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1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
F O R M 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended JANUARY 2, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission File Number 1-313
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)
Ohio 34-0349210
------------------------------- -----------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
25701 Science Park Drive
Cleveland, Ohio 44122-7313
- ---------------------------------------- ---------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 216/464-3400
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------- ----------------
Common Shares, without par value New York Stock Exchange
Pacific Stock Exchange
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 12,
1999 by non-affiliates of the registrant: $61,149,590.
As of February 12, 1999 the Registrant had outstanding 13,444,534
common shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 1999 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
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: (i) Industrial, Residential, Commercial,
Telecommunications and Utility Construction (served by Carlon) -- contractors
engaged in the installation of electrical or telecommunication systems in
industrial, residential and commercial construction, and electric power utility
projects; original equipment manufacturers who use components as subassemblies
for their own products; and industrial companies who maintain or repair their
own facilities; cable television ("CATV"), telephone and telecommunications
companies; (ii) Consumer (served by Lamson Home Products) -- retail consumers of
electrical products who perform "do-it-yourself" home repairs; and small
electrical contractors; and (iii) Engineered Sewer Products (served by Lamson
Vylon Pipe) -- various government and private builders of sewer and drainage
systems.
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A breakdown of revenues as a percent of net sales by major business segment for
1998, 1997 and 1996, respectively, is as follows:
1998 1997 1996
------------------- ----------------- -----------------
(Dollars in thousands)
Carlon $193,693 71% $194,044 71% $205,211 71%
Lamson Home Products 57,443 21% 59,983 22% 55,199 19%
Lamson Vylon Pipe 19,778 8% 17,753 7% 28,642 10%
-------- --------- --------- --------- --------- --------
$270,914 100% $271,780 100% $289,052 100%
======== ========= ========= ========= ========= ========
See discussion of segment products in Note K of financial statements.
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 35. Currently,
three of these 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
and has historically been able to obtain quantities adequate for its
manufacturing needs.
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.
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MAJOR CUSTOMERS
Sales to Affiliated Distributors, a buying group within the Carlon segment not
otherwise affiliated with the Company, totaled approximately 15% of net sales in
1998 and 13% of net sales in 1997 and 1996.
BACKLOG
In two of the Company's three business segments, the order to delivery cycle
ranges from several days to a few weeks. However, the Lamson Vylon Pipe business
segment has become increasingly dependent upon order backlog as its market
emphasis has shifted from new sewer construction to the rehabilitation market
where products are more predominately sold via a formal project bidding process.
The business completed 1998 with an order backlog of $8.7 million, an increase
of 36% when compared to $6.4 million in 1997, which illustrates strong growth
and a shift in the range of products offered.
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 $3.7 million,
$4.6 million and $4.0 million in 1998, 1997 and 1996, 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 2, 1999, the Company had 983 associates, 781 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.
FOREIGN OPERATIONS
The net sales, operating earnings and assets employed outside the United States
are not significant. Export sales were approximately 1% of net sales in 1998, 2%
in 1997 and 1% in 1996, and were made principally to countries in North America.
ACQUISITIONS
In October 1996, the Company purchased Dimango Products Corporation ("Dimango")
located in Brighton, Michigan to expand its market share in the wireless door
chimes, home security devices and other wireless products. The acquisition has
been accounted for under the purchase method.
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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:
Approximate
Manufacturing Facilities (Owned) Square Feet
- -------------------------------- -----------
Woodland, California 66,000
High Springs, Florida 110,000
Clinton, Iowa 124,000
Bowling Green, Ohio 67,000
Oklahoma City, Oklahoma 170,000
Nazareth, Pennsylvania 59,000
Pasadena, Texas 48,000
Distribution Centers (Leased):
- ------------------------------
Woodland, California 105,300
Oklahoma City, Oklahoma 130,000
Allentown, Pennsylvania 65,000
The Company operated the above manufacturing facilities at approximately 90% of
their productive capacity in 1998.
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Item 3. - LEGAL PROCEEDINGS
The Company is a party to various 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 effect on the Company's
financial position.
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 61.
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 52.
CHARLES E. ALLEN
Senior Vice President
Senior Vice President since September 1989.
Age 58.
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 51.
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 41.
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 53.
MELVIN W. JOHNSON
Vice President
Vice President since February 1991. Age 62.
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. Previously was
Materials Manager, Nordson Corp. 1988 - 1994.
Age 45.
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. Previously was
Manager Internal Audit, August 1992 - September
1994. Age 39.
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.
Previously was Vice President Carlon Power &
Telecom Systems, August 1992 - January 1994. Age
49.
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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 1998, 1997 or 1996. The approximate number of shareholders of record of
the Company's Common Stock at February 12, 1999 was 1685.
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Item 6. - SELECTED FINANCIAL DATA
FIVE-YEAR FINANCIAL SUMMARY
FISCAL YEARS ENDED
------------------------------------------------------------
(Dollars in thousands except per share data,
shareholders, associates and percentages 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
OPERATIONS:
NET SALES $ 270,914 $ 271,780 $ 289,052 $ 299,166 $ 287,645
Cost of products sold 218,097 226,449 227,778 242,608 235,876
GROSS PROFIT 52,817 45,331 61,274 56,558 51,769
Selling, general and administrative expenses 43,897 47,826 49,135 42,520 40,840
OPERATING INCOME (LOSS) 8,920 (2,495) 12,139 14,038 10,929
Net interest expense 4,341 3,768 2,611 5,864 6,673
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE 4,579 (6,263) 9,528 8,174 4,256
Income tax benefit 2,100 1,550 4,100 3,900
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 6,679 (4,713) 13,628 12,074 4,256
Loss from discontinued operations (9,930)
Cumulative effect of accounting change (4,940)
NET INCOME (LOSS) 6,679 (9,653) 13,628 12,074 (5,674)
------------------------------------------------------------------------------------------------------------------------------
YEAR-END FINANCIAL POSITION:
Current Assets $ 83,975 $ 91,567 $ 90,945 $ 80,244 $ 87,526
Other Assets 25,957 21,079 9,703 2,680 2,899
Assets Held for Sale 3,742
Property, Plant and Equipment 50,735 56,329 60,473 51,747 53,979
Total Assets 160,667 168,975 161,121 134,671 148,146
Current Liabilities 47,278 57,580 51,906 49,584 52,032
Long-Term Debt 40,807 44,712 36,911 24,842 46,958
Other Long-Term Liabilities 28,451 29,702 27,517 29,326 36,276
Shareholders' Equity 44,131 36,981 44,787 30,919 12,880
Working Capital 36,697 33,987 39,039 30,660 35,494
- ----------------------------------------------------------------------------------------------------------------------------------
STATISTICAL INFORMATION:
Average number of common shares and
common share equivalents 13,488 13,349 13,641 13,404 13,239
Number of shareholders of record 1,687 1,832 1,987 2,162 2,370
Number of associates 983 1,044 1,164 1,048 1,325
Book value per share $ 3.27 $ 2.77 $ 3.28 $ 2.33 $ 0.97
Market price per share $ 5-1/8 $ 5-13/16 $ 7-1/4 $ 7-3/4 $ 6
Market capitalization $ 68,903 $ 77,970 $ 96,433 $ 103,011 $ 79,673
Long-term debt as a % of market capitalization 59.2% 57.3% 38.3% 24.1% 58.9%
Total debt as a % of market capitalization 64.8% 62.2% 42.8% 27.8% 64.6%
Operating cash flow as a % of total debt 19.5% 6.2% 21.3% 66.6% 7.3%
Long-term debt as a % of equity 92.5% 120.9% 82.4% 80.3% 364.6%
Return on average equity from continuing operations 16.5% (11.5)% 36.0% 55.1% 29.7%
- ----------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS (LOSS) PER COMMON SHARE
Continuing operations $ 0.50 $ (0.35) $ 1.02 $ 0.91 $ 0.32
Discontinued operations (0.75)
Cumulative effect of accounting change $ (0.37)
NET EARNINGS (LOSS) $ 0.50 $ (0.72) $ 1.02 $ 0.91 $ (0.43)
DILUTED EARNINGS (LOSS) PER COMMON SHARE
Continuing operations $ 0.50 $ (0.35) $ 1.00 $ 0.90 $ 0.32
Discontinued operations (0.75)
Cumulative effect of accounting change $ (0.37)
NET EARNINGS (LOSS) $ 0.50 $ (0.72) $ 1.00 $ 0.90 $ (0.43)
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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 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.
Net Sales of $272 million for 1997 were 6% lower than net sales of $289 million
in 1996. Lamson Vylon Pipe business accounted for $11 million of this decline.
Approximately $4 million of the sales decrease resulted from a planned exit of
the commodity sewer pipe product market, and $7 million resulted from large
diameter pipe project delays. Despite the disruption to the Company's wireless
electrical products business from a fire at the Dimango Products facility and
customer service and logistic support issues, Lamson Home Products was able to
offset these declines by the introduction of new products and retail market
strength to grow by 8%. The reduction in net sales in the Carlon segment was due
primarily to customer service problems resulting from the implementation of new
business processes and information technology, supply chain logistics issues and
a reduction in rigid pipe product sales due to competitive pressures in the
market.
GROSS MARGIN increased 17% to 19.5% of net sales in 1998 compared to 16.7% 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 is expected to be completed in the
second quarter of 1999.
Gross Margin decreased 21% to 16.7% of net sales for 1997 compared to 21.2% of
net sales in 1996. The gross margin decrease was due in part to the same factors
that reduced sales levels. In addition, because of competitive conditions and
customer service issues, the Company was unable to raise prices on its commodity
rigid pipe after absorbing substantial raw material price increases.
Manufacturing plants operated at reduced production rates for several months in
1997 in order to decrease the working capital investment in inventory.
Distribution costs were elevated due to logistic network changes and heavy
emphasis on increasing customer order fill rates and delivery timeliness to
regain customer confidence. Freight costs were also negatively impacted by the
UPS strike and Union Pacific rail logistic problems during 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES in 1998 decreased by 8% to 16.2% of
net sales compared to 17.6% 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.
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Selling, General and Administrative Expenses were reduced by 3% to $48
million in 1997 compared to 1996. This decrease was primarily the
result of lower sales commissions, as 1997 net sales were 6% less than 1996.
Despite the reduction in expense, the total costs rose to 17.6% of net sales in
1997 compared to 17% in 1996 due to the decrease in net sales between the two
periods.
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 1997
through the first quarter of 1998, which resulted in higher average debt
outstanding and borrowing rates in 1998.
Interest Expense of $3.8 million for 1997 reflects a 44% increase from 1996 and
is primarily attributable to increased debt levels, higher working capital
investment and the operating loss. The Company had planned to incur the cost of
the increased working capital investment in support of key projects that it was
implementing in 1997. The operating loss decreased the interest coverage under
the terms of the secured borrowing agreement and resulted in high borrowing
rates.
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 placed on the
Company's net deferred tax assets.
The Company reduced its net deferred tax assets valuation allowance by
approximately $1.6 million in 1997 and $4.1 million in 1996.
DISCUSSION OF THE CONSOLIDATED BALANCE SHEETS
THE CONSOLIDATED BALANCE SHEETS present the Company's financial position at
year-end, compared to the previous year-end. The statement provides information
to assist in assessing such factors as the Company's liquidity and financial
resources. The 1998 current ratio increased 12% to 1.8, mainly due to decreased
accounts payable, which resulted from lower raw material costs and less capital
spending. The total debt-to-equity ratio decreased to 1 to 1 in 1998 compared to
1.3 to 1 in 1997. Total debt decreased by 7.8%, from $48.5 million in 1997 to
$44.7 million in 1998, while equity increased 19.3% to $44.1 million due to a
strong turnaround in 1998 operating results.
ACCOUNTS RECEIVABLE are primarily due from trade customers. Accounts Receivable
increased approximately $2.1 million in 1998 from 1997, which is the result of
$1.8 million in higher sales in the fourth quarter. Days sales outstanding are
45.8 for 1998 compared to 46.7 in 1997.
INVENTORIES decreased nearly $6.4 million in 1998 from 1997. This change
resulted primarily from reduced average raw material costs in 1998, the
accelerated sale of traditionally slow-moving products and improved inventory
planning and control. Average inventory turns improved to 4.4 times in 1998
compared to 4.1 times in 1997.
PENSION ASSETS increased $3.6 million in 1998 from 1997. The increase resulted
from continued improvement in the funding status of the Company's qualified
pension plans, due to the Company's contributions and a favorable investment
performance.
ACCOUNTS PAYABLE decreased by $7.6 million in 1998 representing a 27.6% decline.
Lower PVC resin costs, reduced capital spending and improved operating
efficiencies were the main causes of this reduction.
LONG-TERM DEBT decreased $3.9 million during 1998. Due to favorable operating
cash flow, the Company was able to pay down term debt without an increase in the
revolving line of credit.
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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 1998 compared to 1997.
CASH FLOWS FROM OPERATING ACTIVITIES - The Company generated $8.7 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).
The Company generated $3 million in cash from operations in 1997, a decrease of
nearly $6 million from 1996. The decline in cash flow from operations in 1997
relates to the decline in operating profits between the two years offset by
better management of accounts receivable and accounts payable.
CASH FLOWS FROM INVESTING ACTIVITIES - 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.
The Company used $12 million in 1997 for the purchases of equipment, primarily
for increasing capacity and production efficiencies, a decrease of $5 million
from 1996. This reduction is due to completion of the implementation of the
business process and information technology project.
CASH FLOWS FROM FINANCING ACTIVITIES - The Company used $3.6 million of cash in
1998 for financing activities. Due to improved operating cash flows, the Company
was able to pay down term debt and capital lease obligations without increasing
the revolving line of credit.
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 1999 cash needs for
capital expenditures and general operating requirements.
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Year 2000 Compliance
- --------------------
As is the case with most other companies utilizing information technology
systems in their businesses, the Company is in the process of evaluating and
addressing Year 2000 ("Y2K") compliance of its information technology systems as
set forth below. These efforts are designed to identify, address and resolve
issues that may be created by information technology systems written using two
digits rather than four to define the applicable year. This could result in a
systems' failure or miscalculations causing disruption of operations, including,
among other things, a temporary inability to process transactions, invoices or
engage in other normal business activities.
In 1995, the Company began a comprehensive review of the operating systems which
underlie its ability to conduct daily business activity. Over the next three
years, concluding in 1997, the Company spent in excess of $15 million to replace
its core business operations and communications software systems; virtually all
of the computer and telecommunications hardware; and re-engineered or adopted
best practices throughout its business process activities. The primary impetus
for this investment was to support the attainment of strategic business
objectives and to address Y2K concerns concurrently. This investment included a
significant commitment to electronic commerce activities with our customers and
manufacturers' sales representative organizations. In addition, the Company has
implemented extensive education and skill development programs to provide for
continued knowledge transfer, ongoing support and functionality development.
During 1998, the Company authorized an independent audit of all software and
facilities equipment at each of its business sites to identify potential areas
of exposure, representing a continuing proactive investment in addressing Y2K
concerns. As a follow-up to this audit, a Y2K cross-functional team was formed
to monitor and assess official compliance statements from our software and
equipment vendors and to initiate remediation activities at the non-compliant
sites where potentially there could be a material impact on our business. In
addition, the Company has contacted our significant customers and suppliers to
inform them of our compliance status, to determine their state of readiness and
to identify any subsequent actions which may be needed by us.
Current analysis indicates that our core business information system, to the
best of our knowledge, is Y2K compliant. As we address potential areas of
non-compliance, we are evaluating and prioritizing them on the basis of their
materiality to our business. We are utilizing existing staff in the respective
functional areas to assist in this evaluation process and take appropriate
corrective action, but we do not expect to incur significant additional costs
based on what has been identified to date. We will continue our compliance
investigation and develop contingency plans where necessary. We plan to complete
the assessment phase by the end of the second quarter of 1999, and expect to
achieve Y2K readiness on our internal computer systems and facilities equipment
by the end of the third quarter of 1999.
While the information we have received regarding third-party systems, on which
the Company's systems rely, indicates that they are or will be Y2K compliant, we
cannot guarantee this nor can we estimate at this time any material effect on
our Company and its operations if this would not be the case. The Company
continues its aggressive assessment of these potential third-party exposures and
will address the issues accordingly. This is a known uncertainty and is
currently not estimable.
However, our ability to achieve these dates may be impacted by (i) the timely
availability of software patches by existing suppliers of software, (ii) the
Company's ability to employ and retain qualified professionals to handle Year
2000 issues, (iii) the ability of third parties to complete their own Year 2000
compliance remediation efforts on a timely basis, and (iv) the Company's ability
to prepare and implement contingency plans.
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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.
During 1998, the Company continually improved its customer service performance
and the utilization of its new business processes and information technology.
This resulted in a strong turnaround from the difficult year experienced in
1997. In 1999, the Company expects to make further gains in servicing customers
with the opening of a 350,000-square-foot, state-of-the-art distribution center
in Columbia, South Carolina. This will allow consolidation of all eastern and
midwest distribution operations into one facility. Pursuant to the
restructuring, the Company will incur a pre-tax restructuring charge totaling $2
to $4 million. Approximately $800,000 of the charge was recognized in 1998, and
the remainder will be recognized in the first half of 1999.
As a result of an evaluation of strategic alternatives available to reduce its
exposure to highly volatile raw material pricing inherent in the commodity PVC
pipe products, on December 11, 1998, the Company signed an agreement to sell
substantially all of its PVC Pipe Business assets and certain liabilities to
Eagle Pacific Industries, Inc. This transaction is expected to close by the end
of the second quarter of 1999. The Company values this transaction at
approximately $58 million and estimates a gain of at least $6 million on the
completion of the sale. The Company will use the proceeds from this sale to
substantially reduce long-term debt, provide funding for possible acquisitions
and other corporate needs.
The Company's efforts in 1999 will focus on growing the retained business
through high-quality customer service, expanding its penetration in the North
American market, leveraging innovative products recently introduced and
redoubling its efforts to grow through acquisitions, especially in the
industrial electrical and telecommunication markets.
The retained product lines, after the PVC Pipe Business disposition, are
expected to exceed market rate of growth as new products are introduced and
become specified in standards. Based on current indications of steady 1999
construction spending, housing starts, interest rates and retail spending, the
Company anticipates sales growth and improved profitability in each business
segment.
The foregoing outlook contains expectations that involve risks and uncertainties
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) the ability of the Company to pass through raw material cost
increases to its customers, (iii) satisfaction of the various conditions to
closing the sale of the PVC Pipe Business in the second quarter of 1999 and the
timely consummation of that transaction (iv) maintaining the current level of
housing starts, consumer confidence and general construction trends, and (v) a
reversal in the country's general pattern of economic improvement affecting the
markets for the Company's products.
Item 7(a). - Not Applicable.
-14-
15
ITEM 8. - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED STATEMENTS OF OPERATIONS
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
(Dollars in thousands, except per share data)
FISCAL YEARS
-----------------------------------
1998 1997 1996
-----------------------------------
NET SALES $ 270,914 $ 271,780 $ 289,052
Cost of products sold 218,097 226,449 227,778
--------- --------- ---------
GROSS PROFIT 52,817 45,331 61,274
Selling, general and administrative expenses 43,897 47,826 49,135
--------- --------- ---------
OPERATING INCOME (LOSS) 8,920 (2,495) 12,139
Interest (4,341) (3,768) (2,611)
--------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE 4,579 (6,263) 9,528
Income tax benefit 2,100 1,550 4,100
--------- --------- ---------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT
OF ACCOUNTING CHANGE 6,679 (4,713) 13,628
Cumulative effect of accounting change (4,940)
--------- --------- ---------
NET INCOME (LOSS) $ 6,679 $ (9,653) $ 13,628
========= ========= =========
BASIC EARNINGS (LOSS) PER COMMON SHARE:
Earnings (loss) before change in
accounting principle $ 0.50 $ (0.35) $ 1.02
Cumulative effect of accounting change (0.37)
--------- --------- ---------
NET EARNINGS (LOSS) $ 0.50 $ (0.72) $ 1.02
========= ========= =========
DILUTED EARNINGS (LOSS) PER COMMON SHARE:
Earnings (loss) before change in
accounting principle $ 0.50 $ (0.35) $ 1.00
Cumulative effect of accounting change (0.37)
--------- --------- ---------
NET EARNINGS (LOSS) $ 0.50 $ (0.72) $ 1.00
========= ========= =========
See notes to consolidated financial statements.
-15-
16
CONSOLIDATED STATEMENTS OF CASH FLOWS
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
(Dollars in thousands)
Fiscal Years
---------------------------------
1998 1997 1996
---------------------------------
OPERATING ACTIVITIES
Net income (loss) $ 6,679 $ (9,653) $ 13,628
Adjustments to reconcile net income (loss)
to cash provided by operations:
Depreciation and amortization 9,957 8,719 8,770
Deferred income tax benefit (2,100) (1,450) (4,300)
Cumulative effect of accounting change 4,940
Net change in working capital accounts:
Accounts receivable (2,129) 3,675 (1,551)
Inventories 6,413 (2,753) (5,818)
Prepaid expenses and other 4,535 (166) (166)
Accounts payable, accrued expenses and other current
liabilities (10,391) 6,012 (476)
Net change in other long-term items (4,243) (6,313) (1,290)
-------- -------- --------
CASH PROVIDED BY OPERATIONS 8,721 3,011 8,797
INVESTING ACTIVITIES
Net purchases of property, plant and equipment (4,546) (11,584) (16,771)
Purchase of business (5,427)
Net proceeds from sale of assets 1,413
-------- -------- --------
CASH USED IN INVESTING ACTIVITIES (4,546) (10,171) (22,198)
FINANCING ACTIVITIES
Net (payments) borrowings under secured credit agreement (3,065) 7,817 12,446
Net change in long-term borrowings and capital lease obligations (751) (633) 232
Exercise of stock options 168 628 50
-------- -------- --------
CASH (USED) PROVIDED BY FINANCING ACTIVITIES (3,648) 7,812 12,728
-------- -------- --------
INCREASE (DECREASE) IN CASH 527 652 (673)
Cash at beginning of year 1,410 758 1,431
-------- -------- --------
CASH AT END OF YEAR $ 1,937 $ 1,410 $ 758
======== ======== ========
See notes to consolidated financial statements
-16-
17
CONSOLIDATED BALANCE SHEETS
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
January 2, 1999 and January 3, 1998
(Dollars in thousands)
1998 1997
-------- --------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,937 $ 1,410
Accounts receivable, less allowances;
1998--$2,924 and 1997--$2,975 35,080 32,951
Inventories:
Finished goods and work-in-process 33,873 39,532
Raw materials 5,289 6,043
-------- --------
39,162 45,575
Deferred tax assets 6,057 5,357
Prepaid expenses and other 1,739 6,274
-------- --------
TOTAL CURRENT ASSETS 83,975 91,567
PENSION ASSETS 15,347 11,700
OTHER ASSETS 10,610 9,379
PROPERTY, PLANT AND EQUIPMENT
Land 3,588 3,586
Buildings 21,592 21,430
Machinery and equipment 88,662 86,195
-------- --------
113,842 111,211
Less allowances for depreciation and amortization 63,107 54,882
-------- --------
TOTAL NET PROPERTY, PLANT AND EQUIPMENT 50,735 56,329
-------- --------
TOTAL ASSETS $160,667 $168,975
======== ========
See notes to consolidated financial statements.
-17-
18
CONSOLIDATED BALANCE SHEETS
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
January 2, 1999 and January 3, 1998
(Dollars in thousands, except per share data)
1998 1997
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 20,077 $ 27,734
Accrued expenses and other liabilities 19,648 22,272
Taxes 3,705 3,815
Current maturities of long-term debt 3,848 3,759
--------- ---------
TOTAL CURRENT LIABILITIES 47,278 57,580
LONG-TERM DEBT 40,807 44,712
POST-RETIREMENT BENEFITS AND OTHER
LONG-TERM LIABILITIES 28,451 29,702
SHAREHOLDERS' EQUITY
Common shares, without par value, with stated
value of $0.10 per share, authorized 20,000,000
shares; outstanding--13,444,534 shares in 1998
and 13,414,184 shares in 1997 1,344 1,341
Other capital 73,574 73,409
Retained earnings (deficit) (30,000) (36,679)
Accumulated other comprehensive income (loss) (787) (1,090)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 44,131 36,981
--------- ---------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 160,667 $ 168,975
========= =========
See notes to consolidated financial statements.
-18-
19
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
(Dollars in thousands) Accumulated Other
Comprehensive Income (Loss)
---------------------------
Retained Foreign Currency Minimum Pension Total
Common Other Earnings Translation Liability Shareholders'
Shares Shares (Deficit) Adjustment Adjustment Equity
------ ------ --------- ---------- ---------- ------
BALANCE AT DECEMBER 30, 1995
Net income $ 1,329 $ 72,743 $ (40,654) $ (2,499) $ 30,919
Other comprehensive income (loss): 13,628 13,628
Foreign currency translation $ (279) (279)
Minimum pension liability 469 469
----------
Total comprehensive income (loss) 13,818
Issuance of 9,333 common shares
under stock option plans 1 49 50
- ------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 28, 1996 $ 1,330 $ 72,792 $ (27,026) $ (279) $ (2,030) $ 44,787
Net loss (9,653) (9,653)
Other comprehensive income (loss):
Foreign currency translation
Minimum pension liability 1,219 1,219
----------
Total comprehensive income (loss) (8,434)
Issuance of 113,100 common shares
under stock option plans 11 617 628
- ------------------------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 3, 1998 $ 1,341 $ 73,409 $ (36,679) $ (279) $ (811) $ 36,981
Net income 6,679 6,679
Other comprehensive income (loss):
Foreign currency translation (72) (72)
Minimum pension liability 375 375
----------
Total comprehensive income (loss) 6,982
Issuance of 30,350 common shares
under stock option plans 3 165 168
- ------------------------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 2, 1999 $ 1,344 $ 73,574 $ (30,000) $ (351) $ (436) $ 44,131
================================================================================================================
See notes to consolidated financial statements.
-19-
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
Three fiscal years ended January 2, 1999
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 significant intercompany items and
transactions. Certain 1997 and 1996 items have been reclassified to conform with
1998 financial statement presentation.
REVENUE RECOGNITION: Revenues are derived from sales to unaffiliated customers
and are recognized when products are shipped.
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 their 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. 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 $3,700,000, $4,600,000 and
$4,000,000 in 1998, 1997 and 1996, respectively.
ADVERTISING EXPENDITURES: Advertising costs are expensed as incurred and totaled
$2,600,000, $3,500,000 and $3,800,000 for 1998, 1997 and 1996, respectively.
-20-
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTE A--ACCOUNTING POLICIES--Continued
NEW ACCOUNTING PRONOUNCEMENTS:
During 1998, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 130, "Reporting Comprehensive Income," SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information," and SFAS No. 132,
"Employers' Disclosures about Pensions and Other Post-Retirement Benefits." In
accordance with SFAS No. 130, the Company expanded its reporting and display of
comprehensive income and its components in the Consolidated Statements of
Shareholders' Equity. SFAS No. 131 establishes standards for reporting
information about operating segments and related disclosures about products and
services, geographic area and major customers. Pursuant to SFAS No. 131, the
Company added disclosures on segment reporting in Note K. The new disclosures
required for pensions and other post-retirement benefits according to SFAS No.
132 are included in Note C. The adoption of these statements did not affect the
Company's reported financial position, results of operations or cash flows.
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.
NOTE B--LONG-TERM DEBT AND COMMITMENTS
Long-term debt consists of the following:
(Dollars in thousands) FISCAL YEARS
--------------------------------
1998 1997
--------------------------------
Secured Credit Agreement:
Term $11,250 $14,250
Revolver 23,000 23,065
------------- -------------
34,250 37,315
Industrial Revenue Bonds 8,570 8,770
Building mortgage 1,793 2,052
Other 42 334
------------- -------------
44,655 48,471
Less amounts classified as current 3,848 3,759
------------- -------------
$40,807 $44,712
============= =============
-21-
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTE B--LONG-TERM DEBT AND COMMITMENTS--Continued
The Company has a long-term $65,000,000 secured credit agreement. The agreement
was amended effective July 24, 1997 to reset the term loan portion of the debt
to $15,000,000 and extend the term. 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 8.6% which is 3.5%
over the commercial paper rate at January 2, 1999 and requires principal
payments of $750,000 due the last day of each calendar quarter with a $6,000,000
balloon payment due December 31, 2000. The revolving credit portion permits
borrowings up to $50,000,000 at any time through December 31, 2000 and carries
an average variable rate of 8.72% at January 2, 1999. 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 $10,000,000 under the agreement.
The Company's Industrial Revenue Bond financings include several issues due in
annual installments from 1999 through 2023 with interest at variable rates. The
weighted average rate for these bonds at January 2, 1999 was 3.54%. The Company
maintains a letter of credit related to one of the Industrial Revenue Bonds for
approximately $1,900,000 with a local bank. 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 and certain other financial
ratios.
The aggregate minimum combined maturities of long-term debt for the years 2000
through 2003 are approximately $32,141,000, $971,000, $1,054,000 and $1,020,000,
respectively, with $5,621,000 due thereafter.
Interest expense includes $142,000, $253,000 and $471,000 for amortization of
deferred financing cost in 1998, 1997 and 1996, respectively. Interest
capitalized was $170,000 and $417,000 in 1997 and 1996, respectively. No
interest was capitalized in 1998. Interest paid was $4,253,000, $3,895,000 and
$2,647,000 in 1998, 1997 and 1996, respectively.
Rental expense was $4,092,000, $4,656,000 and $3,699,000 in 1998, 1997 and 1996,
respectively. Aggregate future minimum payments related to operating leases with
initial or remaining terms of one year or more for the years 1999 through 2003
are $3,104,000, $3,167,000, $2,850,000, $1,506,000 and $1,399,000, respectively.
-22-
23
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 the two-year period ended January
2, 1999 and a statement of the funded status for both year ends:
(Dollars in thousands) Pension Benefits Other Benefits
1998 1997 1998 1997
-------------- --------------- --------------- --------------
CHANGE IN BENEFIT OBLIGATION
Obligation at beginning of year $ 78,821 $ 76,901 $ 18,287 $ 18,139
Service Cost 1,164 922 289 294
Interest Cost 5,306 5,483 1,206 1,027
Plan participants' contribution 93 118
Actuarial loss 4,788 3,173 368 784
Benefits paid (6,928) (7,658) (1,840) (2,075)
-------------- --------------- --------------- --------------
Obligation at end of year $ 83,151 $ 78,821 $ 18,403 $ 18,287
============== =============== =============== ==============
(Dollars in thousands) Pension Benefits Other Benefits
1998 1997 1998 1997
------------- -------------- ------------- ------------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $ 76,747 $ 71,409
Actual return on plan assets 9,257 9,552
Employer contributions 4,823 3,444 $ 1,747 $ 1,957
Plan participants' contributions 93 118
Benefits paid (6,928) (7,658) (1,840) (2,075)
------------- -------------- ------------- ------------
Fair value of plan assets at end of year $ 83,899 $ 76,747 $ $
============= ============== ============= ============
Plan assets include Company securities with a fair market value at January 2,
1999 and January 3, 1998 of $3.5 million and $2.4 million, respectively.
(Dollars in thousands) Pension Benefits Other Benefits
1998 1997 1998 1997
-------------- -------------- --------------- --------------
FUNDED STATUS
Fund status at end of year $ 748 $ (2,074) $(18,403) $(18,287)
Unrecognized actuarial (gain) loss 12,007 9,576 (1,328) (1,844)
Unrecognized transition (asset) (1,429) (1,516)
Unrecognized prior service cost 299 369
-------------- -------------- --------------- --------------
Net amount recognized at end of year $11,625 $6,355 $(19,731) $(20,131)
============== ============== =============== ==============
-23-
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTE C--PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS--Continued
The 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 $4.5 million, $4.1 million and $0, respectively, as of January 3, 1999 and
$29.0 million, $28.8 million and $22.3 million, respectively, as of January 2,
1998.
The following table provides the amounts recognized in the consolidated balance
sheets for both years:
(Dollars in thousands) Pension Benefits Other Benefits
1998 1997 1998 1997
------------- ------------- --------------- -------------
Prepaid benefit cost $ 15,347 $ 11,700
Accrued benefit liability (4,250) (6,480) $ (19,731) $(20,131)
Intangible asset 92 324
Accumulated other comprehensive income 436 811
------------- ------------- --------------- -------------
$ 11,625 $ 6,355 $ (19,731) $(20,131)
============= ============= =============== =============
The assumptions used in the measurement of the Company's benefit obligations at
January 2, 1999 and January 3, 1998 were:
Pension Benefits Other Benefits
1998 1997 1998 1997
------------ ------------- ------------- ------------
Discount rate 6.5% 7.0% 6.5% 7.0%
Expected return on plan assets 9.5% 9.5%
Rate of salary increase 5.0% 5.0%
For measurement purposes, a 9.7% average health care cost trend rate was used
for 1999. The rate is assumed to decline gradually each year to an ultimate rate
of 5.5% in 2007 and thereafter. A 1% change in assumed health care cost trend
rates would have the following effects:
(Dollars in thousands)
1% Increase 1% Decrease
------------------- -----------------
Net periodic benefit cost $ 155 $ (140)
Accumulated post-retirement
benefit obligation $ 1,273 $ (1,146)
-24-
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTE C--PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS--Continued
The components of net periodic benefit cost are as follows:
(Dollars in thousands)
Pension Benefits Other Benefits
1998 1997 1996 1998 1997 1996
----------- ------------- ------------ ----------- ------------ -------------
Service cost $ 1,164 $ 922 $ 930 $ 289 $ 294 $ 279
Interest cost 5,306 5,483 5,574 1,206 1,027 1,092
Actual return on assets (9,257) (9,552) (9,572)
Net amortization and deferral 2,339 3,356 3,889 (149) (278) (252)
Curtailment loss 106 103
Defined contribution plans 853 771 772
----------- ------------- ------------ ----------- ------------ -------------
$ 405 $ 1,086 $ 1,696 $ 1,346 $ 1,043 $ 1,119
=========== ============= ============ =========== ============ =============
The Company remains contingently liable for post-retirement benefits of certain
businesses previously sold.
NOTE D--LITIGATION
The Company is a party to various 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 effect on the Company's
financial position.
NOTE E--PREFERRED AND PREFERENCE STOCK
The Company has authorized 1,200,000 and 3,000,000 shares of Serial Preferred
and Preference Stock, respectively, none of which is issued or outstanding at
January 2, 1999. The Company has reserved for issuance 200,000 shares of
Cumulative Redeemable Serial Preference Stock, Series II, without par value
("Series II Preference Stock"), which relates to the Rights Agreement, dated as
of September 8, 1998, between the Company and National City Bank (the "Rights
Agreement"). The Company adopted the Rights Agreement to replace its
then-existing shareholder rights plan, which expired on September 7, 1998.
Under the Company's Rights Agreement, each shareholder has the right to purchase
from the Company one one-hundredth of a share of the Series II Preference Stock,
subject to adjustment, upon payment of an exercise price of $44.75. The rights
will become exercisable only after a person or group acquires beneficial
ownership of or commences a tender or exchange offer for 15% or more of the
Company's Common Shares. Rights held by persons who exceed that threshold will
be void. In the event that a person or group acquires beneficial ownership of
15% or more of the Company's Common Shares, or a 15% shareholder merges into or
with the Company or engages in one of a number of self-dealing transactions,
each right would entitle its holder to purchase a number of the Company's Common
Shares (or, in certain cases, common stock of an acquirer) having a market value
of twice the right's exercise price.
The Company's Board of Directors may, at its option, redeem all rights for $0.01
per right, generally at any time prior to the rights becoming exercisable. The
rights will expire on September 20, 2008, unless earlier redeemed, exchanged or
amended by the Board of Directors.
-25-
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTE F--STOCK COMPENSATION PLANS
Under the 1994 Nonemployee Directors Stock Option Plan, the Company is
authorized to issue 60,000 common shares in non-qualified stock options. The
stock options become exercisable one year after date of grant and expire at the
end of ten years. At January 2, 1999 a total of 17,000 shares were available for
future grant of stock options under this plan.
On May 5, 1998, the Company's 1988 Incentive Equity Performance Plan expired. On
January 2, 1999, there were options outstanding under the Plan representing
1,422,300 shares of the Company's common stock. The options outstanding under
the Plan may be exercised through April 20, 2008, pursuant to the terms of the
stock option agreements.
On April 24, 1998, at the Company's Annual Meeting, the 1998 Incentive Equity
Plan, was approved by the shareholders for 650,000 shares of common stock. Under
the 1998 Incentive Equity Plan, the Company is authorized to issue incentive
stock options (ISOs), non-qualified stock options, stock appreciation rights
(SARs) and restricted or deferred stock. Stock options generally become
exercisable, in part, one year after date of grant and expire at the end of ten
years. At January 2, 1999, under this Plan, a total of 642,000 shares were
available for future grant.
A summary of the status of the Company's three stock compensation plans as of
January 2, 1999, January 3, 1998 and December 28, 1996, and changes during the
respective years then ended is presented below:
(Shares in thousands)
1998 1997 1996
------------------------------- -------------------------------- --------------------
Weighted- Weighted- Weighted-
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
---------- -------------------- ---------- ----------------- --------- --------------
Outstanding at beginning of year 1,177 $ 6.83 1,138 $ 6.58 933 $ 6.04
Granted 461 6.91 251 7.91 229 8.76
Exercised (30) 5.54 (113) 5.55 (9) 5.29
Forfeited (135) 8.47 (99) 8.16 (15) 7.60
---------- -------------------- ---------- ---------------- ---------- --------------
Outstanding at end of year 1,473 $ 6.73 1,177 $ 6.83 1,138 $ 6.58
========== ==================== ========== ================ ========== ==============
Options exercisable at year-end 899 841 896
Weighted-average fair value of options
granted during the year $ 2.55 $ 2.97 $ 3.32
-26-
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTE F--STOCK COMPENSATION PLANS--Continued
The following table summarizes information about options outstanding at January
2, 1999:
Options Outstanding Options Exercisable
------------------------------------------------------- ---------------------------------
Weighted-Average
Range of Shares Remaining Weighted-Average Shares Weighted-Average
Exercise Prices at 1/2/99 Contractual Life (Yrs) Exercise Price at 1/2/99 Exercise Price
--------------- --------- ---------------------- -------------- --------- --------------
$ 0-5 168,300 2.33 $ 4.43 160,300 $ 4.43
5-10 1,293,500 6.92 7.00 727,164 6.78
10-15 11,500 7.40 10.24 11,500 10.24
The Company applies Accounting Principles Board Opinion No. 25 "Accounting for
Stock Issued to Employees" and related interpretations in accounting for its
stock-based plans. Accordingly, compensation cost has not been recognized for
the fixed stock compensation plans. Had compensation expense been recognized
following SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's
net income and earnings per share would have been reduced to the pro forma
amounts indicated below:
(Dollars in thousands, except per share data)
Fiscal Years
-----------------------------------------------
1998 1997 1996
-----------------------------------------------
Net income (loss) As reported $ 6,679 $ (9,653) $ 13,628
Pro forma 6,230 (9,932) 13,383
Basic earnings (loss) per share As reported $ 0.50 $ (0.72) $ 1.02
Pro forma 0.46 (0.74) 1.01
Diluted earnings (loss) per share As reported $ 0.50 $ (0.72) $ 1.00
Pro forma 0.46 (0.74) 0.98
For pro forma calculations, the fair value of each stock option grant is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions used for grants:
--------------------------------------------------------
1998 1997 1996
--------------------------------------------------------
Expected volatility 30.0% 28.9% 30.4%
Risk-free interest rates 5.62% 6.34% 6.0%
Average expected life 5 years 5 years 5 years
-27-
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTE G--EARNINGS PER SHARE CALCULATION
The following table sets forth the computation of basic and diluted earnings per
share:
(Dollars and shares in thousands,
except per share data) Fiscal Years
-------------------------------
1998 1997 1996
-------------------------------
BASIC EARNINGS (LOSS) PER SHARE COMPUTATION
Net Income (Loss) $ 6,679 $ (9,653) $ 13,628
======== ======== ========
Average Common Shares Outstanding 13,433 13,349 13,297
======== ======== ========
Basic Earnings (Loss) Per Share $ 0.50 $ (0.72) $ 1.02
======== ======== ========
DILUTED EARNINGS (LOSS) PER SHARE COMPUTATION
Net Income (Loss) $ 6,679 $ (9,653) $ 13,628
======== ======== ========
Basic Shares Outstanding 13,433 13,349 13,297
Stock Options Calculated Under
the Treasury Stock Method 55 344
-------- -------- --------
Total Shares 13,488 13,349 13,641
======== ======== ========
Diluted Earnings (Loss) Per Share $ 0.50 $ (0.72) $ 1.00
======== ======== ========
NOTE H--INCOME TAXES
The Company has recognized net federal income tax benefits as follows:
(Dollars in thousands)
1998 1997 1996
---- ---- ----
Current $ (100) $ 200
----------- ------------ -----------
(100) 200
Deferred $ (2,100) (1,450) (4,300)
------------ ------------ -----------
$ (2,100) $ (1,550) $ (4,100)
============ ============ ===========
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTE H--INCOME TAXES--Continued
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities are presented below:
(Dollars in thousands) Fiscal Years
---------------------------------
1998 1997
---------------------------------
Deferred tax assets:
Net operating loss carryforwards $ 18,200 $ 17,700
Other accruals, credits and reserves 8,100 7,200
General business and alternative minimum tax credits 2,700 2,700
Post-retirement benefits other than pensions 7,000 7,000
-------------- --------------
36,000 34,600
Less: valuation allowance (14,500) (18,800)
-------------- --------------
Total deferred tax assets 21,500 15,800
Deferred tax liabilities:
Tax in excess of book depreciation 5,750 4,350
Pensions 4,000 1,800
-------------- --------------
Total deferred tax liabilities 9,750 6,150
-------------- --------------
Total net deferred tax assets $ 11,750 $ 9,650
============== ==============
The valuation allowance for net deferred tax assets decreased by $4,300,000 in
1998. The reduction was the result of net changes in temporary differences and
the reversal of $2,100,000 of the valuation allowance, based on improved
operating results in 1998 and projected operating results in 1999. The Company
has available net operating loss carryforwards totaling approximately $52
million which expire in the years 2001 to 2012. The Company also has available
general business tax credit carryforwards of $1.8 million which expire through
2012 and alternative minimum tax credit carryforwards of approximately $1
million which may be carried forward indefinitely.
The provision for income taxes is different than the amount computed using the
applicable statutory federal income tax rate with the differences summarized
below:
(Dollars in thousands) Fiscal Years
-----------------------------------------------------
1998 1997 1996
-----------------------------------------------------
Tax expense (benefit) at statutory rates $ 1,603 $ (3,921) $ 3,335
Adjustment due to:
Change in valuation allowance (4,300) 1,900 (6,600)
Other 597 471 (835)
-------------- --------------- --------------
$ (2,100) $ (1,550) $ (4,100)
============== =============== ==============
Income taxes paid in 1998 and 1996 were $11,000 and $282,000, respectively. In
1997, the Company received an income tax refund of $175,000.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTE I--CHANGE IN ACCOUNTING PRINCIPLE
As required by Emerging Issues Task Force (EITF) Issue No. 97-13, "Business
Process Re-engineering Costs," the Company changed its accounting policy in the
fourth quarter of 1997, regarding its business and information technology
project. Prior to the issuance of the consensus opinion, substantially all
direct costs relating to the project were capitalized, including the portion
related to business process re-engineering. Under the EITF consensus, all costs
for business process re-engineering must be expensed as incurred and the
unamortized balance of these costs of $4.9 million were written off as a
cumulative adjustment in the fourth quarter of 1997.
NOTE J--ACQUISITION AND PENDING DISPOSITION OF BUSINESSES
In October 1996, the Company acquired all the outstanding shares of Dimango
Products Corporation for $5,400,000 (including the assumption of debt). The
results of operations for Dimango from the date of acquisition are included in
the Company's consolidated statements of operations.
On December 11, 1998, the Company executed an agreement to sell substantially
all of its PVC pipe business assets and certain liabilities to Eagle Pacific
Industries, Inc. (Eagle) for $45 million in cash, $6 million in Eagle
subordinated notes, 785,000 shares of Eagle common stock and $6 million in
retained net working capital. The proposed sale transaction is conditioned upon
antitrust clearance and approval of Eagle shareholders of a related merger
agreement and is expected to close in the second quarter of 1999. Net sales for
the PVC pipe product lines being sold were $111.3 million, $114.4 million and
$136.2 million in 1998, 1997 and 1996, respectively.
NOTE K--BUSINESS SEGMENTS
The Company's reportable segments are as follows:
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 to this segment include rigid conduit, 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 traditional smooth wall communication duct and spacers used by
telecommunication and CATV industries to house telecommunications cable,
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 merchandise for the "do-it-yourself" 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, the
Company supplies this market with products such as outlet boxes, electrical
conduit, liquidtight conduit and electrical fittings.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTE K - BUSINESS SEGMENTS -- Continued
LAMSON VYLON PIPE - ENGINEERED SEWER PRODUCTS. Provides engineered sewer
products to various municipalities and private contractors for drainage systems
and sewer construction and rehabilitation. Principal products utilized by this
segment include closed profile engineered sewer pipe for new sewer construction
and existing sewer line rehabilitation. The products range in diameter from 4 to
54 inches.
(Dollars in thousands)
1998 1997 1996
----------------- ----------------- ------------------
NET SALES
Carlon $ 193,693 $ 194,044 $ 205,211
Lamson Home Products 57,443 59,983 55,199
Lamson Vylon Pipe 19,778 17,753 28,642
----------------- ----------------- ------------------
$ 270,914 $ 271,780 $ 289,052
================= ================= ==================
OPERATING INCOME (LOSS)
Carlon $ 15,345 $ 9,443 $ 18,808
Lamson Home Products (669) (2,735) 1,686
Lamson Vylon Pipe 2,109 (1,479) 59
Corporate Office (7,865) (7,724) (8,414)
----------------- ----------------- ------------------
$ 8,920 $ (2,495) $ 12,139
================= ================= ==================
IDENTIFIABLE ASSETS
Carlon $ 78,558 $ 84,428 $ 88,768
Lamson Home Products 34,674 40,032 40,411
Lamson Vylon Pipe 15,037 13,869 14,645
Corporate Office 32,398 30,646 17,297
----------------- ----------------- ------------------
$ 160,667 $ 168,975 $ 161,121
================= ================= ==================
DEPRECIATION AND AMORTIZATION
Carlon $ 5,855 $ 5,087 $ 5,371
Lamson Home Products 2,906 2,494 2,230
Lamson Vylon Pipe 1,196 1,107 1,169
----------------- ----------------- ------------------
$ 9,957 $ 8,688 $ 8,770
================= ================= ==================
Substantially all sales are made within North America. Net sales to a single
customer within the Carlon segment totaled approximately 15% in 1998 and 13% in
1997 and 1996 of consolidated net sales.
NOTE L--RESTRUCTURING CHARGE
During the fourth quarter of 1998 the Company recorded a restructuring charge of
$792,000 when it entered into a commitment to have a new distribution center
constructed in South Carolina in order to consolidate distribution activities.
The charge, which is included in cost of products sold, consisted primarily of a
write-down of certain inventory to net realizable value.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTE M--SUMMARY OF QUARTERLY RESULTS OF OPERATIONS--(UNAUDITED)
(Dollars in thousands, except per share data)
Basic Earnings (Loss) Diluted Earnings (Loss)
Per Common Share Per Common Share
------------------------------ -----------------------------
Net Income (Loss) Before Net Income (Loss) Before Net Market Price
Net Gross Income Cumulative Effect of Income Cumulative Effect of Income PER SHARE
Sales Profit (Loss) Accounting Change (Loss) Accounting Change (Loss) High Low
----- ------ ------ ----------------- ------ ----------------- ------ ---- ---
Fiscal 1998:
First quarter $ 64,794 $ 12,258 $ (326) $ (0.02) $ (0.02) $ (0.02) $ (0.02) $7-7/16 $ 5-5/8
Second quarter 71,168 14,374 2,351 0.18 0.18 0.17 0.17 7-5/8 5-5/8
Third quarter 73,160 15,275 3,611 0.27 0.27 0.27 0.27 6-9/16 3-7/8
Fourth quarter 61,792 10,910 1,043 0.08 0.08 0.08 0.08 6-1/8 4-1/4
-------- -------- -------- -------- --------- --------- --------
Total $270,914 $ 52,817 $ 6,679 $ 0.50* $ 0.50* $ 0.50 $ 0.50
Fiscal 1997:
First quarter $ 68,844 $ 14,893 $ 2,157 $ 0.16 $ 0.16 $ 0.16 $ 0.16 $ 8-1/2 $ 6-3/4
Second quarter 72,439 12,772 1,975 0.15 0.15 0.15 0.15 8-3/4 7-1/4
Third quarter 70,492 8,353 (5,647) (0.42) (0.42) (0.42) (0.42) 8-5/8 7-3/8
Fourth quarter 60,005 9,313 (8,138) (0.24) (0.61) (0.24) (0.61) 7-3/16 5-13/16
-------- -------- -------- -------- --------- --------- --------
Total $271,780 $ 45,331 $ (9,653) $ (0.35) $ (0.72) $ (0.35) $ (0.72)
* Earnings per share were computed on a stand-alone quarterly basis for each
respective quarter. Therefore, the sum of the quarters in 1998 for Basic
Earnings Per Common Share does not equal the year's total due to rounding.
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REPORT OF INDEPENDENT AUDITORS
- ------------------------------
Board of Directors and Shareholders
The Lamson & Sessions Co.
We have audited the accompanying consolidated balance sheets of The Lamson &
Sessions Co. and Subsidiaries as of January 2, 1999 and January 3, 1998, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three fiscal years in the period ended January 2, 1999.
Our audits also included the financial statement schedule listed in the Index at
Item 14 (a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of The
Lamson & Sessions Co. and Subsidiaries at January 2, 1999 and January 3, 1998,
and the consolidated results of their operations and their cash flows for each
of the three fiscal years in the period ended January 2, 1999, in conformity
with generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in Note I to the financial statements, in 1997 the Company changed
its method of accounting for business process re-engineering costs.
Ernst & Young LLP
Cleveland, Ohio
January 28, 1999
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STATEMENT OF MANAGEMENT'S RESPONSIBILITY
----------------------------------------
We have prepared the financial statements and other financial information
contained in this Annual Report.
The management of Lamson & Sessions is primarily responsible for the integrity
of this financial information. The financial statements were prepared in
accordance with generally accepted accounting principles and necessarily include
certain amounts based on management's reasonable best estimates and judgments,
giving due consideration to materiality. Financial information contained
elsewhere in this Annual Report is consistent with that contained in the
financial statements.
Management is responsible for establishing and maintaining a system of internal
control designed to provide reasonable assurance as to the integrity and
reliability of financial reporting. The concept of reasonable assurance is based
on the recognition that there are inherent limitations in all systems of
internal control, and that the cost of such systems should not exceed the
benefits to be derived therefrom.
To meet management's responsibility for financial reporting, we have established
internal control systems that we believe are adequate to provide reasonable
assurance that our assets are protected from loss. These systems produce data
used for the preparation of published financial information and provide for
appropriate reporting relationships and division of responsibility. All
significant systems and controls are reviewed periodically by our internal
auditors in order to ensure compliance, and by our independent auditors to
support their audit work. It is management's policy to implement a high
proportion of recommendations resulting from these reviews.
The Audit Committee of the Board of Directors, composed solely of outside
directors, meets regularly with management, internal auditors and our
independent auditors to review accounting, auditing and financial matters. Both
the independent auditors and the internal auditors have free access to the Audit
Committee, with or without management, to discuss the scope and results of their
audits and the adequacy of the system of internal controls.
/s/ John B. Schulze
- ------------------------
John B. Schulze
Chairman of the Board, President and
Chief Executive Officer
/s/ James J. Abel
- ------------------------
James J. Abel
Executive Vice President, Secretary,
Treasurer and Chief Financial Officer
/s/ Lori L. Spencer
- ------------------------
Lori L. Spencer
Vice President and Controller
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PART II
Item 9. - DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
Item 10. - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Directors
The information set forth under the caption "Election of Directors"
in the Company's definitive proxy statement for its annual meeting
of shareholders to be held April 23, 1999 is hereby incorporated by
reference.
(b) Executive Officers - See Part I
(c) Compliance with Section 16 (a) of the Exchange Act.
The information set forth under the caption "Section 16(a)
Beneficial Ownership Reporting Compliance" in the Company's
definitive proxy statement for its annual meeting of shareholders
to be held April 23, 1999 is hereby incorporated by reference.
Item 11. - EXECUTIVE COMPENSATION
The information set forth under the caption "Executive Compensation" in the
Company's definitive proxy statement for its annual meeting of shareholders to
be held April 23, 1999 is hereby incorporated by reference.
Item 12. - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the captions "Ownership of the Company's Common
Shares," "Election of Directors" and "Security Ownership of Management" in the
Company's definitive proxy statement for its annual meeting of shareholders to
be held April 23, 1999 is hereby incorporated by reference.
Item 13. - CERTAIN RELATIONSHIPS AND RELATED TRANSACTION
During the past fiscal year, the Company, in the normal course of business,
utilized the services of the law firm of Jones, Day, Reavis & Pogue, in which
Mr. Coquillette, a director of the Company, is a partner. The Company plans to
continue using the services of the firm in 1999.
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PART IV
Item 14. - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
Consolidated financial statements of The Lamson & Sessions Co. and
Subsidiaries are included in Item 8 of this report:
1. Financial Statements
Consolidated Statements of Operations for Fiscal Years Ended
1998, 1997 and 1996.
Consolidated Statements of Cash Flows for Fiscal Years Ended
1998, 1997 and 1996.
Consolidated Balance Sheets at January 2, 1999 and January
3, 1998.
Consolidated Statements of Shareholders' Equity for Fiscal
Years Ended 1998, 1997 and 1996.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts and Reserves.
All other schedules for which provision is made in
the applicable accounting regulations of the
Securities and Exchange Commission are not required
under the related instructions or are inapplicable
and, therefore, have been omitted.
3. The exhibits listed in the accompanying Exhibit Index and
required by Item 601 of Regulation S-K (numbered in accordance
with Item 601 of Regulation S-K) are filed or incorporated by
reference as part of this Report.
(b) Reports on Form 8-K
1. The Company filed a current report on Form 8-K on September 9,
1998 disclosing that, on September 8, 1998, the Company entered
into a Rights Agreement with National City Bank.
2. The Company filed a current report on Form 8-K on December 28,
1998 disclosing that, on December 11, 1998, the Company executed
an agreement to sell substantially all of the assets and certain
liabilities of its polyvinyl chloride pipe business to Eagle
Pacific Industries, Inc.
(c) Exhibits - See 14(a) 3.
(d) Financial Statement Schedule
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SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(Dollars in thousands)
- ----------------------------------------------------------------------------------------------------------------------
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND END OF
DESCRIPTION PERIOD EXPENSES DEDUCTIONS PERIOD
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
YEAR ENDED JANUARY 2, 1999
Allowances deducted from assets:
Trade receivable allowances $ 2,975 $ 1,000 $ 1,051 (A) $ 2,924
Inventory obsolescence reserve 760 1,365 936 (B) 1,189
Other current and long-term assets 400 400
Accounts and loss reserves included in
current and long-term liabilities 4,241 15 (D) 4,226
- ----------------------------------------------------------------------------------------------------------------------
YEAR ENDED JANUARY 3, 1998
Allowances deducted from assets:
Trade receivable allowances $ 2,895 $ 1,022 $ 942 (A) $ 2,975
Inventory obsolescence reserve 606 420 266 (B) 760
Other current and long-term assets 2,222 1,822 (C) 400
Accounts and loss reserves included in
current and long-term liabilities 5,446 1,205 (D) 4,241
- ----------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 28, 1996
Allowances deducted from assets:
Trade receivable allowances $ 2,129 $ 1,314 $ 548 (A) $ 2,895
Inventory obsolescence reserve 933 360 687 (B) 606
Other current and long-term assets 2,757 535 (C) 2,222
Accounts and loss reserves included in
current and long-term liabilities 6,423 977 (D) 5,446
- ----------------------------------------------------------------------------------------------------------------------
Note A - Principally write-off of uncollectible accounts and disputed items, net of recoveries.
Note B - Principally the disposal of obsolete inventory.
Note C - Adjustment to reserves and collection of note receivable for previously sold businesses.
Note D - Principally payments on contractual obligations for previously sold businesses.
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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, on this 25th day of
February 1999.
THE LAMSON & SESSIONS CO.
By /s/ James J. Abel
------------------------------------
James J. Abel
Executive Vice President, Secretary,
Treasurer and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated as of February 25, 1999.
Signature Title
--------- -----
/s/ John B. Schulze Chairman of the Board, President
- -------------------
John B. Schulze and Chief Executive Officer
(Principal Executive Officer)
/s/ James J. Abel Executive Vice President, Secretary,
- -------------------
James J. Abel Treasurer and Chief Financial Officer
(Principal Financial Officer)
/s/ Lori L. Spencer Vice President and Controller
- -------------------
Lori L. Spencer (Principal Accounting Officer)
/s/ James T. Bartlett* Director
- ----------------------
James T. Bartlett
/s/ Francis H. Beam, Jr.* Director
- ------------------------
Francis H. Beam, Jr.
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39
/s/ Martin J. Cleary* Director
- ---------------------
Martin J. Cleary
/s/ William H. Coquillette* Director
- --------------------------
William H. Coquillette
/s/ John C. Dannemiller* Director
- ------------------------
John C. Dannemiller
/s/ George R. Hill* Director
- -------------------
George R. Hill
/s/ A. Malachi Mixon, III* Director
- --------------------------
A. Malachi Mixon, III
/s/ John C. Morley* Director
- -------------------
John C. Morley
/s/ D. Van Skilling* Director
- --------------------
D. Van Skilling
* The undersigned, by signing his name hereto, does sign and execute
this Annual Report on Form 10-K pursuant to a Power of Attorney
executed on behalf of the above named directors of The Lamson &
Sessions Co. and filed herewith as Exhibit 24 on behalf of The
Lamson & Sessions Co. and each such person.
February 25, 1999
By /s/ James J. Abel
--------------------------------
James J. Abel, Attorney-in-fact
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EXHIBIT INDEX
EXHIBIT NO.
- -----------
Management Contracts and Compensatory Plans are identified with an asterisk (*).
3(a) Amended Articles of Incorporation of the Company (incorporated by
reference to Exhibit 4(a) to the Company's Registration Statement on
Form S-8, Registration No. 333-32875) filed with the Securities and
Exchange Commission on August 5, 1997).
3(b) Amended Code of Regulations of the Company (incorporated by
reference to Exhibit 3(b) to the Company's Annual Report on Form
10-K for the year December 31, 1994).
4(a) Specimen Certificate of Common Shares, without par value with Rights
legend (incorporated by reference to Exhibit 3 to the Company's
Registration Statement on Form 8-A filed with the Securities and
Exchange Commission on September 9, 1998).
4(e) Form of Rights Certificate (incorporated by reference to Exhibit
4(oo) to the Company's Registration Statement on Form 8-A filed with
the Securities and Exchange Commission on September 9, 1998).
4(g) Rights Agreement, dated as of September 8, 1998, by and between the
Company and National City Bank (incorporated by reference to Exhibit
4.1 to the Company's Registration Statement on Form 8-A filed with
the Securities and Exchange Commission on September 9, 1998).
10(a) 1988 Incentive Equity Performance Plan (as of April 26, 1996)
(incorporated by reference to the Company's Registration Statement
on Form S-8, Registration No. 333-32875) filed with the Securities
and Exchange Commission on August 5, 1997.
10(b) Form of Three-Year Employment Agreement between the Company and
certain executive officers (incorporated by reference to Exhibit
10(b) to the Company's Annual Report on Form 10-K for the year ended
December 30, 1995).
10(c) Form of Two-Year Employment Agreement between the Company and
certain executive officers (incorporated by reference to Exhibit
10(c) to the Company's Annual Report on Form 10-K for the year ended
December 31, 1994).
10(d) Corporate Officers Incentive Compensation Plan (incorporated by
reference to Exhibit 10(d) to the Company's Annual Report on Form
10-K for the year ended December 31, 1994).
10(e) Form of Amended and Restated Supplemental Executive Retirement
Agreement dated as of March 20, 1990 between the Company and certain
of its executive officers (incorporated by reference to Exhibit
10(e) to the Company's Annual Report on Form 10-K for the year ended
December 30, 1995).
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10(f) The Company's Deferred Compensation Plan for Nonemployee Directors
(incorporated by reference to the Company's Registration Statement,
on Form S-8 (Registration No. 33-12585) filed with the Securities
and Exchange Commission on September 24, 1996).
10(g) Form of Indemnification Agreement between the Company and the
Directors and certain officers (incorporated by reference to Exhibit
10(g) to the Company's Annual Report on Form 10-K for the year ended
December 31, 1994).
10(h) The Company's Long-Term Incentive Plan (incorporated by
reference to Exhibit 10(h) to the Company's Annual Report on Form
10-K for the year ended December 28, 1996).
10(j) Mortgage and Security Agreement, dated October 29, 1993, between The
Lamson & Sessions Co. and PFL Life Insurance Company (incorporated
herein by reference to Exhibit 10(j) to the Company's Annual Report
on Form 10-K for the year ended January 1, 1994).
10(k) Asset Purchase Agreement between Iochpe-Maxion Ohio, Inc. and The
Lamson & Sessions Co. dated as of May 4, 1994 (incorporated by
reference to Exhibit 10 to the Company's Current Report on Form 8-K
dated as of May 27, 1994).
10(s) Amended and Restated Loan Agreement dated as of July 14, 1995 by and
between the Company and General Electric Capital Corporation
(incorporated by reference to Exhibit 10(g) to the Company's
Quarterly Report on Form 10-Q for the period ended July 1, 1995, the
"GECC Loan Agreement").
10(t) Amendment No. 1 dated as of October 30, 1995, to the GECC Loan
Agreement (incorporated by reference to Exhibit 10(t) to the
Company's Annual Report on Form 10-K for the year ended December 30,
1995).
10(u) Amendment No. 2 and Consent dated as of November 8, 1995 to the GECC
Loan Agreement (incorporated by reference to Exhibit 10(u) to the
Company's Annual Report on Form 10-K for the year ended December 30,
1995).
10(v) Amendment No. 3 dated as of March 31, 1996, to the GECC Loan
Agreement (incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the period ended March 30, 1996).
10(w) Amendment No. 4 dated as of October 25, 1996, to the GECC Loan
Agreement (incorporated by reference to Exhibit 10(w) to the
Company's Quarterly Report on Form 10-Q for the period ended
September 28, 1996).
10(y) Amendment No. 5 dated as of March 5, 1997, to the GECC Loan
Agreement (incorporated by reference to Exhibit 10(y) to the
Company's Annual Report on Form 10-K for the year ended December 28,
1996).
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42
10(z) The Company's Nonemployee Directors Stock Option Plan (incorporated
by reference to the Company's Registration Statement on Form S-8
(Registration No. 33-62443) filed with the Securities and Exchange
Commission on September 8, 1995).
10(aa) Amendment No. 6 dated as of July 24, 1997 to the GECC Loan Agreement
(incorporated by reference to Exhibit 10(aa) to the Company's
Quarterly Report on Form 10-Q for the period ended July 5, 1997).
10(ab) Amendment No. 7, dated as of January 30, 1998 to the GECC Loan
Agreement (incorporated by reference to Exhibit 10(ab) to the
Company's Annual Report on Form 10-K for the year ended January 3,
1998).
10(ac) Amendment to the 1988 Incentive Equity Performance Plan (as amended
as of February 26, 1998) (incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended January 3, 1998).
10(ad) Amendment to The Lamson & Sessions Co. Deferred Savings Plan (as
amended February 26, 1998) (incorporated by reference to the
Company's Registration Statement on Form S-8, (Registration No.
333-46953) filed with the Securities and Exchange Commission on
February 26, 1998).
10(ae) 1998 Incentive Equity Plan (incorporated by reference to the
Company's Registration Statement on Form S-8, (Registration No.
333-61911) filed with the Securities and Exchange Commission on
August 20, 1998).
10(af) 1988 Incentive Equity Performance Plan (as amended as of February
26, 1998) (incorporated by reference to the Company's Registration
Statement on Form S-3, (Registration No. 333-65795) filed with the
Securities and Exchange Commission on October 16, 1998).
10(ag) Amendment No. 8, dated as of January 29, 1999, to the GECC Loan
Agreement filed herewith.
10(ah) Amendment to the Nonemployee Directors Stock Option Plan effective
as of February 25, 1999 filed herewith.
21 Subsidiaries of the Registrant filed herewith.
23 Consent of Independent Auditors filed herewith.
24 Powers of Attorney filed herewith.
27 Financial Data Schedule (Submitted for the SEC's Information) filed
herewith.
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