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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

F O R M  10-K

T H E   L A M S O N   &   S E S S I O N S   C O.

(Exact name of Registrant as specified in its charter)

Registrant’s telephone number, including area code: 216/464-3400

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None

      Indicate by check mark whether the Registrant (1) 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 [  ]

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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 aggregate market value of the voting stock held as of February 10, 2000 by non-affiliates of the Registrant: $76,981,064.

      As of February 10, 2000 the Registrant had outstanding 13,453,251 common shares.

DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the Proxy Statement for the 2000 Annual Meeting of Shareholders are incorporated by reference into Part III.

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PART I

Item 1. — Business

The Lamson & Sessions Co., an Ohio corporation, (the “Company” or “Lamson & Sessions”), founded in 1866, is a diversified manufacturer and distributor of a broad line of thermoplastic electrical, consumer, telecommunications and fluid drainage products for major domestic markets. The markets for thermoplastic electrical conduit, related fittings and accessories, wiring devices and sewer pipe include: the construction, utility and telecommunications industries, municipalities, other government agencies, and contractors; and Do-It-Yourself (DIY) home remodelers.

Principal Products and Markets

The Company is engaged in the manufacture and distribution of a broad line of thermoplastic electrical, telecommunication and engineered sewer products. In addition, the Company distributes a wide variety of consumer electrical wiring devices, home security devices, wireless electrical and other wireless products.

All of the Company’s thermoplastic electrical products compete with and serve as substitutes for similar metallic products. The Company’s engineered sewer pipe products compete with and serve as substitutes for clay, concrete, ductile iron, asbestos cement and polyethylene products. The Company’s thermoplastic electrical products offer several advantages over these other products. Specifically, nonmetallic electrical conduit and related fittings and accessories are generally less expensive, lighter and easier to install than metallic products. Furthermore, thermoplastic electrical conduit does not rust, corrode or conduct electricity. Thermoplastic sewer pipe weighs less than alternative products, is easier and more economical to install, does not degenerate due to chemical attack as do some competing products, and eliminates avoidable problems which can be caused by infiltration and exfiltration.

Three markets are served, each of which has unique product and marketing requirements. These markets are:

Carlon — Industrial, Residential, Commercial, Telecommunications and Utility Construction: The major customers served are electrical contractors and distributors, original equipment manufacturers, electric power utilities, cable television (CATV), telephone and telecommunications companies. The principal products sold by this segment include electrical and wire raceway systems and a broad line of nonmetallic enclosures, outlet boxes and electrical fittings. Examples of the applications for the products included in this segment are multi-cell duct systems designed to protect underground fiber optic cables allowing future cabling expansion and flexible conduit used inside buildings to protect communications cable.

Lamson Home Products — Consumer: The major customers served are home centers and mass merchandisers for the DIY home repair market. The products included in this segment are light dimmers, fan speed controls, touch controls, wireless door chimes, motion sensors and home security systems. In addition, this segment supplies its market with products such as outlet boxes, liquid tight conduit and electrical fittings.

PVC Pipe: This business segment supplies electrical, power and communications conduit to the electrical distribution, retail, power utility and telecommunications markets. In addition, it provides engineered sewer products to various municipalities and private contractors for drainage systems and sewer construction and rehabilitation. Principal products utilized by the waste water market include closed profile engineered sewer pipe for new sewer construction and existing sewer line rehabilitation. The products range in diameter from 4 inches to 54 inches for sewer products and 1/2 inch to 6 inches for electrical conduit.

A breakdown of revenues as a percent of net sales by major business segment for 1999, 1998 and 1997, is as follows:

See discussion of segment products in Note J of financial statements.

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Competition

Each of the three segments in which the Company presently operates is highly competitive based on service, price and quality. Most of the competitors are either national or smaller regional manufacturers who compete with limited product offerings. Unlike a majority of the Company’s competitors, the Company manufactures a broad line of thermoplastic products, complementary fittings and accessories. The Company believes that its products will continue to compete favorably. However, certain of the Company’s competitors have greater financial resources than the Company, which could adversely affect the Company through price competition strategies.

Distribution

The Company distributes its products through a nationwide network of more than 100 manufacturers’ representatives and a direct sales force of 42. Currently, three manufacturers’ representatives maintain an inventory of the Company’s products.

Raw Materials

The Company is a large purchaser of pipe grade polyvinyl chloride (“PVC”) resin. The Company has entered into resin supply contracts which should stabilize its availability for the next several years.

Patents and Trademarks

The Company owns various patents, patent applications, licenses, trademarks and trademark applications relating to its products and processes. While the Company considers that, in the aggregate, its patents, licenses and trademarks are of importance in the operation of its business, it does not consider that any individual patent, license or trademark, or any technically related group, is of such importance that termination would materially affect its business.

Seasonal Factors

Two of the Company’s three business segments experience moderate seasonality caused principally by a decrease in construction activity during the winter months. They are subject also to the economic cycles affecting the construction industry. The Company’s consumer products business unit is affected by consumer spending and consumer confidence.

Major Customers

Sales to Affiliated Distributors, a buying group within the Carlon and PVC Pipe segments not otherwise affiliated with the Company, totaled approximately 17% of net sales in 1999, 15% of net sales in 1998 and 13% of net sales in 1997.

Backlog

In the Company’s three business segments, the order to delivery cycle ranges from several days to a few weeks. Therefore, the measurement of backlog is not a significant factor in the evaluation of the Company’s prospects.

Research and Development

The Company is engaged in an aggressive product development program in an effort to introduce innovative applications for thermoplastic and wireless electrical products. The Company maintains a separate product development center in Cleveland, Ohio to facilitate this effort and improve manufacturing processes. The Company sponsored research and development activity totaled $3.8 million, $3.7 million and $4.6 million in 1999, 1998 and 1997, respectively.

Environmental Regulations

The Company believes that its current operations and its use of property, plant and equipment conform in all material respects to applicable environmental laws and regulations presently in effect. The Company has facilities at numerous geographic locations, which are subject to a range of federal, state and local environmental laws and regulations. Compliance with these laws has, and will, require expenditures on a continuing basis.

Associates

At January 1, 2000, the Company had 963 associates, 762 of whom were employed at the Company’s manufacturing facilities and distribution centers. The remainder of associates were primarily employed at the Company’s corporate headquarters and product development facilities.

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Foreign Operations

The net sales, operating earnings and assets employed outside the United States are not significant. Export sales were approximately 2% of net sales in 1999, 1% of net sales in 1998 and 2% in 1997, and were made principally to countries in North America.

Item 2. — Properties

The Company owns or leases manufacturing and distribution facilities, which are suitable and adequate for the production and marketing of its products. The Company owns executive and administrative offices, which are located in Cleveland, Ohio, and occupy 68,000 square feet in a suburban office complex. The Company also has research and development offices, located in Cleveland, Ohio, which occupy leased space of 27,000 square feet. The following is a list of the Company’s manufacturing and distribution center locations:

The Company operated the above manufacturing facilities at approximately 93% of their productive capacity in 1999.

Item 3. – Legal Proceedings

On September 23, 1999, the Company announced that a United States District Court jury in the Northern District of Illinois found that the Company willfully infringed on a patent held by Intermatic Incorporated of Spring Grove, Illinois, relating to the design of an in-use weatherproof electrical outlet cover, and awarded Intermatic $12.5 million in damages plus pre-judgment interest of approximately $1.5 million. The court declined to increase the damages with respect to the willfulness finding. The Company is pursuing a vigorous appeal and believes it has meritorious positions that will substantially reduce or eliminate the jury award. If, however, the appeal process is not successful, the final resolution of the matter could have a material adverse affect on the Company’s financial position, cash flows and results of operations. It is the Company’s understanding that the appeal process may require a one-to-two year period.

In addition, during the second quarter of 1999, the Company reached a settlement on litigation involving environmental matters at a property sold by the Company in 1981 whereby the Company agreed to incur costs of certain remediation activities. The settlement did not have a material impact on the Company’s financial position or results of operations.

The Company has filed suit to recover damages related to the termination of the agreement to sell its PVC Pipe business. It is premature to estimate the timing for a resolution of this suit.

The Company is also a party to various other claims and matters of litigation incidental to the normal course of its business. Management believes that the final resolution of these matters will not have a material adverse affect on the Company’s financial position, cash flows and results of operations.

Item 4. – Submission of Matters to Security Holders

None.

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EXECUTIVE OFFICERS OF THE REGISTRANT

JOHN B. SCHULZE

Chairman, President and Chief Executive Officer

Chairman, President and Chief Executive Officer since January 1990. Age 62.

JAMES J. ABEL

Executive Vice President, Secretary, Treasurer and Chief Financial Officer

Executive Vice President, Secretary, Treasurer and Chief Financial Officer since September 1994. Previously was Executive Vice President, Treasurer and Chief Financial Officer February 1993 — September 1994. Age 54.

CHARLES E. ALLEN

Senior Vice President

Senior Vice President since September 1989. Age 59.

ALBERT J. CATANI, II

Vice President — Manufacturing

Vice President, Manufacturing since August 1995. Previously was Independent Consultant, Environmental Growth Chambers, March 1995 — August 1995. Previously was Vice President, Operations, Universal Electronics, Inc., April 1993 — March 1995. Age 52.

DONALD A. GUTIERREZ

Vice President — Carlon

Vice President, Carlon since March 1998. Previously was Vice President, Carlon Electrical Products since July 1997. Previously was National Sales Manager since January 1997. Previously was Manager, Distributor Sales August 1996 - January 1997. Previously was in Marketing and Sales with General Electric 1979 - - August 1996. Age 42.

CHARLES W. HENNON

Vice President and Chief Information Officer

Vice President and Chief Information Officer since April 1998. Previously was Manager, Business Support Services with Ferro Corporation 1993 — April 1998. Age 54.

MELVIN W. JOHNSON

Vice President

Vice President since February 1991. Age 63.

ROBERT J. MOYER

Vice President — Supply Chain Management

Vice President, Supply Chain Management since July 1997. Previously was Vice President, Distribution since April 1997. Previously was Vice President, Supply Chain Management, Little Tikes Co., 1994 — April 1997. Age 46.

LORI L. SPENCER

Vice President and Controller

Vice President and Controller since August 1997. Previously was Vice President, Strategic Planning since February 1997. Previously was Director, Financial Planning & Internal Audit, September 1994 — February 1997. Age 41.

NORMAN P. SUTTERER

Vice President — Lamson Home Products

Vice President — Lamson Home Products since March 1998. Previously was Vice President, Carlon Telecom Systems since January 1994. Age 50.

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PART II

Item 5. – Market for the Registrant’s Common Stock and Related Security Holder Matters

The Company’s Common Stock is traded on the New York Stock Exchange and the Pacific Stock Exchange. High and low sales prices for the common stock are included in Note L to the Consolidated Financial Statements. No dividends were paid in 1999, 1998 or 1997. The approximate number of shareholders of record of the Company’s Common Stock at February 10, 2000 was 1,558.

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Item 6. – Selected Financial Data

FIVE-YEAR FINANCIAL SUMMARY

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Item 7. – Management’s Discussion and Analysis of Financial Condition and
Results of Operations

Discussion of the Consolidated Statements of Operations

The Consolidated Statements of Operations present Lamson & Sessions’ operating performance over the last three years.

Net Sales increased in 1999 by 7.6% to $291 million. The largest increases came in the Carlon business unit, which expanded sales by 10.5%, or $11.5 million. The segment has continued to gain market acceptance of its engineered cable management products used in telecommunications network construction both for inside premise and outside plant applications. Strong construction markets and improved customer service led to solid growth across the board in electrical products. Lamson Home Products grew net sales by 6.1%, or $3.1 million, in 1999 compared with 1998. Continued strong growth in the home improvement market drove improved sales volume in electrical fittings, outlet boxes and liquidtight tubing. This segment was negatively impacted by the Hechinger’s bankruptcy as well as the elimination of unprofitable wiring device products. Finally, the PVC Pipe business increased sales by 5.3% with the electrical and telecommunication conduit growing by 8.1%, primarily from increased resin costs which we were able to pass on to our customers. This segment was negatively impacted by unexpected PVC resin shortages during the third quarter, which limited its supply of conduit to the electrical construction market. In addition, sales in large diameter sewer pipe declined by 5.7% due to increased competition and a softening in demand for rehabilitation pipe.

Net Sales of $271 million in 1998 were less than 1% lower than the $272 million reported in 1997. Overall volume in the commodity rigid pipe products was up 2%, but average selling prices decreased by 6% due to lower raw material costs that were passed on to customers. This sales decline was partially offset by an 8% increase in sales of priority products, especially large diameter sewer pipe, specialty extrusion, raceway systems and the enclosure and electrical fitting products lines. During 1998, the Company continued to eliminate many of its lower-margin products, primarily commodity sewer pipe and wiring devices. These product line reductions lowered sales by $4.8 million, or 1.8% compared with 1997.

Gross Margins were 21.1% in 1999, a slight improvement from 20.9% in 1998. The current year’s cost of products sold includes $2.1 million of costs for the consolidation of distribution operations. They consist primarily of associate relocation, training and start-up costs and asset dispositions. Better product mix, distribution and freight cost savings were partially offset by unfavorable volume variances caused by the raw material shortages experienced during the peak construction season.

Gross Margin increased 13.6% to 20.9% of net sales in 1998 compared with 18.4% in 1997. This improvement was a result of reduced raw material costs referred to above, increased utilization of the Company’s manufacturing plants, a shift in sales mix to higher-margin products and improved manufacturing and distribution cost controls. These improvements helped to offset $792,000 in a restructuring charge consisting primarily of a write-down of certain inventory to net realizable value. The charge, which is included in cost of products sold, was incurred during the fourth quarter of 1998 and related to the consolidation of the Company’s distribution operations, which was completed during the first half of 1999.

Operating Expenses in 1999 declined to 16.5% of net sales, 6.3% lower than the 17.6% in 1998. The Company continues to experience productivity improvements from its infrastructure investments in management information systems and associate training programs, which have resulted in lower staffing levels. With the exception of higher commissions expense due to increased sales, operating expenses actually declined by 1.3% from 1998.

Operating Expenses in 1998 decreased by 8.8% to 17.6% of net sales compared with 19.3% in 1997. The decline is attributable to more efficient administrative operations, elimination of excess costs from the Company’s 1997 implementation of new business processes and information technology and reduced pension costs. This was partially offset by costs of $700,000 incurred in support of the sale of the polyvinyl chloride (PVC) pipe business.

Interest Expense decreased 18% in 1999 to $3.6 million as a result of lower average debt levels and improved operating results, from $4.3 million in 1998. Despite increasing market interest rates in the second half of the year, the Company's average interest rate declined as its improved operating performance provided for lower net rates under its long-term secured credit agreement.

Interest Expense increased 15% to $4.3 million in 1998 from $3.8 million in 1997. This increase reflects the effect of operating losses incurred in the second half of 1997 through the first quarter of 1998, which resulted in higher average debt outstanding and borrowing rates in 1998.

Income Tax Benefit of $9 million was recognized by the Company in 1999 (compared with $2.1 million in 1998) from the reversal of a substantial portion of the deferred tax valuation allowance, due to continued improvement in operating performance and expectations about future years’ taxable income. Beginning in 2000, the Company expects to record a normalized tax provision.

An Income Tax Benefit of approximately $2.1 million in 1998 and $1.6 million in 1997 was generated from a reduction in the valuation allowance on the Company’s net deferred tax assets.

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Discussion of the Consolidated Balance Sheets

The Consolidated Balance Sheets present the Company’s financial position at year-end, compared with the previous year-end. The statement provides information to assist in assessing such factors as the Company’s liquidity and financial resources. The 1999 current ratio declined slightly to 1.7 versus 1.8 in 1998 mainly due to higher accounts payable balances reflecting the higher raw material costs at the end of 1999. The total debt-to-equity ratio declined $3.9 million, or 8.7%, in 1999 while equity increased 43.6% to $63.3 million, the highest level since 1991.

Accounts Receivable are primarily due from trade customers. Accounts receivable increased approximately $5.6 million in 1999 from 1998, which is the result of the 20% increase in sales during the fourth quarter of 1999 as compared with the same period in 1998. Days sales outstanding are 47.5 for 1999 compared with 45.8 in 1998.

Inventories increased 8.7%, or $3.4 million, in 1999 from 1998. This change resulted primarily from increases in PVC resin costs during 1999 offset by continued SKU reduction and improved inventory planning and control. Average inventory turns increased to 4.7 times in 1999 compared with 4.4 times in 1998.

Pension Assets increased $3.7 million in 1999 from 1998. The Company contributed $2 million to fully fund all qualified pension plans and continued to experience favorable investment performance. It is expected in 2000 that no contributions will be required for these plans.

Accounts Payable increased by $8.2 million from 1998 which was caused by higher PVC resin costs and operating levels in the fourth quarter of 1999 compared with the same period in the prior year.

Long-Term Debt decreased by $3.9 million during 1999. Strong operating cash flow allowed the Company to pay down term and other debt without increases in the revolver.

Post-Retirement Benefits and Other Long-Term Liabilities declined by $1.6 million which primarily was due to the payment on a settlement on litigation involving environmental matters on a property previously sold by the Company (see Note D).

Discussion of the Consolidated Statements of Cash Flows

The Consolidated Statements of Cash Flows present the cash inflows and outflows from the Company’s operating, investing and financing activities. Cash and cash equivalents increased slightly at year-end 1999 compared with 1998.

Cash Flows From Operating Activities - The Company generated $13.9 million in cash from continuing operations in 1999, an increase of 60% over the 1998 cash flow from operations of $8.7 million. This increase in operating cash flow reflects improved earnings which resulted in $23.5 million ($18.9 million in 1998) in earnings before interest, tax, depreciation and amortization (EBITDA).

The Company generated $3 million in cash from operations in 1998, an increase of 190% over the 1997 cash flow from operations of $3 million. The increase in cash flow from operations in 1998 reflects an improved operating performance, which resulted in $18.9 million in earnings before interest, tax, depreciation and amortization (EBITDA).

Cash Flows From Investing Activities – During 1999, the Company increased its investments in property, plant and equipment to $7 million. The main areas of expansion were the new distribution center in South Carolina, additions to manufacturing capacity including machinery, molds and tooling, and continued improvements to the Company’s information systems infrastructure. The Company expects to continue making manufacturing capacity additions and investments in productivity improvements in order to be a more efficient producer and improve customer service. Anticipated capital expenditures approximate $10 million for 2000.

The Company reduced its purchases of property, plant and equipment by $7 million to $4.5 million in 1998. These additions were directed toward increased manufacturing capacity of priority products and product line expansions.

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Cash Flows From Financing Activities - The Company used $3.8 million of cash in 1999 for financing activities. Due to improved operating cash flows, the Company was able to pay down term debt and other obligations.

Based upon the Company’s past performance and current expectations, management believes that internally generated cash flows and existing capacity under the secured credit agreement are adequate to fund the Company’s 2000 cash needs for capital expenditures and general operating requirements.

Impact of Year 2000

In prior years, the Company discussed the nature and progress of its plans to become Year 2000 ready. In mid 1999, the Company completed its remediation and testing of systems. As a result of these planning and implementation efforts, the Company experienced no significant disruptions in mission critical information technology and non-information technology systems and believes those systems successfully responded to the Year 2000 date change. The Company spent approximately $360,000 during 1999 in connection with remediating its systems and equipment. The Company is not aware of any material problems resulting from Year 2000 issues, either with its products, its internal systems, or the products and services of third parties. The Company will continue to monitor its mission critical computer applications, equipment, suppliers and customers throughout the Year 2000 to ensure that any latent Year 2000 matters that may arise are addressed promptly.

Outlook

The following paragraphs contain forward-looking comments. These comments are subject to, and the actual future results may be impacted by, the cautionary limitations and factors outlined in the following narrative comments.

In 1999, the Company experienced many challenges including the consolidation of its distribution operations, significant increases in PVC resin costs and unexpected resin shortages due to the Oklahoma City tornado, which created a force majure condition at Lamson’s primary resin supplier. Despite these hurdles, the Company provided improved customer service, introduced several new product lines and was able to maintain its margins despite significant raw material cost increases arising from very tight market supply and demand conditions. This resulted in an excess of 8% growth in sales and the Company’s best operating performance of the nineties.

The Company expects upward pressure on PVC resin prices throughout 2000 as no increase in supply is anticipated until the end of 2001. The demand for the Company’s products follows new home sales and housing start construction indexes, telecom market construction, consumer confidence and consumer spending in the DIY retail market, all of which should be fairly stable in 2000.

The Company intends to capitalize on favorable market conditions, improved service levels, a stable economy and increased new product sales to achieve its long-term growth goals of 10%-12% in sales.

The Company is well positioned in 2000 to take advantage of favorable market conditions and operating efficiencies to meet its long-term goal of a 15%-20% increase in net earnings.

The above statements contain expectations that are forward looking within the meaning of the private Securities Litigation Reform Act of 1995. Actual results may differ materially from those expected as a result of a variety of factors such as (i) the volatility of polyvinyl chloride resin pricing, (ii) changes in the pattern of construction spending in both the new construction and repair and rehabilitation markets, (iii) changes in the number and distribution of housing starts, (iv) fluctuations in the interest rate affecting housing starts, (v) the ability of the Company to pass through raw material cost increases to its customers and (vi) a reversal in the country’s general pattern of economic stability affecting the markets for the Company’s products.

Item 7(a). — Not Applicable.

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Item 8. – Financial Statements and Supplementary Data

CONSOLIDATED STATEMENTS OF OPERATIONS

THE LAMSON & SESSIONS CO. AND SUBSIDIARIES

(Dollars in thousands, except per share data)

See notes to consolidated financial statements.

11

CONSOLIDATED STATEMENTS OF CASH FLOWS

THE LAMSON & SESSIONS CO. AND SUBSIDIARIES

(Dollars in thousands)

See notes to consolidated financial statements.

12

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

See notes to consolidated financial statements.

13

CONSOLIDATED BALANCE SHEETS

THE LAMSON & SESSIONS CO. AND SUBSIDIARIES

January 1, 2000 and January 2, 1999
(Dollars in thousands, except per share data)

See notes to consolidated financial statements.

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CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
(Dollars in thousands)

See notes to consolidated financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

THE LAMSON & SESSIONS CO. AND SUBSIDIARIES

Three fiscal years ended January 1, 2000

NOTE A—ACCOUNTING POLICIES

Fiscal Year: The Company’s fiscal year end is the Saturday closest to December 31.

Principles of Consolidation and Presentation: The consolidated financial statements include the accounts of the Company and all domestic and foreign subsidiaries after elimination of intercompany items. Certain 1998 and 1997 items have been reclassified to conform with the 1999 financial statement presentation.

Revenue Recognition: Revenues are derived from sales to unaffiliated customers and are recognized when products are shipped and title has transferred.

Cash and Cash Equivalents: The Company considers all investments with an original maturity of three months or less on their acquisition date to be cash equivalents.

Inventories: Inventories are valued at the lower of first-in, first-out (FIFO) cost or market.

Financial Instruments: The Company’s carrying value of its financial instruments approximates fair value.

Property and Depreciation: Property, plant and equipment are recorded at cost. For financial reporting purposes, depreciation and amortization are computed principally by the straight-line method over the estimated useful lives of the assets. Buildings are depreciated over a period of up to 31.5 years. Machinery and equipment is depreciated over periods ranging from 3 years to 15 years. Accelerated methods of depreciation are used for federal income tax purposes.

Income Taxes: The Company accounts for income taxes using the provisions of Statement of Financial Accounting Standards (SFAS) No. 109, “Accounting for Income Taxes.” Investment tax credits are recorded using the flow-through method.

Research and Development Costs: Research and development (R&D) costs consist of Company-sponsored activities to develop new value-added products. R&D costs are expensed as incurred and expenditures were $3,800,000, $3,700,000 and $4,600,000 in 1999, 1998 and 1997, respectively. R&D costs are included in operating expenses in the Consolidated Statements of Operations.

Advertising Costs: Advertising costs are expensed as incurred and totaled $2,300,000, $2,600,000 and $3,500,000 for 1999, 1998 and 1997, 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 those estimates.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued

THE LAMSON & SESSIONS CO. AND SUBSIDIARIES

NOTE B—LONG-TERM DEBT AND COMMITMENTS

Long-term debt consists of the following:

The Company has a long-term $65,000,000 secured credit agreement. The agreement was amended February 7, 2000 to extend the term to June 30, 2001. The agreement is secured by the Company’s accounts receivable, inventory and property, plant and equipment. The agreement consists of both term and revolving credit facilities with interest variable on both portions. The rate paid varies based on the Company’s financial performance and the pricing option chosen. Borrowings under this agreement carry interest based on any of three pricing options (prime rate, LIBOR or commercial paper), at the Company’s option, plus the applicable spread. Interest is paid in accordance with the maturity of the pricing option selected. The term portion of this facility carried interest at a weighted average rate of 9.1%, which is 3.0% over the commercial paper rate at January 1, 2000, and requires principal payments of $750,000 due the last day of each calendar quarter with a $4,500,000 balloon payment due June 30, 2001. The revolving credit portion permits borrowings of up to $50,000,000 at any time through June 30, 2001 and carries an average variable rate of 8.79% at January 1, 2000. The agreement provides for the payment of a commitment fee on the revolving line of credit of .375% per annum on the average daily unused commitment. In addition to amounts borrowed, letters of credit related to Industrial Revenue Bond financings and other contractual obligations total approximately $13,500,000 under the agreement.

The Company’s Industrial Revenue Bond financings include several issues due in annual installments from 2000 through 2023 with interest at variable rates. The weighted average rate for these bonds at January 1, 2000 was 4.28%. The Company maintains letters of credit related to one of the Industrial Revenue Bonds and other contractual obligations for approximately $3,900,000 with two banks. The Company’s headquarters is subject to a mortgage payable in equal monthly installments through 2003 with interest at 8.625%.

The Company’s credit agreements contain various restrictive covenants pertaining to maintenance of debt service, tangible net worth, dividend payments and certain other financial ratios.

The aggregate minimum combined maturities of long-term debt for the years 2001 through 2004 are approximately $29,219,000, $1,051,000, $1,054,000 and $660,000, respectively, with $4,935,000 due thereafter.

Interest paid was $3,679,000, $4,253,000 and $3,895,000 in 1999, 1998 and 1997, respectively.

Rental expense was $4,908,000, $4,092,000 and $4,656,000 in 1999, 1998 and 1997, respectively. Aggregate future minimum payments related to non-cancelable operating leases with initial or remaining terms of one year or more for the years 2000 through 2004 are approximately $4,060,000, $3,924,000, $2,315,000, $1,897,000 and $1,467,000, respectively, with $7,105,000 due thereafter.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued

THE LAMSON & SESSIONS CO. AND SUBSIDIARIES

NOTE C—PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS

The Company sponsors several qualified and nonqualified pension plans and other post-retirement benefit plans for its current and former employees. The following table provides a reconciliation of the changes in the benefit obligations and fair value of plan assets over each of the two years in the period ended January 1, 2000 and a statement of the funded status for both year ends:

Effective January 1, 2000, the Company amended its salaried associates retirement benefits program by phasing out certain medical benefits.

Plan assets include Company common shares with a fair market value at January 1, 2000 and January 2, 1999 of $3.3 million and $3.5 million, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued

THE LAMSON & SESSIONS CO. AND SUBSIDIARIES

NOTE C—PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS—Continued

The pension benefits table above provides information relating to the funded status of all defined benefit pension plans on an aggregated basis. The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets were $4.2 million, $3.9 million and $0 million, respectively, as of January 1, 2000 and $4.5 million, $4.1 million and $0, respectively, as of January 2, 1999.

The following table provides the amounts recognized in the consolidated balance sheets for both years:

The assumptions used in the measurement of the Company’s benefit obligations at January 1, 2000 and January 2, 1999 were: