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, 1998 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, 1999, 10,648,822 shares of Common Stock were outstanding. The aggregate market value of the Registrant's Common Stock held by nonaffiliates on March 1, 1999 was approximately $120,745,000. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 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 11, 1999 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 66,000 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 1998, 1997 and 1996 respectively: Percentage of Consolidated Net Sales ----------------------- 1998 1997 1996 ---- ---- ---- Fasteners, Fittings and Related Parts................. 45% 46% 45% Industrial Supplies................................... 51 49 50 Automotive and Equipment Maintenance Parts............ 4 5 5 -- ----- ----- 100% 100% 100% 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 4.6% of the Company's purchases in 1998. 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 35% of 1998 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 42% of 1998 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 1998 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 11% of 1998 sales were made to customers in this market. The Company has approximately 216,000 customers, the largest of which accounted for less than one percent of net sales during 1998. Sales are made through a force of approximately 1,850 independent sales representatives of which 84 serve the O.E.M. marketplace. Included in this group are 224 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 43 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 1,110 employees. The Company's products are sold in all 50 states, Mexico, Puerto Rico, the District of Columbia, Canada and England. 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; Norcross, 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 six centers located in Decatur, Alabama; Conway, Arkansas; Cairo, Georgia; Burr Ridge, Illinois; Tupelo, Mississippi; and Memphis, Tennessee. 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 three 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 1998. 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 approximately 1% of the Company's net sales during 1998. 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 1998. 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 other distribution facilities to a lesser degree. 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); Norcross, Georgia (61,300 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 facilities leased in Conway, Arkansas (6,500 sq. ft.) Burr Ridge, Illinois (24,000 sq. ft.) Tupelo, Mississippi, (10,000 sq. ft.) and Memphis, Tennessee, (40,000 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. The Company is constructing a new warehouse in Georgia and has estimated the cost of land and buildings at $4 million. The Norcross, Georgia facility will be sold in conjunction with occupancy of the new facility. 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, 1998 was 1,052. 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> 1998 1997 ----------------------------------- --------------------- Cash Cash High Low Dividends High Low Dividends ---- --- --------- ---- --- --------- <S> <C> <C> <C> <C> <C> <C> First Quarter $31 1/4 $24 1/2 $.14 $22 5/8 $21 1/8 $.13 Second Quarter 28 1/4 25 1/4 .14 27 1/8 22 1/8 .13 Third Quarter 27 1/4 20 9/16 .14 30 1/8 25 3/8 .13 Fourth Quarter 24 3/4 21 1/2 .14 31 1/2 27 5/16 .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, 1998, are derived from the audited Financial Statements of the Company. <TABLE> <CAPTION> 1998 1997 1996 1995 1994 ------ ------ ------ ------ ----- <S> <C> <C> <C> <C> <C> Net Sales $292,523,475 $278,144,321 $250,289,124 $223,537,182 $213,097,143 Income Before Income Taxes 33,590,229 35,723,277 33,884,637 34,815,029 34,031,074 Net Income 19,474,229 21,350,277 19,994,637 21,120,029 20,524,074 Total Assets 198,982,290 188,974,415 175,161,839 160,613,798 168,130,848 Noncurrent Liabilities 25,246,269 24,577,547 22,065,583 19,292,794 17,084,617 Stockholders' Equity 142,934,735 139,925,387 128,746,212 122,810,577 131,230,469 Return on Equity (percent) 13.5% 16.0% 15.8% 16.9% 14.7% Per Share of Common Stock: Basic Net Income $1.77 $1.91 $1.73 $1.75 $1.55 Diluted Net Income 1.76 1.91 1.73 1.75 1.55 Stockholders' Equity* 12.97 12.55 11.13 10.17 9.91 Cash Dividends Declared* .56 .54 .52 .51 .48 Basic Weighted Average Shares Outstanding 11,023,934 11,153,091 11,563,052 12,072,668 13,237,181 Diluted Weighted Average Shares Outstanding 11,041,819 11,175,232 11,563,715 12,074,647 13,240,024 * 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 1998 and 1997 advanced 5.2% and 11.1%, respectively, over the immediately preceding years. The sales gains for 1998 and 1997 reflect increased contribution from substantially all Lawson operations with our specialty chemical subsidiary spearheading the 1998 increase. Our subsidiary, Assembly Component Systems, Inc. ("ACS"), the business and assets of which were acquired in April 1996, contributed significantly to the sales improvement in 1997. Net income in 1998 declined 8.8% from 1997 to $19,474,229, while diluted net income per share in 1998 decreased 7.9% to $1.76 from $1.91 in 1997. The decline in net income from 1997 is primarily due to a $1,520,000 non-recurring charge, net of taxes, for compensation arrangements related to management personnel reductions. 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. These items more than offset the sales gains and gross profit improvements in 1998. Excluding the effect of the non-recurring charge, 1998 net income was approximately $20,994,000 ($1.90 per diluted share), a decline of 1.7% from 1997. Sales gains, partially offset by a decrease in gross margins, were primarily responsible for the increase in net income in 1997 over 1996. Per share net income for 1998, 1997 and 1996 was positively affected by the Company's share repurchases discussed below. LIQUIDITY AND CAPITAL RESOURCES Cash flows provided by operations for 1998, 1997 and 1996 were $16,070,908, $16,979,646 and $24,552,774, respectively. The decline in 1998 resulted principally from the decrease in net income noted above, and payments made under deferred compensation and security bonus plans which more than offset the positive impact from higher operating liabilities, resulting from the non-recurring charge noted above. The decrease in 1997 was due primarily to increases in operating assets over 1996 levels, which more than offset the advance in net income noted above. Current investments and cash flows from operations have continued to be sufficient to fund operating requirements, cash dividends and capital improvements. Such internally generated funds are also expected to finance the Company's future growth. Capital expenditures for 1998, 1997, and 1996, respectively, were $5,378,660, $5,894,656 and $4,820,724. 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 first quarter of 1998, the Company purchased land in Suwanee, Georgia. The Company is constructing a new Lawson outbound facility on the site. This facility will be used in place of the Norcross, Georgia, facility which will be sold. The cost of land and buildings is estimated at $4,000,000. Also, construction was completed relative to the facilities expansion of the Company's specialty chemical subsidiary, at a cost of approximately $3,000,000.
During the third quarter of 1998, the Board of Directors authorized the purchase of up to 500,000 shares of the Company's common stock. No shares have been purchased relative to this authorization. In 1996, the Board of Directors authorized the purchase of up to 1,000,000 shares of the Company's common stock, of which 472,000 shares were purchased for approximately $10,348,000 during 1998, 187,500 shares were purchased for approximately $4,062,000 during 1997 and 292,000 shares were purchased for approximately $6,386,000 in 1996. As of December 31, 1998, 951,500 shares have been repurchased relative to the 1996 stock repurchase authorization. Also, during 1996, the remaining 86,000 shares relative to the 1994 authorization of 1,500,000 shares, were purchased for $2,095,000. Funds to purchase these shares were provided by investments and cash flows from operations. IMPACT OF THE YEAR 2000 The Company has developed a plan to modify its information technology to recognize the Year 2000 Issue. The Year 2000 Issue involves computer programs being written using two digits rather than four to define the applicable year. Computer programs or hardware that have date-sensitive software or embedded chips may recognize a date using "00" as the year 1900 rather than the year 2000, which could result in a system failure or miscalculations causing disruptions in the processing of normal business transactions. Based on the Company's assessment of the Year 2000 Issue, it has been determined that it will be required to modify or replace portions of its software and certain hardware to insure the proper recognition of dates beyond December 31, 1999. The Company presently believes that with modifications or replacements of certain existing software and hardware, the Year 2000 Issue can be mitigated. The Company's plan to resolve the Year 2000 Issue involves the following four phases: assessment, remediation, testing, and implementation. The Company has fully completed its assessment of all systems that could be significantly impacted by the Year 2000 and is currently converting its critical data processing systems. Based on a review of its product line, the Company has determined that the products it has sold and will continue to sell do not require remediation to be Year 2000 compliant. Accordingly, the Company does not believe that the Year 2000 presents exposure as it relates to the Company's products. The Company has contacted all of its suppliers and has gathered information about their Year 2000 compliance status. To date, the Company is not aware of any supplier with a Year 2000 issue that would have a material impact on the operations of the Company. However, the Company does not have the means to ensure that third parties will be Year 2000 ready. The inability of third parties to complete their Year 2000 resolution process in a timely fashion could materially impact the Company. The effect of non-compliance by third parties is not determinable. The Company will utilize both internal and external resources to reprogram, or replace, test, and implement the software and operating equipment for Year 2000
modifications. This project remains on schedule, including testing and implementation. The Company presently believes all phases of the conversion will be completed by the second quarter of 1999 at a total cost of approximately $500,000, of which $375,000 of expense has been incurred as of December 31, 1998. These costs are primarily for modifying code and testing computer software programs. This project is not expected to have a significant effect on operations. If the Company is unsuccessful in its remediation efforts or if the remediation efforts of its key suppliers or customers are unsuccessful, there may be a material adverse impact on the Company's results of operations and financial position. If the Year 2000 Issue project is unsuccessful, the worst case scenario is that the Company will be unable to distribute its products. As the Company cannot predict the magnitude or time length of Year 2000 business interruptions, the Company is unable to estimate the financial impact of Year 2000 issues. The Company does not currently have a contingency plan although one is under development. Although the project is not yet complete, the management of the Company believes it has an effective program in place to resolve the Year 2000 Issue in a timely manner. The Company is committed to providing the necessary resources, including additional funding and manpower, as required, until such time that all phases of the Year 2000 project are completed. IMPACT OF INFLATION AND CHANGING PRICES The Company has continued to pass most increases in product costs on to its customers 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, 1998 and 1997. Consolidated Statements of Income for the Years ended December 31, 1998, 1997 and 1996. Consolidated Statements of Changes in Stockholders' Equity for the Years ended December 31, 1998, 1997 and 1996. Consolidated Statements of Cash Flows for the Years ended December 31, 1998, 1997 and 1996. 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, 1998 and 1997, 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, 1998. 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 generally accepted auditing standards. 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, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. 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 26, 1999
<TABLE> LAWSON PRODUCTS, INC. CONSOLIDATED BALANCE SHEETS <CAPTION> December 31, ---------------------------------------- 1998 1997 ---- ---- <S> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 13,871,720 $ 10,247,568 Marketable securities 13,815,692 11,637,521 Accounts receivable, less allowance for doubtful accounts (1998-$1,450,067; 1997-$1,423,902) 35,255,226 33,714,165 Inventories 46,670,162 41,788,322 Miscellaneous receivables 2,894,636 2,972,544 Prepaid expenses 4,638,406 2,788,143 Deferred income taxes 1,256,000 836,000 ----------------- ----------------- Total Current Assets 118,401,842 103,984,263 ----------------- ----------------- Property, plant and equipment, at cost, less allowances for depreciation and amortization (1998-$32,450,023; 1997-$27,862,855) 41,142,497 40,963,035 ----------------- ----------------- Other assets: Marketable securities 11,019,945 21,713,267 Investments in real estate 4,053,664 3,730,664 Cash value of life insurance 12,876,120 12,054,380 Deferred income taxes 6,747,000 4,447,000 Other 4,741,222 2,081,806 ----------------- ----------------- 39,437,951 44,027,117 ----------------- ----------------- $ 198,982,290 $ 188,974,415 ================= ================= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 5,112,982 $ 4,928,689 Accrued expenses and other liabilities 22,405,504 17,901,997 Income taxes 3,282,800 1,640,795 ----------------- ----------------- Total Current Liabilities 30,801,286 24,471,481 ----------------- ----------------- Non-current liabilities and deferred credits: Accrued liability under security bonus plans 15,314,813 14,000,016 Deferred compensation and other liabilities 9,931,456 10,577,531 ----------------- ----------------- 25,246,269 24,577,547 ----------------- ----------------- 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-1998-10,663,822 shares; 1997-11,135,233 shares 10,663,822 11,135,233 Capital in excess of par value 749,320 769,738 Retained earnings 132,208,664 128,708,111 ----------------- ----------------- 143,621,806 140,613,082 Foreign currency translation adjustment (1,355,071) (1,250,695) Unrealized gain on marketable securities 668,000 563,000 ----------------- ----------------- Accumulated other comprehensive income (687,071) (687,695) ----------------- ------------------ 142,934,735 139,925,387 ----------------- ----------------- $ 198,982,290 $ 188,974,415 ================= ================= See notes to consolidated financial statements </TABLE>
<TABLE> LAWSON PRODUCTS, INC. CONSOLIDATED STATEMENTS OF INCOME <CAPTION> Year ended December 31, --------------------------------------------------------- 1998 1997 1996 ---- ---- ---- <S> <C> <C> <C> Net sales $ 292,523,475 $ 278,144,321 $ 250,289,124 Cost of goods sold 99,554,363 95,985,602 81,116,518 ---------------- --------------- --------------- Gross profit 192,969,112 182,158,719 169,172,606 Selling, general and administrative expenses 158,433,648 147,235,497 136,265,322 Non-recurring charge 2,621,124 - - Provision for doubtful accounts 983,367 1,028,221 859,326 ---------------- --------------- --------------- Operating Income 30,930,973 33,895,001 32,047,958 ---------------- --------------- --------------- Interest and dividend income 1,458,548 1,285,809 1,499,993 Interest expense (47,957) (31,280) (25,596) Other income - net 1,248,665 573,747 362,282 ---------------- --------------- --------------- 2,659,256 1,828,276 1,836,679 Income Before Income Taxes 33,590,229 35,723,277 33,884,637 ---------------- --------------- --------------- Federal and state income taxes (benefit): Current 16,034,000 15,306,000 14,610,000 Deferred (1,918,000) (933,000) (720,000) ---------------- -------------- -------------- 14,116,000 14,373,000 13,890,000 ---------------- --------------- --------------- Net Income $ 19,474,229 $ 21,350,277 $ 19,994,637 ================ =============== ============== Net Income Per share of Common Stock Basic $ 1.77 $ 1.91 $ 1.73 ================ =============== =============== Diluted $ 1.76 $ 1.91 $ 1.73 ================ =============== =============== 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, 1996 $ 11,686,614 $ 493,783 $ 111,320,907 $ (690,727) $ Net income 19,994,637 19,994,637 Other comprehensive income, net of tax: 38,000 38,000 Unrealized gain on marketable securities Adjustment for foreign 341,238 341,238 currency translation Other comprehensive income 379,238 for the year Comprehensive income for the 20,373,875 year Cash dividends declared (5,994,808) Stock issued under employee 2,850 34,718 stock plans Purchase and retirement of (378,000) (16,493) (8,086,507) common stock Balance at December 31, 1996 11,311,464 512,008 117,234,229 (311,489) Net income 21,350,277 21,350,277 Other comprehensive income, net of tax: 55,000 55,000 Unrealized gain on marketable securities Adjustment for foreign (431,206) (431,206) currency translation Other comprehensive income (376,206) for the year Comprehensive income for the 20,974,071 year Cash dividends declared (6,010,507) Stock issued under employee 11,269 266,217 stock plans Purchase and retirement of (187,500) (8,487) (3,865,888) common stock 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: 105,000 105,000 Unrealized gain on marketable securities Adjustment for foreign (104,376) (104,376) currency translation Other comprehensive income 624 for the year Comprehensive income for the $19,474,853 year Cash dividends declared (6,130,363) Stock issued under employee 589 12,738 stock plans Purchase and retirement of (472,000) (33,156) (9,843,313) common stock Balance at December 31, 1998 $ 10,663,822 $ 749,320 $ 132,208,664 $ (687,071) ============= =========== ============== ================ See notes to consolidated financial statements </TABLE>
<TABLE> LAWSON PRODUCTS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS <CAPTION> Year ended December 31, --------------------------------------------------------- 1998 1997 1996 ---- ---- ---- <S> <C> <C> <C> Operating activities: Net income $ 19,474,229 $ 21,350,277 $ 19,994,637 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 5,498,385 5,019,437 4,014,251 Provision for allowance for doubtful accounts 983,367 1,028,221 859,326 Deferred income taxes (1,918,000) (933,000) (720,000) Deferred compensation and security bonus plans 4,190,541 4,214,100 3,734,727 Payments under deferred compensation and security bonus plans (3,414,210) (1,604,352) (1,068,542) Losses from sale of property, plant and equipment 627 108,079 274,717 Income from investments in real estate (763,000) (506,000) (232,500) Changes in operating assets and liabilities (Exclusive of effect of acquisition): Accounts receivable (2,524,428) (4,416,319) (864,397) Inventories (4,881,840) (4,741,208) (3,965,081) Prepaid expenses and other assets (6,121,144) (2,224,583) (2,265,095) Accounts payable and accrued expenses 4,753,798 886,109 2,751,842 Income taxes payable 1,642,005 (852,139) 1,531,104 Other (849,422) (348,976) 507,785 ----------------- --------------- --------------- Net Cash Provided by Operating Activities 16,070,908 16,979,646 24,552,774 ---------------- --------------- --------------- Investing activities: Additions to property, plant and equipment (5,378,660) (5,894,656) (4,820,724) Purchases of marketable securities (196,265,030) (143,028,547) (367,665,946) Proceeds from sale of marketable securities 204,848,618 137,301,088 376,705,975 Proceeds from sale of property, plant and equipment 1,000 2,308 94,421 Proceeds from life insurance policies 438,819 - 130,000 Acquisition of Automatic Screw Machine Products, net of cash acquired of $240,545 - - (10,506,472) Other 440,000 80,000 80,000 ---------------- --------------- --------------- Net Cash Provided by (Used In) Investing Activities 4,084,747 (11,539,807) (5,982,746) ---------------- --------------- ---------------- Financing Activities: Purchases of common stock (10,348,469) (4,061,875) (8,481,000) Proceeds from exercise of stock options 13,327 277,486 37,568 Dividends paid (6,196,361) (5,923,040) (6,043,577) ----------------- --------------- ---------------- Net Cash Used in Financing Activities (16,531,503) (9,707,429) (14,487,009) ----------------- --------------- ---------------- Increase (Decrease) in Cash and Cash Equivalents 3,624,152 (4,267,590) 4,083,019 Cash and Cash Equivalents at Beginning of Year 10,247,568 14,515,158 10,432,139 ---------------- --------------- --------------- Cash and Cash Equivalents at End of Year $ 13,871,720 $ 10,247,568 $ 14,515,158 ================ =============== =============== 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: YEARS ENDED DECEMBER 31 ---------------------------------------------- 1998 1997 1996 - -------------------------------------------------------------------------------- Revenues: Canada $6,324 $6,212 $5,323 United Kingdom 2,872 3,018 2,711 Mexico 2,276 1,912 1,382 Long-lived Assets: Canada 2,273 2,553 2,680 United Kingdom 693 714 608 Mexico 135 220 74 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 securities 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. 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, 1998, 1997 and 1996. 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. Comprehensive Income: In 1998, the Company adopted FASB Statement No. 130, "Reporting Comprehensive Income." Statement 130 establishes new rules for the reporting and displaying of comprehensive income and its components; however, the adoption of this Statement had no impact on the Company's net income or equity. Statement 130 requires unrealized gains on the Company's available-for-sale securities and foreign currency translation adjustments to be included in accumulated other comprehensive income, which prior to adoption were reported separately in stockholders' equity. Prior year financial statements have been reclassified to conform to the requirements of Statement 130.
Reclassifications: Certain amounts have been reclassified in the 1996 and 1997 financial statements to conform with the 1998 presentation. NOTE C-NON-RECURRING CHARGE In the fourth quarter of 1998, the Company recorded non-recurring charges of $2.6 million representing severance and early retirement benefits to five members of management. At December 31, 1998, no amount had yet been expended. NOTE D-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 1998 Cost Gains Losses Fair Value - -------------------------------- -------------------- ------------------ -------------------- ----------------- <S> <C> <C> <C> <C> Obligations of states and $ 16,723 $ 90 $ 4 $ 16,809 political subdivisions 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 ========== ======= ===== ========= 1997 - -------------------------------- -------------------- ------------------ -------------------- ----------------- Obligations of states and $ 28,343 $ 56 $ 1 $ 28,398 political subdivisions Foreign government securities 4,092 - - 4,092 Other debt securities 44 - - 44 -------------- ------------ ------------ ------------- Total debt securities 32,479 56 1 32,534 Equity securities 6 817 6 817 -------------- ------------ ------------ ------------- $ 32,485 $ 873 $ 7 $ 33,351 ========== ======= ===== ========= </TABLE> The gross realized gains on sales of marketable securities totaled: $52,000, $52,000 and $128,000 in 1998, 1997 and 1996, respectively, and the gross realized losses totaled $1,000, $7,000 and $28,000, respectively. The net adjustment to unrealized holding gains included as a separate component of stockholders' equity, net of taxes, totaled $105,000, $55,000 and 38,000 in 1998, 1997 and 1996, respectively.
In 1996, the Company received equity shares on the conversion of certain mutual insurance companies, from which the Company held policies, to stock companies. These shares carry no cost. The amortized cost and estimated fair value of marketable securities at December 31, 1998, 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 $ 13,779 $ 13,816 Due after one year through five years 10,024 10,073 --------------- ---------------- Total debt securities 23,803 23,889 Equity securities 6 947 --------------- ---------------- $ 23,809 $ 24,836 ============ ============= </TABLE> NOTE E-PROPERTY, PLANT AND EQUIPMENT The cost of property, plant and equipment consists of: <TABLE> <CAPTION> 1998 1997 ----------------- ----------- <S> <C> <C> Land $ 6,011,531 $ 6,072,718 Buildings and improvements 38,290,080 34,162,854 Machinery and equipment 22,216,024 19,855,003 Furniture and fixtures 5,014,995 5,053,931 Vehicles 272,829 239,740 Construction in Progress 1,787,061 3,441,644 ----------------- ----------------- $ 73,592,520 $ 68,825,890 ================= ================= </TABLE> NOTE F-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 G-ACCRUED EXPENSES AND OTHER LIABILITIES Accrued expenses and other liabilities consist of the following: <TABLE> <CAPTION> 1998 1997 ----------------- ----------- <S> <C> <C> Salaries, commissions and other compensation $ 10,188,449 $ 7,051,691 Accrued and withheld taxes, other than income taxes 2,080,204 2,002,092 Accrued profit sharing contributions 2,443,289 2,337,319 Accrued self-insured health benefits 1,318,356 1,300,000 Cash dividends payable 1,492,935 1,558,933 Other 4,882,271 3,651,962 ----------------- ----------------- $ 22,405,504 $ 17,901,997 ================= ================= </TABLE> NOTE H-STOCK PLAN The Company's Incentive Stock Plan, As Amended ("Plan"), provides for the issuance of shares of Common Stock to officers and key employees pursuant to stock options, stock appreciation rights, stock purchase agreements and stock awards. At December 31, 1998, 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. 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: Average Option Price Shares - -------------------------------------------------------------------------------- Outstanding January 1, 1996 $27.06 126,131 Granted 22.57 187,004 Exercised 16.27 (2,850) - ------------------------------------------------------------------------------- Outstanding December 31, 1996 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 - ------------------------------------------------------------------------------- Exercisable options at December 31, 1998 $24.97 169,488 December 31, 1997 26.10 149,026 December 31, 1996 27.38 123,281 As of December 31, 1998, the Company had the following outstanding options: <TABLE> <CAPTION> <S> <C> <C> <C> Exercise Price $22.50-$23.25 $27.00-$29.75 $26.75 ------------- ------------- ------ Options Outstanding 177,940 83,950 9,000 Weighted Average Exercise Price $22.55 $27.49 $26.75 Weighted Average Remaining Life 7.4 1.5 9.4 Options Exercisable 86,288 83,200 - Weighted Average Exercise Price $22.54 $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: 1998 1997 1996 ---- ---- ---- Risk-free interest rate 4.97% 5.81% 6.61% Dividend yield 2.00% 2.00% 2.00% Stock price volatility factor .18 .19 .21 Weighted-average expected life (years) 8 8 8 Weighted-average fair value of options granted $6.80 $7.77 $7.26 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> 1998 1997 1996 ---- ---- ---- <S> <C> <C> <C> Net income as reported $19,474,229 $21,350,277 $19,994,650 Net income - pro forma 19,123,000 21,010,000 19,779,000 Basic earnings per share - as reported 1.77 1.91 1.73 Diluted earnings per share - as reported 1.76 1.91 1.73 Basic earnings per share - pro forma 1.73 1.88 1.71 Diluted earnings per share - pro forma 1.73 1.88 1.71 </TABLE> NOTE I-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 $4,845,399, $4,387,000 and $3,946,000 for the years ended December 31, 1998, 1997 and 1996, 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 J-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: 1998 1997 ----------------- ----------- <S> <C> <C> Compensation and benefits $ 10,850,000 $ 9,399,000 Inventory 1,037,000 642,000 Net operating loss carryforwards of subsidiary 3,877,000 3,270,000 Accounts receivable 446,000 428,000 Other 730,000 - ----------------- ----------------- Total Deferred Tax Assets 16,940,000 13,739,000 Valuation allowance for deferred tax assets (3,877,000) (3,270,000) ----------------- ---------------- Net Deferred Tax Assets 13,063,000 10,469,000 ----------------- ----------------- Deferred Tax Liabilities: Property, plant & equipment 1,318,000 1,489,000 Investments in real estate 3,169,000 3,163,000 Marketable securities 359,000 303,000 Other 214,000 231,000 ----------------- ----------------- Total Deferred Tax Liabilities 5,060,000 5,186,000 ----------------- ----------------- Total Net Deferred Tax Assets $ 8,003,000 $ 5,283,000 ================= ================= </TABLE> Income before income taxes consisted of the following: 1998 1997 1996 ---- ---- ---- United States $36,288,309 $37,303,959 $35,969,862 Foreign (2,698,080) (1,580,682) (2,085,225) ----------- ----------- ----------- $33,590,229 $35,723,277 $33,884,637 =========== =========== ===========
The provisions for income taxes for the years ended December 31, consisted of the following: 1998 1997 1996 ---------------- ---------------- ----------- Current: Federal $ 13,136,000 $ 12,568,000 $ 11,733,000 State 2,898,000 2,738,000 2,877,000 --------------- ---------------- ---------------- 16,034,000 15,306,000 14,610,000 Deferred benefit (1,918,000) (933,000) (720,000) --------------- --------------- --------------- $ 14,116,000 $ 14,373,000 $ 13,890,000 =============== ================ ================ The reconciliation between the effective income tax rate and the statutory federal rate is as follows: 1998 1997 1996 ---- ---- ---- Statutory federal rate 35.0% 35.0% 35.0% Increase (decrease) resulting from: State income taxes, net of federal income tax benefit 5.6 5.0 5.5 Non-taxable dividend and interest income (.7) (1.6) (1.1) Foreign losses 2.7 1.9 2.2 Other items (.6) (.1) (.6) ------ ------- ------- Provision for income taxes 42.0% 40.2% 41.0% ===== ===== ===== Income taxes paid for the years ended December 31, 1998, 1997 and 1996 amounted to $14,359,000, $16,078,000 and $12,944,000, respectively. NOTE K-COMMITMENTS The Company's minimum rental commitments, principally for equipment, under noncancelable leases in effect at December 31, 1998 amounted to approximately $3,331,000. Such rentals are payable as follows: 1999-$1,494,000; 2000-$1,142,000; 2001-$475,000 and 2002 and thereafter-$220,000. Total rental expense for the years ended December 31, 1998, 1997 and 1996 amounted to $1,655,000, $1,647,000 and $1,402,000.
NOTE L - 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) 1998 1997 1996 ---- ---- ---- <S> <C> <C> <C> NUMERATOR: Net income $ 19,474 $ 21,350 $ 19,995 ============= ============= ============= DENOMINATOR: Denominator for basic income per share - 11,024 11,153 11,563 Weighted average shares Effect of dilutive securities: 18 22 1 ------------- ------------- ------------- Stock option plans Denominator for diluted income per share - 11,042 11,175 11,564 ============= ============= ============= Adjusted weighted average shares Basic income per share $ 1.77 $ 1.91 $ 1.73 ============= ============= ============= Diluted income per share $ 1.76 $ 1.91 $ 1.73 ============= ============= ============= </TABLE>
NOTE M - SUMMARY OF UNAUDITED QUARTERLY RESULTS OF OPERATIONS Unaudited quarterly results of operations for the years ended December 31, 1998 and 1997 are summarized as follows: <TABLE> <CAPTION> Quarter ended ------------------------------------------------------------------- 1998 Mar. 31 Jun. 30 Sept. 30 Dec. 31* - ---- ------- ------- -------- -------- (In thousands, except per share data) <S> <C> <C> <C> <C> 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 Quarter ended ------------------------------------------------------------------- 1997 Mar. 31 Jun. 30 Sept. 30 Dec. 31* - ---- ------- ------- -------- -------- (In thousands, except per share data) Net sales $65,883 $70,390 $71,420 $70,451 Cost of goods sold 22,731 24,105 24,331 24,818 Income before income taxes 7,949 9,463 10,044 8,268 Provision for income taxes 3,227 3,814 4,165 3,167 Net income 4,722 5,649 5,879 5,101 Basic and diluted net income per share of common stock .42 .51 .53 .46 Diluted weighted average shares outstanding 11,209 11,140 11,157 11,181 *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. In 1998, this adjustment increased net income by approximately $1,146,000 while in 1997, this adjustment decreased net income by approximately $438,000. Also, in the fourth quarter of 1998, non-recurring charges were recorded related to severance and early retirement benefits which reduced net income by $1,520,000. </TABLE>
<TABLE> SCHEDULE II LAWSON PRODUCTS, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS <CAPTION> Balance at Charged to Beginning of Costs and Deductions- Balance at End Description Period Expenses Describe (A) of Period ----------- ------ -------- ------------ --------- Allowance deducted from assets to which it applies: Allowance for doubtful accounts: <S> <C> <C> <C> <C> 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 Year ended December 31, 1996 1,111,337 859,326 613,001 1,357,662 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 11, 1999, 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 11, 1999, are as follows: <TABLE> <CAPTION> Year First Other Offices Held Name and Present Elected to During the Past Position with Company Age Present Office Five Years - --------------------- --- -------------- ---------- <S> <C> <C> <C> Sidney L. Port, 88 1977 * Chairman of the Executive Committee and Director Bernard Kalish, 61 1989 * Chief Executive Officer, Chairman of the Board and Director Peter G. Smith(1) 60 1989 * President, Chief Operating Officer and Director - ------------------------ (1) Mr. Smith retired as President and Chief Operating Officer of the Company on December 31, 1998.
Jeffrey B. Belford(2) 52 1989 * Executive Vice President--Operations Chief Operating Officer (Office of the President) Robert J. Washlow(3) 54 1985 * Executive Vice President Corporate Affairs, Secretary and Director (Office of the President) Roger Cannon 50 1997 Mr. Cannon has been Executive Vice President - a member of the Sales/Marketing Office of the President (Office of the President) since January 1, 1999. Vice President - - Central Field Sales from 1991 to 1997. James Smith, 58 1996 Mr. Smith was Vice Vice President-- President, Personnel Human Resources from 1995 to 1996. Prior to 1995, Mr. Smith was Manager, Human Resources since he joined the Company in 1993. Jerome Shaffer, 71 1987 * Vice President, Treasurer and Director Joseph L. Pawlick, 56 1987 * Vice President and Controller and Assistant Secretary - ------------------------- (2) Mr. Belford became Chief Operating Officer and a member of the Office of the President effective January 1, 1999. (3) Mr. Washlow has been Executive Vice President-Corporate Affairs since 1998, Secretary since 1985 and a member of the Office of the President since January 1, 1999. * These persons have held the indicated positions for at least five years. </TABLE>
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 11, 1999, 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 11, 1999 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 11, 1999 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, 1998 and 1997. Consolidated Statements of Income for the Years ended December 31, 1998, 1997 and 1996. Consolidated Statements of Changes in Stockholders' Equity for the Years ended December 31, 1998, 1997 and 1996. Consolidated Statements of Cash Flows for the Years ended December 31, 1998, 1997 and 1996. 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. *10(c)(1) Lawson Products, Inc. Incentive Stock Plan, incorporated herein by reference to Exhibit A to the Company's Proxy Statement for the Annual Meeting of Stockholders held on May 28, 1997. *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. Peter G. Smith dated July 17, 1972 incorporated herein by reference from Exhibit 10(c)(6) to the Company's Annual Report on Form 10-K for the year ended December 31, 1981. *10(c)(4) 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)(4.1) Second Amendment to Employment Agreement 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. - --------------------- *Indicates management employment contracts or compensatory plans or arrangements.
*10(c)(5) 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)(5.1) 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)(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) Agreement of Early Retirement dated December 23, 1998, between Peter G. Smith and the Company. *10(c)(8) Employment Agreement dated July 21, 1994 between the Company and Roger F. Cannon. 21 Subsidiaries of the Company. 23 Consent of Ernst & Young LLP. 27 Financial Data Schedule (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 24, 1999 By /s/ Bernard Kalish ------------------ Bernard Kalish, Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. <TABLE> <CAPTION> Signature Title Date --------- ----- ---- <S> <C> <C> /s/ Bernard Kalish Chairman, Chief Executive Officer and Director (principal executive officer) /s/ Jerome Shaffer Vice President, Treasurer and Director - --------------------------------- Jerome Shaffer (principal financial officer) /s/ Joseph L. Pawlick Vice President and Controller - --------------------------------- Joseph L. Pawlick (principal accounting officer) /s/ James T. Brophy Director March 24, 1999 - --------------------------------- James T. Brophy /s/ Ronald B. Port, M.D. Director - --------------------------------- Ronald B. Port, M.D. /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 /s/ Robert J. Washlow Director - --------------------------------- Robert J. Washlow </TABLE>
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. 10(c)(1) Lawson Products, Inc. Incentive Stock Plan, incorporated herein by reference to Exhibit A to the Company's Proxy Statement for the Annual Meeting of Stockholders held on May 28, 1997. 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. Peter G. Smith, dated January 17, 1972 incorporated herein by reference from Exhibit 10(c)(6) to the Company's Annual Report on Form 10-K for the year ended December 31, 1981. 10(c)(4) 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)(4.1) Second Amendment to Employment Agreement 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)(5) 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)(5.1) 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.
Exhibit Number Description of Exhibit - ------ ---------------------- 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) Agreement of Early Retirement dated December 23, 1998 between Peter G. Smith and the Company. 10(c)(8) Employment Agreement dated July 21, 1994 between the Company and Roger F. Cannon. 21 Subsidiaries of the Company. 23 Consent of Ernst & Young LLP. 27 Financial Data Schedule