsidiaries also have in effect security bonus plans for the benefit of their regional managers and independent sales representatives, under the terms of which participants are credited with a percentage of their yearly earnings (as defined). Of the aggregate amounts credited to participants' accounts, 25% vests after five years and an additional 5% vests each year thereafter. For financial reporting purposes, amounts are charged to operations over the vesting period. Provisions for profit sharing and security bonus plans aggregated $5,051,000, $4,845,000 and $4,387,000 for the years ended December 31, 1999, 1998 and 1997, respectively. The Company sponsors a 401(k) defined contribution savings plan. The plan, which is available to all employees, was provided to give employees a pre-tax investment vehicle to save for retirement. All contributions to the plan are made by plan participants. NOTE K-INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. In addition, deferred income taxes include net operating loss carryforwards of a foreign subsidiary which do not expire. The valuation allowance has been provided since there is no assurance that the benefit of the net operating loss carryforwards will be realized. Significant components of the Company's deferred tax assets and liabilities as of December 31 are as follows: <TABLE> <CAPTION> Deferred Tax Assets: 1999 1998 ----------------- ----------------- <S> <C> <C> Compensation and benefits $ 12,327,000 $ 10,850,000 Inventory 1,237,000 1,037,000 Net operating loss carryforwards of subsidiary 4,169,000 3,877,000 Accounts receivable 486,000 446,000 Other 583,000 730,000 ----------------- ----------------- Total Deferred Tax Assets 18,802,000 16,940,000 Valuation allowance for deferred tax assets (4,169,000) (3,877,000) ----------------- ----------------- Net Deferred Tax Assets 14,633,000 13,063,000 ----------------- ----------------- Deferred Tax Liabilities: Property, plant & equipment 1,060,000 1,318,000 Investments in real estate 3,063,000 3,169,000 Marketable securities - 359,000 Other 337,000 214,000 ----------------- ----------------- Total Deferred Tax Liabilities 4,460,000 5,060,000 ----------------- ----------------- Total Net Deferred Tax Assets $ 10,173,000 $ 8,003,000 ================= ================= </TABLE> Net deferred tax assets include the tax impact of items in comprehensive income of $583,000 and $371,000 at December 31, 1999 and 1998, respectively. Income before income taxes for the years ended December 31, consisted of the following: <TABLE> <CAPTION> 1999 1998 1997 ---- ---- ---- <S> <C> <C> <C> United States $41,671,677 $36,288,309 $37,303,959 Foreign (1,401,696) (2,698,080) (1,580,682) ------------ ----------- ----------- $40,269,981 $33,590,229 $35,723,277 =========== =========== =========== </TABLE>
The provisions for income taxes for the years ended December 31, consisted of the following: <TABLE> <CAPTION> 1999 1998 1997 ---------------- ---------------- ---------------- <S> <C> <C> <C> Current: Federal $ 15,187,000 $ 13,136,000 $ 12,568,000 State 3,088,000 2,898,000 2,738,000 --------------- ---------------- ---------------- 18,275,000 16,034,000 15,306,000 Deferred benefit (1,933,000) (1,918,000) (933,000) --------------- ---------------- --------------- $ 16,342,000 $ 14,116,000 $ 14,373,000 =============== ================ ================ </TABLE> The reconciliation between the effective income tax rate and the statutory federal rate is as follows: <TABLE> <CAPTION> 1999 1998 1997 ---- ---- ---- <S> <C> <C> <C> Statutory federal rate 35.0% 35.0% 35.0% Increase (decrease) resulting from: State income taxes, net of federal income tax benefit 5.0 5.6 5.0 Non-taxable dividend and interest income (.1) (.7) (1.6) Foreign losses 1.5 2.7 1.9 Other items (.8) (.6) (.1) ---- ------ ------- Provision for income taxes 40.6% 42.0% 40.2% ===== ===== ===== </TABLE> Income taxes paid for the years ended December 31, 1999, 1998 and 1997 amounted to $17,157,000, $14,359,000 and $16,078,000, respectively. NOTE L-COMMITMENTS The Company's minimum rental commitments, principally for equipment, under noncancelable leases in effect at December 31, 1999 amounted to approximately $5,333,000. Such rentals are payable as follows: 2000-$2,551,000; 2001-$1,786,000; 2002-$735,000 and 2003 and thereafter-$261,000. Total rental expense for the years ended December 31, 1999, 1998 and 1997 amounted to $2,203,000, $1,655,000 and $1,647,000, respectively.
NOTE M - INCOME PER SHARE The computation of basic and diluted income per share consisted of the following: <TABLE> <CAPTION> Year ended December 31 (In thousands, except per share data) 1999 1998 1997 ---- ---- ---- <S> <C> <C> <C> NUMERATOR: Net income $ 23,928 $ 19,474 $ 21,350 ============= ============= ============= DENOMINATOR: Denominator for basic income per share - Weighted average shares 10,444 11,024 11,153 Effect of dilutive securities: Stock option plans 2 18 22 ------------- ------------- ------------- Denominator for diluted income per share - Adjusted weighted average shares 10,446 11,042 11,175 ============= ============= ============= Basic income per share $ 2.29 $ 1.77 $ 1.91 ============= ============= ============= Diluted income per share $ 2.29 $ 1.76 $ 1.91 ============= ============= ============= </TABLE>
NOTE N - SUMMARY OF UNAUDITED QUARTERLY RESULTS OF OPERATIONS Unaudited quarterly results of operations for the years ended December 31, 1999 and 1998 are summarized as follows: <TABLE> <CAPTION> Quarter ended 1999 Mar. 31 Jun. 30, (1)(2) Sept. 30, (3) Dec. 31, (1)(4) - ---- ------- --------------- ------------- --------------- (In thousands, except per share data) <S> <C> <C> <C> <C> Net sales $74,148 $78,247 $82,515 $84,060 Cost of goods sold 25,837 26,672 29,595 27,121 Income before income taxes 8,992 8,716 9,942 12,620 Provision for income taxes 3,715 3,590 4,081 4,956 Net income 5,277 5,126 5,861 7,664 Net income per share of common stock Basic .50 .49 .57 .75 Diluted .50 .49 .57 .75 Diluted weighted average shares outstanding 10,651 10,495 10,360 10,282 Quarter ended 1998 Mar. 31 Jun. 30 Sept. 30 Dec. 31, (1)(4) - ---- ------- ------- -------- --------------- (In thousands, except per share data) Net sales $70,363 $72,535 $75,530 $74,095 Cost of goods sold 24,828 24,876 25,941 23,909 Income before income taxes 7,728 8,267 9,138 8,458 Provision for income taxes 3,205 3,538 3,884 3,489 Net income 4,523 4,729 5,254 4,969 Net income per share of common stock: Basic .41 .42 .48 .46 Diluted .40 .42 .48 .46 Diluted weighted average shares outstanding 11,175 11,161 11,057 10,785 (1) During the second quarter of 1999 and the fourth quarter of 1999 and 1998, special charges were recorded related to severance and early retirement benefits, which reduced net income by $1,236,000, $524,000 and $1,520,000, respectively. (2) The quarter reflects a $554,000 gain, net of income taxes, on the sale of marketable securities. (3) The Company purchased substantially all the assets and assumed liabilities of the businesses now known as ACS/SIMCO on July 1, 1999. The transaction was accounted for as a purchase, and, therefore the results of ACS/SIMCO have been included with the Company's results since that date. (4) Inventories and cost of goods sold during interim periods are determined through the use of estimated gross profit rates. The difference between actual and estimated gross profit rates used for the interim periods is adjusted in the fourth quarter. This adjustment increased net income by approximately $1,689,000 and $1,146,000 in 1999 and 1998, respectively. </TABLE>
SCHEDULE II LAWSON PRODUCTS, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS <TABLE> <CAPTION> Balance at Charged to Beginning of Costs and Deductions- Balance at End Description Period Expenses Describe(A) of Period ----------- ------ -------- ----------- --------- <S> <C> <C> <C> <C> Allowance deducted from assets to which it applies: Allowance for doubtful accounts: Year ended December 31, 1999 $1,450,067 $1,065,811 $914,229 $1,601,649 Year ended December 31, 1998 1,423,902 983,367 957,202 1,450,067 Year ended December 31, 1997 1,357,662 1,028,221 961,981 1,423,902 Note A - Uncollected receivables written off, net of recoveries. </TABLE>
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. ----------------------------------------------------------- None. PART III Item 10. Directors and Executive Officers of the Registrant. -------------------------------------------------- a. Directors --------- The information required by this Item is set forth in the Company's Proxy Statement for the Annual Meeting of Stockholders to be held on May 16, 2000, under the caption "Election of Directors," which information is incorporated herein by reference. b. Executive Officers ------------------ The executive officers of the Company, all of whose terms of office expire on May 16, 2000, are as follows: Year First Other Offices Held Name and Present Elected to During the Past Position with Company Age Present Office Five Years - --------------------- --- -------------- ---------- Sidney L. Port 89 1977 * Chairman of the Executive Committee and Director Robert J. Washlow 55 1999 Mr. Washlow has been Chairman of the Board, Chairman of the Board and Chief Executive Officer Chief Executive Officer since and Director August 1999. Prior thereto, Mr. Washlow was Executive Vice President-Corporate Affairs beginning in 1998, Secretary beginning in 1985 and a member of the Office of the President beginning in January 1999. Bernard Kalish 62 1989 Mr. Kalish retired as Chairman Retired Chief Executive of the Board and Chief Officer, Chairman of the Executive Officer of the Board and Director Company in August 1999. Jeffrey B. Belford 53 1999 Mr. Belford became Chief Office of the President and Operating Officer and a Chief Operating Officer member of the Office of the President effective January 1, 1999. Prior to 1999, Mr. Belford was Executive Vice President - Operations, Chief Operating Officer since 1989. Roger Cannon 51 1999 Mr. Cannon has been a member Office of the President and of the Office of the President Chief Sales Officer since January 1, 1999. Prior to 1999, Mr. Cannon was Executive Vice President, Sales - Marketing from 1997-1999, and Vice President - - Central Field Sales from 1991 to 1997. Jerome Shaffer, 72 1987 * Vice President, Treasurer and Director James Smith 59 1996 Mr. Smith was Vice President, Vice President-- Personnel from 1995 to 1996. Human Resources Prior to 1995, Mr. Smith was Manager, Human Resources since he joined the Company in 1993. Joseph L. Pawlick, 57 1999 Prior to 1999, Mr. Pawlick was Chief Financial Officer Vice President, Controller and and Secretary Assistant Secretary of the Company since 1987. Item 11. Executive Compensation. ---------------------- The information required by this Item is set forth in the Company's Proxy Statement for the Annual Meeting of Stockholders to be held on May 16, 2000, under the caption "Remuneration of Executive Officers," which information is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management. -------------------------------------------------------------- The information required by this Item is set forth in the Company's Proxy Statement for the Annual Meeting of Stockholders to be held on May 16, 2000 under the caption "Securities Beneficially Owned by Principal Stockholders and Management," which information is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions. ---------------------------------------------- The information required by this Item is set forth in the Company's Proxy Statement for the Annual Meeting of stockholders to be held on May 16, 2000 under the caption "Election of Directors," which information is incorporated herein by reference. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. -------------------------------------------------------------- (a) (1) Financial Statements -------------------- The following information is presented in this report: Consolidated Balance Sheets as of December 31, 1999 and 1998. Consolidated Statements of Income for the Years ended December 31, 1999, 1998 and 1997. Consolidated Statements of Changes in Stockholders' Equity for the Years ended December 31, 1999, 1998 and 1997. Consolidated Statements of Cash Flows for the Years ended December 31, 1999, 1998 and 1997. Notes to Consolidated Financial Statements. (2) Financial Statement Schedule ---------------------------- The following consolidated financial statement schedule of Lawson Products, Inc. and subsidiaries is included in Item 14(d): Schedule II - Valuation and Qualifying Accounts is submitted with this report. All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not submitted because they are not applicable or are not required under Regulation S-X or because the required information is included in the financial statements or notes thereto. (a) (3) Exhibits. -------- 2 Purchase Agreement dated April 30, 1996 among Assembly Component Systems, Inc., Automatic Screw Machine Products Company, David E. Norman and James C. Norman, incorporated herein by reference from Exhibit (2)(a) to the Company's Current Report on Form 8-K dated April 30, 1996. 3(a) Certificate of Incorporation of the Company, as amended, incorporated herein by reference to Exhibit 3(a) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1988. 3(b) By-laws of the Company, as amended, incorporated herein by reference to Exhibit 3(b) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998. *10(c)(1) Lawson Products, Inc. Incentive Stock Plan, incorporated herein by reference to Appendix A to the Company's Proxy Statement for the Annual Meeting of Stockholders held on May 11, 1999. *10(c)(2) Salary Continuation Agreement between the Company and Mr. Sidney L. Port dated January 7, 1980 incorporated herein by reference from Exhibit 10(c)(2) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991. *10(c)(3) Employment Agreement between the Company and Mr. Bernard Kalish, incorporated herein by reference from Exhibit 10(c)(6) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1985; First Amendment to Employment Agreement dated as of May 27, 1988 incorporated herein by reference from Exhibit 10(c)(6) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1988. *10(c)(3.1) Second Amendment to Employment Agreement between the Company and Bernard Kalish dated as of August 1, 1996, incorporated herein by reference to Exhibit 10(c)(4.1) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996. *10(c)(4) Employment Agreement between the Company and Mr. Jerome Shaffer, incorporated herein by reference from Exhibit 10(c)(9) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1985. *10(c)(4.1) First Amendment to Employment Agreement dated as of August 1, 1996, incorporated herein by reference from Exhibit 10(c)(6.1) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996. *10(c)5) Employment Agreement between the Company and Jeffrey B. Belford dated March 10, 1983. *10(c)(6) Amended and Restated Executive Deferral Plan, incorporated herein by reference from Exhibit 10(c)(7) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995. *10(c)(7) Employment Agreement dated July 21, 1994 between the Company and Roger F. Cannon, incorporated herein by reference to Exhibit 10(c)(8) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998. *10(c)(8) Agreement between the Company and Bernard Kalish dated July 31, 1999. 21 Subsidiaries of the Company. 23 Consent of Ernst & Young LLP. 27 Financial Data Schedule - -------- *Indicates management employment contracts or compensatory plans or arrangements. (b) Reports on Form 8-K ------------------- No reports on Form 8-K were filed during the fourth quarter of the fiscal year covered by this Report. (c) Exhibits -------- See item 14(a)(3) above for a list of exhibits to this report. (d) Schedules --------- See item 14(a)(2) above for a list of schedules filed with this report.
SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. LAWSON PRODUCTS, INC. Date: March 20, 2000 By /s/ Robert J. Washlow --------------------- Robert J. Washlow, Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below this 20th day of March, 2000, by the following persons on behalf of the registrant and in the capacities indicated. Signature Title /s/ Robert J. Washlow Chairman of the Board, Chief Executive - --------------------------------- Officer and Director Robert J. Washlow (principal executive officer) /s/ Joseph L. Pawlick Chief Financial Officer - --------------------------------- (principal financial officer) Joseph L. Pawlick /s/ Victor G. Galvez Controller - --------------------------------- (principal accounting officer) Victor G. Galvez /s/ Jerome Shaffer Vice President, Treasurer and Director - --------------------------------- Jerome Shaffer /s/ James T. Brophy Director - --------------------------------- James T. Brophy /s/ Bernard Kalish Director - --------------------------------- Bernard Kalish /s/ Ronald B. Port Director - --------------------------------- Ronald B. Port /s/ Sidney L. Port Director - --------------------------------- Sidney L. Port /s/ Robert G. Rettig Director - --------------------------------- Robert G. Rettig /s/ Mitchell H. Saranow Director - --------------------------------- Mitchell H. Saranow /s/ Peter G. Smith Director - --------------------------------- Peter G. Smith
EXHIBIT INDEX ------------- Exhibit Number Description of Exhibit - ------ ---------------------- 2 Purchase Agreement dated April 30, 1996 among Assembly Component Systems, Inc., Automatic Screw Machine Products Company, David E. Norman and James C. Norman, incorporated herein by reference from Exhibit (2)(a) to the Company's Current Report on Form 8-K dated April 30, 1996. 3(a) Certificate of Incorporation of the Company, as amended, incorporated herein by reference to Exhibit 3(a) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1988. 3(b) By-laws of the Company, as amended, incorporated herein by reference to Exhibit 3(b) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998. 10(c)(1) Lawson Products, Inc. Incentive Stock Plan, incorporated herein by reference to Appendix A to the Company's Proxy Statement for the Annual Meeting of Stockholders held on May 11, 1999. 10(c)(2) Salary Continuation Agreement between the Company and Mr. Sidney L. Port, dated January 7, 1980, incorporated herein by reference from Exhibit 10(c)(2) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991. 10(c)(3) Employment Agreement between the Company and Mr. Bernard Kalish, incorporated herein by reference from Exhibit 10(c)(6) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1985; First Amendment to Employment Agreement dated as of May 27, 1988 incorporated herein by reference from Exhibit 10(c)(6) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1988. 10(c)(3.1) Second Amendment to Employment Agreement between the Company and Bernard Kalish dated as of August 1, 1996, incorporated herein by reference to Exhibit 10(c)(4.1) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996. 10(c)(4) Employment Agreement between the Company and Mr. Jerome Shaffer, incorporated herein by reference from Exhibit 10(c)(9) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1985. 10(c)(4.1) First Amendment to Employment Agreement dated as of August 1, 1996, incorporated herein by reference from Exhibit 10(c)(6.1) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996. 10(c)(5) Employment Agreement between the Company and Jeffrey B. Belford dated March 10, 1983. 10(c)(6) Amended and Restated Executive Deferral Plan, incorporated herein by reference from Exhibit 10(c)(7) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995. 10(c)(7) Employment Agreement dated July 21, 1994 between the Company and Roger F. Cannon, incorporated herein by reference to Exhibit 10(c)(8) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998. 10(c)(8) Agreement between the Company and Bernard Kalish dated July 31, 1999. 21 Subsidiaries of the Company. 23 Consent of Ernst & Young LLP. 27 Financial Data Schedule