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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, 2000
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, 2001, 9,711,804 shares of Common Stock were outstanding.
The aggregate market value of the Registrant's Common Stock held by
nonaffiliates on March 1, 2001 was approximately $124,218,000.
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. [ ]
The following documents are incorporated into this Form 10-K by reference:
Proxy Statement for Annual Meeting of Stockholders to be held on May 15, 2001
Part III
PART I
"SAFE HARBOR" STATEMENT UNDER THE SECURITIES LITIGATION REFORM ACT OF 1995: This
Annual Report on Form 10-K contains certain forward-looking statements. These
statements are based on management's current expectations, intentions or beliefs
and are subject to a number of factors, assumptions and uncertainties that could
cause actual results to differ materially from those described in the
forward-looking statements. The factors that could cause actual results to
differ materially from those described in the forward-looking statements include
increased competition, seasonality, an economic downturn and the ability to
integrate successfully newly acquired businesses. The Company undertakes no
obligation to update any such factor or to publicly announce the results of any
revisions to any forward-looking statements contained herein to reflect future
events or developments.
ITEM 1. BUSINESS.
Lawson Products, Inc. was incorporated in Illinois in 1952 and
reincorporated in Delaware in 1982.
PRODUCTS
The Company is a seller and distributor of systems, services and
products. The Company also manufactures and distributes production and
specialized component parts to the OEM marketplace. The Company offers to
customers over 400,000 expendable maintenance, repair and replacement products.
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 2000, 1999 and
1998 respectively:
PERCENTAGE OF
CONSOLIDATED
NET SALES
-------------------
2000 1999 1998
---- ---- ----
Fasteners, Fittings and Related Parts.................... 47% 46% 45%
Industrial Supplies...................................... 49 50 51
Automotive and Equipment Maintenance Parts............... 4 4 _4
--- --- ---
100% 100% 100%
Substantially 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 4.1% of the Company's
purchases in 2000.
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 30% of
2000 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 2000 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 11%
of 2000 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 14% of 2000 sales were made to customers in this
market.
At December 31, 2000, the Company had approximately 205,000 customers,
the largest of which accounted for less than one percent of net sales during
2000. Sales were made through a force of approximately 1,700 independent sales
representatives at December 31, 2000. Included in this group were 205 district
and zone managers, each of whom, in addition to his or her own sales activities,
acted in an advisory capacity to other sales representatives in a designated
area. At December 31, 2000, the Company also employed 29 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 had approximately 1,240 employees
at December 31, 2000.
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 has historically funded its working capital requirements internally.
Such internally generated funds, along with a new $50 million unsecured
revolving line of credit, are expected to finance the Company's future growth
and working capital requirements.
DISTRIBUTION AND MANUFACTURING FACILITIES
Substantially all of the Company's maintenance products are stocked in
and distributed from each of its eight general distribution centers in; Addison,
Illinois; Reno, Nevada; Farmers Branch, Texas; Suwanee, Georgia; Fairfield, New
Jersey; Mississauga, Ontario, Canada, Bradley Stoke (Bristol) England and
Guadalajara, Mexico. 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.
2
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 2000.
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 2000.
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
2000.
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.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, all of whose terms of office
expire on May 15, 2001, are as follows:
YEAR FIRST
NAME AND PRESENT ELECTED TO OTHER OFFICES HELD
POSITION WITH COMPANY AGE PRESENT OFFICE DURING THE PAST FIVE YEARS
- --------------------- --- -------------- --------------------------
Sidney L. Port 90 1977 *
Chairman of the Executive
Committee and Director
Robert J. Washlow 56 1999 Mr. Washlow has been Chairman of the Board and Chief
Chairman of the Board, Chief Executive Officer since August 1999. Prior thereto,
Executive Officer and Director 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 63 1989 Mr. Kalish retired as Chairman of the Board and
Retired Chief Executive Officer, Chief Executive Officer of the Company in August
Chairman of the Board and Director 1999.
3
Jeffrey B. Belford 54 1999 Mr. Belford became Chief Operating Officer and a
Office of the President and Chief member of the Office of the President effective
Operating Officer January 1, 1999. Prior to 1999, Mr. Belford was
Executive Vice President - Operations, Chief
Operating Officer since 1989.
Roger Cannon 52 1999 Mr. Cannon has been a member of the Office of the
Office of the President and Chief President since January 1, 1999. Prior to 1999,
Sales Officer Mr. Cannon was Executive Vice President, Sales -
Marketing from 1997-1999, and Vice President
- - Central Field Sales from 1991 to 1997.
Jerome Shaffer, 73 1987 *
Vice President, Treasurer and
Director
James Smith 60 1996 Mr. Smith was Vice President, Personnel from 1995 to
Vice President-- Human Resources 1996. Prior to 1995, Mr. Smith was Manager, Human
Resources since he joined the Company in 1993.
Joseph L. Pawlick, 58 1999 Prior to 1999, Mr. Pawlick was Vice President,
Chief Financial Officer Controller and Assistant Secretary of the Company
since 1987.
Victor G. Galvez 44 1999 Mr. Galvez was Assistant Controller of the Company
Controller from 1994 to 1999.
Neil Jenkins 51 2000 From 1996 to 2000, Mr. Jenkins operated a golf
Secretary travel business and was a business consultant.
Prior thereto, Mr. Jenkins was executive vice
president, secretary and a member of the Board of
Directors of Bally Gaming, International, Inc., a
publicly held manufacturer and distributor of gaming
equipment and systems.
* Held position for more than five years.
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, (33,800 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
4
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.
5
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, 2000 was 959. 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.
2000 1999
------------------------------ -----------------------------
CASH CASH
HIGH LOW DIVIDENDS HIGH LOW DIVIDENDS
---- --- --------- ---- --- ---------
First Quarter $24.50 $21.50 $.15 $23.125 $20.5 $.14
Second Quarter 24.88 22.00 .15 27.25 20.875 .14
Third Quarter 25.88 23.75 .15 27 21.625 .14
Fourth Quarter 27.75 22.88 .15 23.75 22 .14
6
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 Annual 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, 2000, are derived from the audited Financial Statements of the
Company.
2000 1999 1998 1997 1996
------ ------ ------ ------ -------
Net Sales (1) $348,967,486 $328,987,099 $301,831,128 $286,638,316 $258,566,853
Income Before Income Taxes 47,565,673 40,269,981 33,590,229 35,723,277 33,884,637
Net Income (2) 28,135,673 23,927,981 19,474,229 21,350,277 19,994,637
Total Assets 222,721,466 215,990,877 198,982,290 188,974,415 175,161,839
Return on Assets (percent) 12.6% 11.1% 9.8% 11.3% 11.4%
Noncurrent Liabilities 28,946,453 27,525,033 25,246,269 24,577,547 22,065,583
Stockholders' Equity 159,912,465 150,039,989 142,934,735 139,925,387 128,746,212
Return on Average
Equity (percent) 18.6% 16.5% 13.5% 16.0% 15.8%
Per Share of Common Stock:
Basic Net Income 2.85 $2.29 $1.77 $1.91 $1.73
Diluted Net Income 2.85 2.29 1.76 1.91 1.73
Stockholders' Equity (3) 16.22 14.37 12.97 12.55 11.13
Cash Dividends Declared .60 .57 .56 .54 .52
Basic Weighted Average
Shares Outstanding 9,859,610 10,444,076 11,023,934 11,153,091 11,563,052
Diluted Weighted Average
Shares Outstanding 9,873,680 10,445,836 11,041,819 11,175,232 11,563,715
- ------------------
(1) In 2000, the Company adopted EITF No. 00-10, Accounting for Shipping and
Handling Fees and Costs. EITF 00-10 required companies to reflect all
amounts billed to customers in sales transactions as part of net sales.
Prior year amounts have been reclassified to conform to the requirements of
EITF 00-10.
(2) During 2000, the Company recorded a gain of $2,136,000, net of income
taxes, relative to the sale of the Company's interest in a real estate
investment. 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.
(3) These per share amounts were computed using basic weighted average shares
outstanding for all periods presented.
7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATION AND
FINANCIAL CONDITION.
RESULTS OF OPERATIONS
Net sales for 2000 and 1999 rose 6.1% and 9.0%, respectively, over the
immediately preceding years. The sales gain for 2000 resulted from the addition
of new customers, a higher average order size throughout Lawson's businesses and
from the mid-year 1999 acquisition of our subsidiary, ACS/SIMCO. The advance for
1999 resulted from the addition of new customers, increased orders, a higher
average order size throughout Lawson's businesses and from the acquisition in
July 1999, of ACS/SIMCO. In 2000, the Company adopted Emerging Issues Task Force
(EITF) No. 00-10, "Accounting for Shipping and Handling Fees and Costs." EITF
00-10 required companies to reflect all amounts billed to customers in sales
transactions as part of net sales. Previously, the Company recorded
substantially all freight revenue within selling, general and administrative
expenses. Prior year amounts have been reclassified to conform to the
requirements of EITF 00-10. The reclassification had no impact on net income in
any year.
Net income for 2000 increased 17.6% over 1999 to $28.1 million, while
diluted net income per share in 2000 advanced 24.5% to $2.85 from $2.29 in 1999.
Sales gains, the after tax gain on the sale of the Company's interest in a real
estate investment of $2.1 million and cost containment efforts were primarily
responsible for the increase in net income in 2000 over 1999. Excluding the $2.1
million gain noted above, net income was approximately $26.0 million ($2.63 per
diluted share), an advance of 3.4% over 1999 net income, exclusive of a $1.8
million special charge, for compensation arrangements related to management
personnel reductions and a gain of $600,000 from the sale of marketable
securities. Net income for 1999 rose 22.9% over 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 the special charge and gain from the sale of
marketable securities noted above, 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. Per share net income for 2000,
1999 and 1998 was positively affected by the Company's share repurchases
discussed below.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows provided by operations for 2000, 1999 and 1998 were $22.9
million, $23.3 million and $16.1 million, respectively. The slight decrease in
2000 was due primarily to the negative impact of lower operating liabilities
which more than offset the gain in net income noted above. The increase in 1999
resulted principally from the increase in net income noted above, lower payments
made under deferred compensation and security bonus plans and higher
depreciation and amortization levels. 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, along with
a new $50 million unsecured revolving line of credit, are expected to finance
the Company's future growth and working capital requirements.
Capital expenditures for 2000, 1999 and 1998, respectively, were $3.4
million, $6.5 million and $5.4 million. Consistent with prior years, capital
expenditures were incurred primarily for new facilities, improvement of existing
facilities and for the purchase of related equipment. Capital expenditures
during 2000 primarily reflect purchases of computer related equipment, while in
1999, additions to property, plant and equipment primarily reflect costs
incurred relative to the construction of a new Lawson outbound facility in
Suwanee, Georgia and purchases of computer related equipment. In 1998,
construction was completed relative to the facilities expansion of the Company's
specialty chemical subsidiary, at a cost of approximately $3 million.
In 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 to the original equipment
marketplace. The former business operations of SunSource and Hillman are
conducted by ACS/SIMCO.
8
In 2000, the Company purchased 501,268 shares of its own common stock
for approximately $11.9 million. Of these purchases, 412,668 shares were
acquired relative to the 1999 Board authorization of 500,000 shares and 88,600
shares represented the remaining shares relative to a 1998 stock repurchase
authorization of 500,000 shares. During 1999, 411,400 shares of the 1998 stock
repurchase authorization noted above were purchased 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. Funds to purchase these shares were provided by investments and cash flows
from operations.
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.
SUBSEQUENT EVENTS
In January 2001, the Company agreed to purchase certain assets of
Premier Farnell's Cleveland based North American Industrial Products and Kent
Automotive Divisions for approximately $27,000,000 plus approximately $8,000,000
for related inventories. The all-cash transaction is expected to close on March
30, 2001. Under the agreement, the Company will acquire the field sales,
telephone sales and customer service professionals, the customer accounts,
certain administrative executives, and use of various intellectual properties,
including trademarks and trade names of the Industrial Products and Kent
Automotive divisions in certain territories. The Company will combine its
existing operations with Premier Farnell's Premier Fastener, Rotanium Products,
Certanium Alloys, CT Engineering, JI Holcomb and Kent Automotive business units
in the United States, Canada, Mexico, Central America and the Caribbean. This
acquisition is not expected to require a significant investment by the Company
in facilities or equipment.
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.
9
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, 2000 and 1999.
Consolidated Statements of Income for the Years ended December
31, 2000, 1999 and 1998.
Consolidated Statements of Changes in Stockholders' Equity for
the Years ended December 31, 2000, 1999 and 1998.
Consolidated Statements of Cash Flows for the Years ended
December 31, 2000, 1999 and 1998.
Notes to Consolidated Financial Statements.
Schedule II
10
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, 2000 and 1999, 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, 2000. 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, 2000 and 1999, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2000, 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 23, 2001
11
LAWSON PRODUCTS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-----------------------------------------
2000 1999
----------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 7,911,710 $ 11,974,611
Marketable securities 29,972,654 12,282,229
Accounts receivable, less allowance for doubtful accounts
(2000-$1,658,585; 1999-$1,601,649) 40,823,141 41,108,121
Inventories 55,228,380 55,484,532
Miscellaneous receivables 2,696,986 2,835,685
Prepaid expenses 6,658,687 5,193,621
Deferred income taxes 1,857,000 1,389,000
----------------- -----------------
Total Current Assets 145,148,558 130,267,799
----------------- -----------------
Property, plant and equipment, at cost, less allowances for
depreciation and amortization
(2000-$41,571,230; 1999-$36,479,611) 39,404,599 41,988,652
----------------- -----------------
Other assets:
Marketable securities 400,832 4,694,776
Investments in real estate 705,000 4,107,664
Cash value of life insurance 15,795,812 14,760,461
Deferred income taxes 9,212,000 8,784,000
Goodwill, less accumulated amortization
(2000-$304,632; 1999-$124,533) 2,431,347 3,611,447
Other 9,623,318 7,776,078
----------------- -----------------
38,168,309 43,734,426
----------------- -----------------
$ 222,721,466 $ 215,990,877
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,730,250 $ 8,248,929
Accrued expenses and other liabilities 24,517,530 25,844,991
Income taxes 2,614,768 4,331,935
----------------- -----------------
Total Current Liabilities 33,862,548 38,425,855
----------------- -----------------
Non-current liabilities and deferred credits:
Accrued liability under security bonus plans 17,968,018 16,494,190
Deferred compensation and other liabilities 10,978,435 11,030,843
----------------- -----------------
28,946,453 27,525,033
----------------- -----------------
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-2000-9,706,404 shares; 1999-10,203,922 shares 9,706,404 10,203,922
Capital in excess of par value 761,725 717,004
Retained earnings 151,065,840 140,200,567
----------------- -----------------
161,533,969 151,121,493
Foreign currency translation adjustment (1,621,504) (1,053,504)
Unrealized (loss) gain on marketable securities -- (28,000)
----------------- -----------------
Accumulated other comprehensive income (1,621,504) (1,081,504)
----------------- ------------------
159,912,465 150,039,989
----------------- -----------------
$ 222,721,466 $ 215,990,877
================= =================
See notes to consolidated financial statements
12
LAWSON PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
2000 1999 1998
--------------- --------------- ---------------
Net sales $ 348,967,486 $ 328,987,099 $ 301,831,128
Cost of goods sold 117,256,150 109,370,225 99,686,906
---------------- --------------- ---------------
Gross profit 231,711,336 219,616,874 202,144,222
Selling, general and administrative expenses 188,468,661 178,210,549 167,608,758
Special charges -- 2,932,365 2,621,124
Provision for doubtful accounts 1,419,120 1,065,811 983,367
---------------- --------------- ---------------
Operating Income 41,823,555 37,408,149 30,930,973
---------------- --------------- ---------------
Interest and dividend income 1,072,730 1,312,312 1,458,548
Interest expense (7,959) (7,351) (47,957)
Gain from sale of partnership interest 3,502,336 -- --
Other income - net 1,175,011 1,556,871 1,248,665
---------------- --------------- ---------------
5,742,118 2,861,832 2,659,256
---------------- --------------- ---------------
Income Before Income Taxes 47,565,673 40,269,981 33,590,229
---------------- --------------- ---------------
Federal and state income taxes (benefit):
Current 20,012,000 18,275,000 16,034,000
Deferred (582,000) (1,933,000) (1,918,000)
---------------- --------------- ---------------
19,430,000 16,342,000 14,116,000
---------------- --------------- ---------------
Net Income $ 28,135,673 $ 23,927,981 $ 19,474,229
================ =============== ==============
Net Income Per share of Common Stock
Basic $ 2.85 $ 2.29 $ 1.77
================ =============== ===============
Diluted $ 2.85 $ 2.29 $ 1.76
================ =============== ===============
See notes to consolidated financial statements
13
LAWSON PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY
COMMON CAPITAL ACCUMULATED
STOCK, IN EXCESS OF OTHER
$1 PAR PAR RETAINED COMPREHENSIVE COMPREHENSIVE
VALUE VALUE EARNINGS INCOME INCOME
------------- ----------- -------------- --------------- --------------
Balance at January 1, 1998 $ 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 loss 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:
Unrealized loss on marketable securities (696,000) (696,000)
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)
------------- ----------- -------------- ----------------
Net income 28,135,673 $ 28,135,673
Other comprehensive income, net of tax:
Unrealized gain on marketable securities 28,000 28,000
Adjustment for foreign currency translation (568,000) (568,000)
--------------
Other comprehensive loss for the year (540,000)
--------------
Comprehensive income for the year $ 27,595,673
=============
Cash dividends declared (5,875,305)
Stock issued under employee stock plans 3,750 80,625
Purchase and retirement of common stock (501,268) (35,904) (11,395,095)
-------------- ------------ ---------------
Balance at December 31, 2000 $ 9,706,404 $ 761,725 $ 151,065,840 $ (1,621,504))
============= =========== ============== =================
See notes to consolidated financial statements
14
LAWSON PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
2000 1999 1998
---------------- --------------- ---------------
Operating activities:
Net income $ 28,135,673 $ 23,927,981 $ 19,474,229
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 5,986,466 5,977,205 5,197,571
Amortization 677,197 550,254 300,814
Provision for allowance for doubtful accounts 1,419,120 1,065,811 983,367
Deferred income taxes (582,000) (1,933,000) (1,918,000)
Deferred compensation and security bonus plans 3,922,781 4,651,635 4,190,541
Payments under deferred compensation
and security bonus plans (2,420,361) (2,263,293) (3,414,210)
Losses/(Gains) from sale of marketable
securities 803 (902,960) (50,776)
Income from investments in real estate (695,000) (544,000) (763,000)
Gain from sale of investment in real estate (3,502,336) - -
Changes in operating assets and liabilities
(Exclusive of effect of acquisition):
Accounts receivable (1,134,140) (4,276,788) (2,524,428)
Inventories 256,152 (2,886,074) (4,881,840)
Prepaid expenses and other assets (3,730,055) (5,757,891) (6,121,144)
Accounts payable and accrued expenses (2,770,387) 4,290,592 4,753,798
Income taxes payable (1,717,167) 1,049,135 1,642,005
Other (961,691) 368,539 (798,019)
----------------- --------------- ----------------
Net Cash Provided by Operating Activities 22,885,055 23,317,146 16,070,908
---------------- --------------- ---------------
Investing activities:
Additions to property, plant and equipment (3,392,458) (6,462,348) (5,377,660)
Purchases of marketable securities (75,344,146) (122,774,913) (196,265,030)
Proceeds from sale of marketable securities 61,987,598 130,451,955 204,848,618
Proceeds from sale of investment in real estate 7,400,000 - -
Proceeds from life insurance policies - - 438,819
Acquisition of business, net of cash
acquired of $4,850 - (10,519,909) -
Other 200,000 490,000 440,000
---------------- --------------- ---------------
Net Cash Provided by (Used In)
Investing Activities (9,149,006) (8,815,215) 4,084,747
----------------- ---------------- ---------------
Financing Activities:
Purchases of common stock (11,932,267) (10,519,700) (10,348,469)
Proceeds from exercise of stock options 84,375 - 13,327
Dividends paid (5,951,058) (5,879,340) (6,196,361)
----------------- ---------------- ----------------
Net Cash Used in Financing Activities (17,798,950) (16,399,040) (16,531,503)
----------------- ---------------- ----------------
Increase (Decrease) in Cash and
Cash Equivalents (4,062,901) (1,897,109) 3,624,152
Cash and Cash Equivalents at Beginning of Year 11,974,611 13,871,720 10,247,568
---------------- --------------- ---------------
Cash and Cash Equivalents at End of Year $ 7,911,710 $ 11,974,611 $ 13,871,720
================ =============== ===============
See notes to consolidated financial statements
15
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 seven operating units with which it conducts its
business; however these units have been aggegrated into one reportable segment.
The Company's principal operations are in the United States, however the Company
does have foreign operations as follows:
YEARS ENDED DECEMBER 31
- ------------------------------------------------------------------------------
(IN THOUSANDS) 2000 1999 1998
- ------------------------------------------------------------------------------
Revenues(1):
Canada $7,980 $7,154 $6,516
United Kingdom 2,743 3,023 2,917
Mexico 2,273 2,335 2,292
Long-lived Assets:
Canada 2,155 2,312 2,273
United Kingdom 439 693 693
Mexico 86 86 135
(1) Revenue amounts in 1999 and 1998 have been restated to reflect shipping
revenues. See Shipping and Handling Fees and Costs in Note B.
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 and title passes to customers.
Shipping and Handling Fees and Costs: In the fourth quarter of 2000, the Company
adopted Emerging Issues Task Force (EITF) No. 00-10 "Accounting for Shipping and
Handling Fees and Costs." EITF No. 00-10 requires companies to reflect all
amounts billed to customers in sales transactions as part of net sales. Costs
related to shipping and handling fees are included in the income statement in
the caption selling, general and administrative expenses and totaled
$10,521,000, $10,017,000 and $9,308,000 in 2000, 1999 and 1998, respectively.
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.
16
Investment in Real Estate: The Company's investment in real estate representing
a limited partnership interest is 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
Investment 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
(APB) 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, 2000, 1999 and 1998.
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 1998 and 1999
financial statements to conform with the 2000 presentation.
New Accounting Standards: In June 1998, the Financial Accounting Standards Board
(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 No. 133 will require the Company to recognize all
derivatives on the consolidated balance sheet at fair value. The adoption of
Statement No. 133 will not 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
17
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 to
the original equipment marketplace. The former business operations of SunSource
and Hillman are being conducted through the Company's new subsidiary, ACS/SIMCO.
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
$1,033,000 and $323,000 were made in 2000 and 1999, respectively.
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
$626,000 and $1,069,000 were made in 2000 and 1999 against this accrual,
respectively. 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:
(IN THOUSANDS) GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
2000 COST GAINS LOSSES FAIR VALUE
- ------------------------------------ ------------------ ------------------- ----------------- -----------------
Obligations of states and
political subdivisions $ 3,454 $ 5 $ 5 $ 3,454
Foreign government securities 7,797 - - 7,797
Other debt securities 19,122 - - 19,122
---------- ------- ----- ---------
Total debt securities $ 30,373 $ 5 $ 5 $ 30,373
========== ======= ===== =========
1999
- ------------------------------------
Obligations of states and $ 10,268 $ 1 $ 44 $ 10,225
political subdivisions
Foreign government securities 6,724 - - 6,724
Other debt securities 28 - - 28
---------- ------- ----- ---------
Total debt securities 17,020 1 44 16,977
========== ======= ===== =========
The gross realized gains on sales of marketable securities totaled $1,000,
$992,000 and $52,000 in 2000, 1999 and 1998, respectively, and the gross
realized losses totaled $2,000, $89,000 and $1,000, respectively. The net
adjustment to unrealized holding gains included as a separate component of
stockholders' equity, net of taxes, totaled $28,000 and $105,000 in 2000 and
1998, respectively, while in 1999, the net adjustment to unrealized holding
losses included as a separate component of stockholders' equity, net of taxes,
totaled $696,000.
18
The amortized cost and estimated fair value of marketable securities at December
31, 2000, 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.
ESTIMATED
(IN THOUSANDS) COST FAIR VALUE
- ---------------------------------------------------------------- -------------------- ------------------
Due in one year or less $ 29,970 $ 29,973
Due after one year through five years 403 400
------------ -------------
Total debt securities $ 30,373 $ 30,373
============ =============
NOTE F-PROPERTY, PLANT AND EQUIPMENT
The cost of property, plant and equipment consists of:
2000 1999
-------------------- -----------------
Land $ 6,649,440 $ 6,683,222
Buildings and improvements 39,145,917 38,863,186
Machinery and equipment 28,955,498 27,363,448
Furniture and fixtures 5,231,947 5,293,762
Vehicles 217,345 260,895
Construction in Progress 775,682 3,750
------------ -----------------
$ 80,975,829 $ 78,468,263
============ =================
NOTE G-INVESTMENT IN REAL ESTATE
The Company is a limited partner in one real estate limited partnership. An
officer and member of the Board of Directors of the Company has a 1.5% interest
as a general partner in this partnership. This interest is subordinated to the
Company's interest in distributable cash.
In the fourth quarter of 2000, the Company sold its interest in a real estate
partnership for $7,400,000 to the general partners, one of which is an officer
of the Company and member of the Board of Directors, resulting in an after-tax
gain to the Company of $2,136,000. A special committee of outside directors of
the Board of Directors approved the sale price after receiving independent
appraisals of the property sold.
NOTE H-ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist of the following:
2000 1999
----------------- -----------------
Salaries, commissions and other compensation $ 7,490,351 $ 8,051,216
Accrued special charges 2,671,088 4,032,000
Accrued and withheld taxes, other than income taxes 2,344,955 2,196,971
Accrued profit sharing contributions 2,606,254 2,646,677
Accrued self-insured health benefits 1,300,000 1,574,878
Cash dividends payable 1,455,961 1,531,713
Other 6,648,921 5,811,536
----------------- -----------------
$ 24,517,530 $ 25,844,991
================= =================
19
NOTE I-STOCK PLANS
In 2000, the Company granted 71,250 stock appreciation rights (SARs) pursuant to
an incentive plan adopted in 2000. These SARs had a weighted average exercise
price of $26.50 per share, vest at 20% per year and entitle the employee to
receive a cash payment equal to the difference between the SAR price and the
market value of the Company's common stock when the SARs are surrendered. No
SARs are exercisable at December 31, 2000. No compensation expense for the SARs
was incurred in 2000.
The Company also has an Incentive Stock Plan, as amended ("Plan"), which
provides for the issuance of shares of Common Stock to non-employee directors,
officers and key employees pursuant to stock options, SARs, stock purchase
agreements and stock awards. 641,027 shares of Common Stock were available for
issuance under the Plan as of December 31, 2000.
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:
AVERAGE OPTION
PRICE SHARES
- --------------------------------------------------------------------------------
Outstanding January 1, 1998 $24.38 294,579
Granted 26.75 9,000
Exercised 24.19 (889)
Canceled or expired 26.89 (27,500)
- --------------------------------------------------------------------------------
Outstanding December 31, 1998 23.34 275,190
Granted 22.44 9,000
Exercised - -
Canceled or expired 23.56 (9,700)
- --------------------------------------------------------------------------------
Outstanding December 31, 1999 24.18 274,490
Granted 23.56 11,000
Exercised 22.50 (3,750)
Cancelled or expired 27.50 (97,050)
- --------------------------------------------------------------------------------
Outstanding at December 31, 2000 $22.86 184,690
- --------------------------------------------------------------------------------
Exercisable options at
December 31, 2000 $22.72 162,190
December 31, 1999 $24.42 220,439
December 31, 1998 $24.97 169,488
As of December 31, 2000, the Company had the following outstanding options:
Exercise Price $22.44-$23.56 $26.75 $27.00
------------- ------ ------
Options Outstanding 174,690 9,000 1,000
Weighted Average Exercise Price $22.64 $26.75 $27.00
Weighted Average Remaining Life 5.8 7.3 6.6
Options Exercisable 156,940 4,500 750
Weighted Average Exercise Price $22.58 $26.75 $27.00
20
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:
2000 1999 1998
---- ---- ----
Risk-free interest rate 5.22% 6.79% 4.97%
Dividend yield 2.00% 2.00% 2.00%
Stock price volatility factor .19 .18 .18
Weighted-average expected life (years) 8 8 8
Weighted-average fair value of options granted $6.25 $6.95 $6.80
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:
2000 1999 1998
---- ---- ----
Net income - as reported $28,135,673 $23,927,981 $19,474,229
Net income - pro forma 27,968,000 23,565,000 19,123,000
Basic earnings per share - as reported 2.85 2.29 1.77
Diluted earnings per share - as reported 2.85 2.29 1.76
Basic earnings per share - pro forma 2.84 2.26 1.73
Diluted earnings per share - pro forma 2.83 2.26 1.73
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 plan also has a 401(k) defined contribution savings feature. This feature,
available to all participants, was provided to give employees a pre-tax
investment vehicle to save for retirement. The Company does not match the
contributions made by plan participants.
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 $5,222,000,
$5,051,000 and $4,845,000 for the years ended December 31, 2000, 1999 and 1998,
respectively.
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
21
be realized. Significant components of the Company's deferred tax assets and
liabilities as of December 31 are as follows:
2000 1999
----------------- -----------------
Deferred Tax Assets:
Compensation and benefits $ 12,257,000 $ 12,327,000
Inventory 1,847,000 1,237,000
Net operating loss carryforwards of subsidiary 4,718,000 4,169,000
Accounts receivable 519,000 486,000
Other 873,000 583,000
----------------- -----------------
Total Deferred Tax Assets 20,214,000 18,802,000
Valuation allowance for deferred tax assets (4,718,000) (4,169,000)
----------------- -----------------
Net Deferred Tax Assets 15,496,000 14,633,000
----------------- -----------------
Deferred Tax Liabilities:
Property, plant & equipment 883,000 1,060,000
Investment(s) in real estate 1,949,000 3,063,000
Other 1,595,000 337,000
----------------- -----------------
Total Deferred Tax Liabilities 4,427,000 4,460,000
----------------- -----------------
Total Net Deferred Tax Assets $ 11,069,000 $ 10,173,000
================= =================
Net deferred tax assets include the tax impact of items in comprehensive income
of $873,000 and $583,000 at December 31, 2000 and 1999, respectively.
Income before income taxes for the years ended December 31, consisted of the
following:
2000 1999 1998
---------------- ----------------- ----------------
United States $ 49,259,320 $ 41,494,677 $ 36,288,309
Foreign (1,693,647) (1,224,696) (2,698,080)
---------------- ----------------- -----------------
$ 47,565,673 $ 40,269,981 $ 33,590,229
=============== =============== ===============
The provisions for income taxes for the years ended December 31, consisted of
the following:
2000 1999 1998
-------------- -------------- --------------
Current:
Federal $ 16,945,000 $ 15,187,000 $ 13,136,000
State 3,067,000 3,088,000 2,898,000
------------- -------------- --------------
20,012,000 18,275,000 16,034,000
Deferred benefit (582,000) (1,933,000) (1,918,000)
------------- -------------- --------------
$ 19,430,000 $ 16,342,000 $ 14,116,000
============= ============== ==============
22
The reconciliation between the effective income tax rate and the statutory
federal rate is as follows:
2000 1999 1998
---- ---- ----
Statutory federal rate 35.0% 35.0% 35.0%
Increase (decrease) resulting from:
State income taxes, net of federal income
tax benefit 4.2 5.0 5.6
Foreign losses 1.5 1.5 2.7
Other items, net .1 (.9) (1.3)
---- ----- -----
Provision for income taxes 40.8% 40.6% 42.0%
===== ===== =====
Income taxes paid for the years ended December 31, 2000, 1999 and 1998 amounted
to $21,212,000, $17,157,000 and $14,359,000, respectively.
NOTE L-COMMITMENTS
The Company's minimum rental commitments, principally for equipment, under
noncancelable leases in effect at December 31, 2000 amounted to approximately
$2,955,000. Such rentals are payable as follows: 2001-$1,834,000; 2002-$788,000;
2003-$228,000 and 2004 and thereafter-$105,000.
Total rental expense for the years ended December 31, 2000, 1999 and 1998
amounted to $2,783,000, $2,203,000 and $1,655,000, respectively.
NOTE M - INCOME PER SHARE
The computation of basic and diluted income per share consisted of the
following:
YEAR ENDED DECEMBER 31
(In thousands, except per share data) 2000 1999 1998
------------- ------------- -------------
NUMERATOR:
Net income $ 28,136 $ 23,928 $ 19,474
============= ============= =============
DENOMINATOR:
Denominator for basic income per share -
Weighted average shares 9,860 10,444 11,024
Effect of dilutive securities:
Stock option plans 14 2 18
------------- ------------- -------------
Denominator for diluted income per share -
Adjusted weighted average shares 9,874 10,446 11,042
============= ============= =============
Basic income per share $ 2.85 $ 2.29 $ 1.77
============ ============ ============
Diluted income per share $ 2.85 $ 2.29 $ 1.76
============ ============ ============
23
NOTE N - SUMMARY OF UNAUDITED QUARTERLY RESULTS OF OPERATIONS
Unaudited quarterly results of operations for the years ended December 31, 2000
and 1999 are summarized as follows:
QUARTER ENDED
----------------------------------------------------------------------
2000 MAR. 31 JUN. 30 SEPT. 30 DEC. 31, (1)(2)
- ---- ------- ------- -------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales (3) 86,280 89,632 88,064 84,991
Cost of goods sold (3) 29,946 30,458 30,094 26,758
Income before income taxes 10,908 11,381 10,736 14,541
Provision for income taxes 4,463 4,664 4,358 5,945
Net income 6,445 6,717 6,378 8,596
Net income per
share of common stock:
Basic .64 .68 .66 .89
Diluted .64 .68 .65 .88
Diluted weighted average
shares outstanding 10,093 9,895 9,718 9,729
QUARTER ENDED
----------------------------------------------------------------------
1999 MAR. 31 JUN. 30, (4)(5) SEPT. 30, DEC. 31, (2)(4)
- ---- ------- --------------- --------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales (3) $76,567 $80,859 $85,028 $86,533
Cost of goods sold (3) 25,877 26,716 29,630 27,147
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
- ------------------
(1) The fourth quarter includes a gain of $2,136,000, net of income taxes,
relative to the sale of the Company's interest in a real estate investment.
(2) 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 $1,349,000 and $1,689,000 in 2000 and 1999, respectively.
(3) Net sales and costs of good sold amounts in 2000 and 1999 have been
restated to reflect a shipping revenue reclassification. See Shipping and
Handling Fees and Costs in Note B.
(4) During the second and fourth quarters of 1999, special charges were
recorded related to severance and early retirement benefits, which reduced
net income by $1,236,000, and $524,000, respectively.
(5) The second quarter of 1999 reflects a $554,000 gain, net of income taxes,
on the sale of marketable securities.
NOTE O - SUBSEQUENT EVENT
In January 2001, the Company agreed to purchase certain assets of
Premier Farnell's Cleveland-based North American Industrial Products and Kent
Automotive Divisions for approximately $27,000,000 plus approximately $8,000,000
for related inventories. The all cash transaction is expected to close on March
30, 2001. Under the agreement, Lawson will acquire the field sales, telephone
sales and customer service professionals, the customer accounts, certain
administrative executives, and use of various intellectual properties, including
trade
24
marks and trade names of the Industrial Products and Kent Automotive divisions
in certain territories. Lawson will combine its existing operations with Premier
Farnell's Premier Fastener, Rotanium Products, Certanium Alloys, CT Engineering,
JI Holcomb and Kent Automotive business units in the United States, Canada,
Mexico, Central America and the Caribbean. This acquisition is not expected to
require a significant investment by the Company in facilities or equipment.
25
SCHEDULE II
LAWSON PRODUCTS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
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:
Year ended December 31, 2000 $1,601,649 $1,419,120 $1,362,184 $1,658,585
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
Note A - Uncollected receivables written off, net of recoveries.
26
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.
The information required by Item 405 concerning compliance with Section
16(a) of the Securities Exchange Act of 1934 is incorporated herein by reference
from the section in the 2000 proxy statement captioned "Compliance with Section
16(a) of the Exchange Act."
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 15,
2001, under the caption "Election of Directors," which information is
incorporated herein by reference.
b Executive Officers
------------------
The information required by this Item is set forth in Item 1 - Business
under "Executive Officers of the Registrant."
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 15,
2001, 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 15,
2001 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 15,
2001 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, 2000 and 1999.
Consolidated Statements of Income for the Years ended December
31, 2000, 1999 and 1998.
27
Consolidated Statements of Changes in Stockholders' Equity for
the Years ended December 31, 2000, 1999 and 1998.
Consolidated Statements of Cash Flows for the Years ended
December 31, 2000, 1999 and 1998.
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.
--------
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(ii) to the Company's Quarterly Report
on Form 10-Q for the quarter year ended March 31, 1999.
*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. 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)(3.1)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)(4) Employment Agreement between the Company and Jeffrey B.
Belford dated March 10, 1983, incorporated herein by
reference from Exhibit 10(c)(5) to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1999.
*10(c)(5) 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)(6) 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.
- ----------------------------------
*Indicates management employment contracts or compensatory plans or
arrangements.
28
*10(c)(7) Agreement between the Company and Bernard Kalish dated July
31, 1999, incorporated herein by reference from Exhibit
10(c)(8) to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1999.
10(c)(8) Lawson Products, Inc. Stock Performance Plan
21 Subsidiaries of the Company.
23 Consent of Ernst & Young LLP.
(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.
29
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 28, 2001 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 28th day of March, 2001, 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
- ---------------------
Robert J. Washlow Officer and Director
(principal executive officer)
/s/ Joseph L. Pawlick Chief Financial Officer
- ---------------------------------
Joseph L. Pawlick (principal financial officer)
/s/ Victor G. Galvez Controller
- ---------------------------------
Victor G. Galvez (principal accounting officer)
/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/ Robert M. Melzer Director
- ---------------------------------
Robert M. Melzer
/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
30
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
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(ii) to the Company's Quarterly Report on
Form 10-Q for the quarter year ended March 31, 1999.
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. 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)(3.1) 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)(4) Employment Agreement between the Company and Jeffrey B. Belford
dated March 10, 1983, incorporated herein by reference to
Exhibit 10(c)(5) to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1999.
10(c)(5) 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)(6) 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)(7) Agreement between the Company and Bernard Kalish dated July 31,
1999, incorporated herein by reference from Exhibit 10(c)(8) to
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1999.
10(c)(8) Lawson Products, Inc. Stock Performance Plan
21 Subsidiaries of the Company.
23 Consent of Ernst & Young LLP.
31