| Consolidated Statements of Income for the Years ended December
31, 2004, 2003 and 2002.
Consolidated Statements of Changes in Stockholders' Equity for
the Years ended December 31, 2004, 2003 and 2002.
Consolidated Statements of Cash Flows for the Years ended
December 31, 2004, 2003 and 2002.
Notes to Consolidated Financial Statements.
Schedule II
-14-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
Lawson Products, Inc.
We have audited the accompanying consolidated balance sheets of Lawson Products,
Inc. and subsidiaries as of December 31, 2004 and 2003, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 2004. Our
audits also included the financial statement schedule listed in the Index at
Item 15(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on the
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Lawson Products,
Inc. and subsidiaries at December 31, 2004 and 2003, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2004, in conformity with U.S. 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 B to the financial statements, in 2003 the Company changed
its method of accounting for its investment in a real estate partnership.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Lawson
Products, Inc. and subsidiaries internal control over financial reporting as of
December 31, 2004, based on criteria established in Internal Control--Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated March 10, 2005 expressed an unqualified opinion
thereon.
/s/Ernst & Young LLP
Chicago, Illinois
March 10, 2005
-15-
LAWSON PRODUCTS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands) DECEMBER 31,
---------------------------------------------
2004 2003
------------------ ------------------
Assets
Current assets:
Cash and cash equivalents $ 28,872 $ 23,555
Accounts receivable, less allowance for doubtful
accounts
(2004 -$1,986, 2003 - $2,121) 52,129 47,972
Inventories 65,687 59,817
Miscellaneous receivables 2,081 4,773
Prepaid expenses 7,479 6,666
Deferred income taxes 1,729 1,975
------------------------ --------------------
Total Current Assets 157,977 144,758
------------------------ --------------------
Property, plant and equipment, at cost, less allowances for
depreciation and amortization (2004 - $58,837; 2003 - $58,692) 42,452 44,905
------------------------ --------------------
Other assets:
Cash value of life insurance 15,089 13,201
Deferred income taxes 14,779 13,201
Goodwill, less accumulated amortization 28,649 28,649
Other intangible assets, less accumulated amortization
(2004 - $1,335; 2003 - $1,219) 1,365 1,481
Other 239 748
------------------------ --------------------
60,121 57,280
------------------------ --------------------
$ 260,550 $ 246,943
======================== ====================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 8,746 $ 8,240
Accrued expenses and other 32,628 27,176
Current portion of long term debt 1,573 1,462
------------------------ --------------------
Total Current Liabilities 42,947 36,878
------------------------ --------------------
Noncurrent liabilities and deferred credits:
Accrued liability under security bonus plans 21,528 20,823
Long term debt -- 1,573
Deferred compensation and other liabilities 15,743 14,318
------------------------ --------------------
37,271 36,714
------------------------ --------------------
Stockholders' equity:
Preferred Stock, $1 par value: Authorized - 500,000
shares;
Issued and outstanding - None -- --
Common Stock, $1 par value: Authorized - 35,000,000
shares;
Issued - 2004- 9,280,935 shares; 2003 - 9,493,511 9,281 9,494
shares
Capital in excess of par value 3,467 2,667
Retained earnings 167,187 161,831
------------------------ --------------------
179,935 173,992
Accumulated other comprehensive income (loss) 397 (641)
------------------------ --------------------
Stockholders' equity 180,332 173,351
------------------------ --------------------
$ 260,550 $ 246,943
======================== ====================
See notes to consolidated financial statements
-16-
LAWSON PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
2004 2003 2002
---------------- --------------- --------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales $ 419,652 $389,091 $387,456
Cost of goods sold 155,971 141,124 137,129
-------------------------------------------------------
Gross profit 263,681 247,967 250,327
Selling, general and administrative expenses 231,762 221,189 226,571
Other charges -- 2,459 360
Provision for doubtful accounts 1,108 1,578 1,585
-------------------------------------------------------
Operating Income 30,811 22,741 21,811
-------------------------------------------------------
Interest and dividend income 122 194 53
Interest expense (184) (131) (154)
Other income - net 2,689 2,088 1,479
-------------------------------------------------------
2,627 2,151 1,378
-------------------------------------------------------
Income Before Income Taxes 33,438 24,892 23,189
Income tax expense 12,013 8,696 10,742
-------------------------------------------------------
Net Income $ 21,425 $ 16,196 $ 12,447
=======================================================
Net Income Per Share of Common Stock:
Basic $ 2.28 $ 1.71 $ 1.30
=======================================================
Diluted $ 2.27 $ 1.70 $ 1.30
=======================================================
See notes to consolidated financial statements
-17-
LAWSON PRODUCTS, INC.
CHANGES IN STOCKHOLDERS' EQUITY
CONSOLIDATED STATEMENTS
ACCUMULATED
COMMON CAPITAL OTHER
(DOLLARS IN THOUSANDS) STOCK, IN EXCESS OF RETAINED COMPREHENSIVE COMPREHENSIVE
$1 PAR VALUE PAR VALUE EARNINGS INCOME (LOSS) INCOME
------------ ------------- ---------------- ------------------ ----------
Balance at January 1, 2002 $9,629 $913 $151,554 $(2,198) $ --
Net income 12,447 12,447
Other comprehensive loss, net of tax:
Adjustment for foreign currency translation 165 165
-------------
Comprehensive income for the year $ 12,612
=============
Cash dividends declared (6,115)
Stock issued under employee stock plans 61 1,510
Purchase and retirement of common stock (196) (36) (5,391)
- ------------------------------------------ ------------------- -------------- ----------------- ------------------ ----------------
Balance at December 31, 2002 9,494 2,387 152,495 (2,033)
- ------------------------------------------ ------------------- -------------- ----------------- ------------------ ----------------
Net income 16,196 $ 16,196
Other comprehensive income, net of tax:
Adjustment for foreign currency 1,392 1,392
-------------
translation
Comprehensive income for the year $ 17,588
=============
Cash dividends declared (6,265)
Stock issued under employee stock plans 20 285
Purchase and retirement of common stock (20) (5) (595)
- ------------------------------------------ ------------------- -------------- ----------------- ------------------ ----------------
Balance at December 31, 2003 9,494 2,667 161,831 (641)
- ------------------------------------------ ------------------- -------------- ----------------- ------------------ ----------------
Net income 21,425 $ 21,425
Other comprehensive income, net of tax:
Adjustment for foreign currency 1,038 1,038
-------------
translation
Comprehensive income for the year $ 22,463
=================
Cash dividends declared (6,751)
Stock issued under employee stock plans 36 884
Purchase and retirement of common stock (249) (84) (9,318)
- ------------------------------------------ ------------------- -------------- ----------------- ------------------ ----------------
Balance at December 31, 2004 $9,281 $3,467 $167,187 $397
- ------------------------------------------ ------------------- -------------- ----------------- ------------------ ----------------
See notes to consolidated financial statement
-18-
LAWSON PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands) YEAR ENDED DECEMBER 31,
---------------------------------------------------------
2004 2003 2002
---------------- --------------- -----------------
Operating activities
Net income $ 21,425 $ 16,196 $ 12,447
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 5,299 5,359 5,506
Amortization 1,393 1,744 1,321
Provision for allowance for doubtful accounts 1,108 1,578 1,585
Deferred income taxes (1,775) (476) (2,177)
Deferred compensation and security bonus plans 5,060 5,466 2,704
Payments under deferred compensation
and security bonus plans (2,832) (2,099) (1,635)
Income from investments in real estate --- (360) (600)
Changes in operating assets and liabilities:
Accounts receivable (5,265) (5,888) 1,165
Inventories (5,870) 4,902 1,692
Prepaid expenses and other assets (89) (2,678) 5,557
Accounts payable and accrued expenses 5,998 3,176 1,958
Other 1,383 991 129
-----------------------------------------------------
Net Cash Provided by Operating Activities 25,835 27,911 29,652
-----------------------------------------------------
Investing activities
Additions to property, plant and equipment (3,784) (5,734) (6,655)
Other 250 286 756
-----------------------------------------------------
Net Cash Used in Investing Activities ( 3,534) (5,448) (5,899)
-----------------------------------------------------
Financing Activities
Proceeds from revolving line of credit --- 4,000 36,500
Payments on revolving line of credit --- (4,000) (50,500)
Payments on mortgage payable (1,462) (805) ---
Purchases of common stock (9,651) (620) (5,623)
Proceeds from exercise of stock options 920 305 1,571
Dividends paid (6,791) (6,075) (6,138)
-----------------------------------------------------
Net Cash Used in Financing Activities (16,984) (7,195) (24,190)
-----------------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents 5,317 15,268 (437)
Cash and Cash Equivalents at Beginning of Year 23,555 8,287 8,724
-----------------------------------------------------
Cash and Cash Equivalents at End of Year $ 28,872 $23,555 $ 8,287
=====================================================
See notes to consolidated financial statements
-19-
LAWSON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS)
NOTE A - DESCRIPTION OF BUSINESS
Lawson Products, Inc. is an international seller and distributor of
systems, services and products to the industrial, commercial and institutional
maintenance, repair and replacement marketplace. The Company also manufactures,
sells and distributes production and specialized component parts to the original
equipment marketplace ("OEM").
NOTE B - SUMMARY OF MAJOR ACCOUNTING POLICIES
Principles of Consolidation: The accompanying consolidated financial
statements include the accounts and transactions of the Company and its wholly
owned and majority owned subsidiaries. All intercompany accounts and
transactions have been eliminated in consolidation.
Revenue Recognition: Sales and associated cost of goods sold are
recognized when products are shipped and title passes to customers.
Shipping and Handling Fees and Costs: Costs related to shipping and
handling fees are included on the Income Statement in the caption Selling,
general and administrative expenses and totaled $11,565, $11,159 and $11,898 in
2004, 2003 and 2002, respectively.
Use of Estimates: The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from these estimates.
Investment in Real Estate Partnership: The Company's investment in real
estate, representing a limited partnership interest, was carried on the basis of
the equity method until June 30, 2003. The Company adopted FIN 46 as of July 1,
2003, which has resulted in the consolidation of the Company's investment in a
limited partnership, which owns an office building in Chicago, Illinois. An
officer and member of the Board of Directors of the Company is the 1.5% general
partner. (See Note I) The operations of the partnership consist of rental of the
building under a long-term lease and the servicing of the non-recourse mortgage.
The activities are insignificant for separate disclosure.
Inventories: Inventories which consist of principally finished goods
are stated at the lower of cost (first-in, first-out method) or market. (See
Note E)
Property, Plant and Equipment: Provisions for depreciation and
amortization are computed by the straight-line method for buildings using useful
lives of 20 to 30 years and by the double declining balance method for machinery
and equipment, furniture and fixtures and vehicles using useful lives of 3 to 10
years.
Investment Tax Credits: Investment tax credits on assets leased to
others are deferred and amortized over the useful life of the related asset.
Cash Equivalents: The Company considers all highly liquid investments
with a maturity of three months or less when purchased to be cash equivalents.
Stock Options: Stock options are accounted for under Accounting
Principles Board Opinion No. 25 (APB 25), "Accounting For Stock Issued to
Employees." Under APB 25, the Company uses the intrinsic value method where no
compensation expense is recognized because the exercise price of the stock
options granted equals the market price of the underlying stock at the date of
grant.
The following table shows the effect on net income and earnings per
share if the Company had applied the fair value recognition provision of FASB
Statement No. 123, "Accounting for Stock-Based Compensation."
2004 2003 2002
- --------------------------------------------------------------------------------
Net income - as reported $ 21,425 $16,196 $12,447
Deduct: Total stock based
employee compensation
expense determined under
fair value method, net of tax (6) (27) (38)
- --------------------------------------------------------------------------------
Net income - pro forma 21,419 16,169 12,409
Basic earnings per share - as reported 2.28 1.71 1.30
Diluted earnings per share - as reported 2.27 1.70 1.30
-20-
Basic earnings per share - pro forma 2.28 1.70 1.30
Diluted earnings per share - pro forma 2.27 1.70 1.29
For purposes of pro forma disclosures, the estimated fair value of
options granted is amortized as an expense over the option's vesting period. The
pro forma effect on net income is not representative of the pro forma effect on
net income in future years because grants made in 1996 and later years have an
increasing vesting period.
Goodwill and Other Intangibles: Goodwill represents the cost of
business acquisitions in excess of the fair value of identifiable net tangible
assets acquired. (See Note G)
Foreign Currency Translation: The financial statements of foreign
entities have been translated in accordance with Statement of Financial
Accounting Standards No. 52 and, accordingly, unrealized foreign currency
translation adjustments are reflected as a component of stockholders' equity.
Realized foreign currency transaction gains and losses were not significant for
the years ended December 31, 2004, 2003 and 2002.
Income Per Share: Basic EPS is computed by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted
EPS reflects the potential dilution from the exercise or conversion of
securities into common stock, such as stock options.
Reclassifications: Certain amounts have been reclassified in the 2003
and 2002 financial statements to conform with the 2004 presentation.
NOTE C - BUSINESS COMBINATION
Sale of Lawson Products Limited, UK Subsidiary:
In the fourth quarter of 2003, the Company sold its UK subsidiary, Lawson
Products Limited, engaged primarily in the business of MRO sales, to a third
party for approximately $647. The purchase price is in the form of a note
payable to the Company over two years. Prior to the sale, the Company
transferred certain assets and liabilities related to the OEM portion of this
business to a newly formed subsidiary, Assembly Components Systems Limited. The
sale of Lawson Products Limited resulted in a pre-tax loss of approximately
$2,789, largely related to inventory write-offs and termination costs associated
with the sale. This loss is classified in Selling, general and administrative
expenses in the statement of income. This business was part of the Company's OEM
International distribution segment.
The sale also generated approximately $22,441 in capital losses for tax
purposes. The Company was able to carryback $6,163 of the capital loss to offset
capital gains in prior years tax returns. The effect of the carryback resulted
in $2,157 of tax benefit in 2003 for financial statement purposes. A valuation
allowance has been provided for the remainder of the capital loss due to the
uncertainty of utilization.
NOTE D - OTHER CHARGES
In 2003, the Company recorded charges totaling $2,459 for severance
payable to several members of management. Benefits of $1,175 and $422 were paid
in 2004 and 2003 respectively. The remaining benefits will be paid through 2006.
During 2002, the Company recorded a charge of $568 for severance
payable to several members of management and a $208 adjustment to the reserve
resulting from a severance settlement. Benefits of $92 and $155 were paid in
2004 and 2003 respectively. The remaining benefits will be paid in future years.
-21-
The table below shows an analysis of the Company's reserves for other charges:
Severance
Description of Item and Related
Expenses
- -----------------------------------------------
Balance January 1, 2002 $1,458
Charged to earnings 2002 568
Cash paid in 2002 (942)
Non-cash utilization ---
Adjustment to reserves (208)
- -----------------------------------------------
Balance December 31, 2002 876
Charged to earnings 2003 2,459
Cash paid in 2003 (859)
- -----------------------------------------------
Balance December 31, 2003 2,476
Cash paid in 2004 (1,434)
- -----------------------------------------------
Balance December 31, 2004 $1,042
===============================================
NOTE E - INVENTORIES
The following is a summary of inventories and reserve for excess and
obsolete inventory.
2004 2003
- --------------------------------------------------------------------------------
Inventories $ 68,759 $ 64,958
Reserve for excess and obsolete inventory (3,072) (5,141)
- --------------------------------------------------------------------------------
$ 65,687 $ 59,817
================================================================================
NOTE F - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of:
2004 2003
- --------------------------------------------------------------------------------
Land $ 8,472 $ 8,389
Buildings and improvements 51,839 51,556
Machinery and equipment 30,084 30,143
Furniture and fixtures 5,611 5,749
Vehicles 359 432
Capitalized software 4,372 6,771
Construction in progress 552 557
- -------------------------------------------------------------------------------
101,289 103,597
Accumulated Depreciation and amortization (58,837) (58,692)
- -------------------------------------------------------------------------------
$ 42,452 $ 44,905
===============================================================================
-22-
NOTE G- GOODWILL AND OTHER INTANGIBLES
The Company adopted FASB statement No. 142 "Goodwill and Other
Intangibles" as of January 1, 2002. The Company performed its annual impairment
test in the fourth quarter of 2004 and determined the Company's goodwill was not
impaired.
Intangible assets subject to amortization were as follows:
Gross Accumulated Net Carrying
December 31, 2004 Balance Amortization Amount
- --------------------------------------------------------------------------------
Trademarks and tradenames $1,747 $935 $812
Customer lists 953 400 553
- --------------------------------------------------------------------------------
$2,700 $1,335 $1,365
================================================================================
Gross Accumulated Net Carrying
December 31, 2003 Balance Amortization Amount
- --------------------------------------------------------------------------------
Trademarks and tradenames $1,747 $851 $896
Customer lists 953 368 585
- --------------------------------------------------------------------------------
$2,700 $1,219 $1,481
================================================================================
Trademarks and tradenames are being amortized over a weighted average
15.14 years. Customer lists are being amortized over 13.96 years. Amortization
expense, all of which was included in the MRO distribution segment, for the
intangible assets was $116, $518 and $377 in 2004, 2003 and 2002, respectively.
Amortization expense for each of the next five years is estimated to be $83 per
year.
NOTE H - ACCRUED EXPENSES AND OTHER
Accrued expenses and other liabilities consist of the following:
2004 2003
- ---------------------------------------------- --------------- -----------------
Salaries, commissions and other compensation $11,369 $ 6,802
Accrued other charges 1,042 2,476
Accrued and withheld taxes, other than income
taxes 2,644 2,591
Accrued profit sharing contributions 3,626 3,448
Accrued stock performance rights 2,081 654
Accrued self-insured health benefits 1,560 1,800
Cash dividends payable 1,670 1,709
Other 8,636 7,696
- ---------------------------------------------- --------------- -----------------
$32,628 $27,176
============================================== =============== =================
NOTE I - LONG TERM DEBT
On July 1, 2003, the Company adopted FIN No. 46 which has resulted in the
Company's consolidated of an investment in a limited partnership which owns an
office building in Chicago, Illinois. In conjunction with the consolidation of
its investment, the Company has recorded long-term debt, which represents a
non-recourse mortgage payable relative to the building. The interest rate of the
non-recourse mortgage payable is 7.315%, with a maturity date of December 31,
2005. The building and the land have a net carrying value of $4,184, which are
included in property, plant and equipment. The remaining assets, none of which
are significant, are recorded in other assets.
The Company's mortgage obligations in effect at December 31, 2004 and 2003, with
respect to this office building, amounted to approximately $1,573 and $3,035,
respectfully. Mortgage payments are payable as follows: 2005-$1,573. Interest
expense related to the mortgage totaled $171 and $124 in 2004 and 2003,
respectfully.
On February 21, 2001, the Company entered into a $50 million unsecured
multi-currency line of credit. The Company had no loans outstanding under the
line at December 31, 2004 and 2003. Amounts outstanding under the line carry
-23-
interest at 1.5% below the prime rate or .75% over LIBOR. The line matures on
February 21, 2006. The line requires the Company to meet certain covenants, all
of which were met on December 31, 2004. The Company paid interest of $0, $7 and
$220, respectively, in 2004, 2003 and 2002.
NOTE J - STOCK PLANS
The Incentive Stock Plan (Plan), provides for the issuance of shares of Common
Stock to non-employee directors, officers and key employees pursuant to stock
options, stock performance rights (SPRs), stock purchase agreements and stock
awards. As of December 31, 2004, 519,327 shares of Common Stock were available
for issuance under the Plan.
In 2003 and 2002, the Company granted SPRs pursuant to the Plan. These SPRs have
exercise prices ranging from $24.64 to $33.15 per share. These SPRs vest at 20%
per year and entitle the recipient to receive a cash payment equal to the excess
of the market value of the Company's common stock and the SPR price when the
SPRs are surrendered. Compensation expense for the SPRs in 2004, 2003 and 2002
was $2,620, $410 and $244, respectively.
Additional information with respect to SPRs is summarized as follows:
Average SPR
Exercise Price # of SPR's
- ------------------------------------------- ------------------ -----------------
Outstanding January 1, 2002 (1) $ 26.90 230,350
Granted (2) 30.74 18,000
- ------------------------------------------- ------------------ -----------------
Outstanding December 31, 2002 27.18 248,350
Granted (3) 27.85 31,500
Exercised 26.77 (1,900)
- ------------------------------------------- ------------------ -----------------
Outstanding December 31, 2003 27.26 277,950
Exercised 26.76 (66,450)
Canceled 27.45 (22,500)
- ------------------------------------------- ------------------ -----------------
Outstanding December 31, 2004 $ 27.41 189,000
=========================================== ================== =================
(1) Includes 84,560 SPRs vested at December 31, 2004
(2) Includes 5,200 SPRs vested at December 31, 2004
(3) Includes 1,000 SPRs vested at December 31, 2004
The Plan permits the grant of incentive stock options, subject to
certain limitations, with substantially the same terms as non-qualified stock
options. Non-employee directors are not eligible to receive incentive stock
options. Stock options are not exercisable within six months from date of grant
and may not be granted at prices less than the fair market value of the shares
at the dates of grant. Benefits may be granted under the Plan through December
16, 2006.
Additional information with respect to the Plan is summarized as
follows:
Average Price Option Shares
- ------------------------------------------- ------------------ -----------------
Outstanding January 1, 2002 $22.87 172,990
Granted --- ---
Exercised 22.73 (50,954)
Canceled or expired --- ---
- ------------------------------------------- ------------------ -----------------
Outstanding December 31, 2002 22.93 122,036
Canceled --- ---
Exercised 22.50 (19,686)
Canceled or expired --- ---
- ------------------------------------------- ------------------ -----------------
Outstanding December 31, 2003 23.01 102,350
Granted --- ---
Exercised 23.62 (31,350)
Canceled or expired 22.70 (21,450)
- ------------------------------------------- ------------------ -----------------
Outstanding December 31, 2004 $22.75 49,550
=========================================== ================== =================
Weighted Average
Exercisable options at: Price Option Shares
- ------------------------------------------- ------------------ -----------------
December 31, 2004 $22.75 49,550
December 31, 2003 $22.99 99,600
December 31, 2002 $22.90 114,286
-24-
As of December 31, 2004, the Company had the following outstanding options:
Exercise Price $22.44 - $22.50 $23.56 $26.75
- --------------------------------------- ---------------- ------------ ----------
Options Outstanding 40,550 8,000 1,000
Weighted Average Exercise Price $22.49 $23.56 $26.75
Weighted Average Remaining Life 1.9 5.4 3.3
Options Exercisable 40,550 8,000 1,000
Weighted Average Exercise price $22.49 $23.56 $26.75
Disclosure of pro forma information regarding net income and net income
per share is required by FASB Statement No. 123, "Accounting for Stock-Based
Compensation," and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value of these options was estimated at the date of grant using the
Black-Scholes options pricing model.
No options were granted in 2004, 2003 or 2002. See Note B Stock Options
for impact of options granted prior to 2001 on pro forma earnings per share.
NOTE K - PROFIT SHARING AND SECURITY BONUS PLANS
The Company and certain subsidiaries have a profit sharing plan for
office and warehouse personnel. The amounts of the companies' annual
contributions are determined by the board of directors subject to limitations
based upon operating results.
The plan also has a 401(k) defined contribution saving feature. This
feature, available to all participants, was provided to give employees a pre-tax
investment vehicle to save for retirement. The Company does not match the
contributions made by plan participants.
The Company and its subsidiaries also have in effect security bonus
plans for the benefit of their regional managers and independent sales
representatives, under the terms of which participants are credited with a
percentage of their yearly earnings. Of the aggregate amounts credited to
participants' accounts, 25% vests after five years and an additional 5% vests
each year thereafter. For financial reporting purposes, amounts are charged to
operations over the vesting period.
Provisions for profit sharing and security bonus plans aggregated
$5,979, $5,301and $5,689 for the years ended December 31, 2004, 2003 and 2002,
respectively.
NOTE L - INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. In addition,
deferred income taxes include net operating loss carryforwards of foreign
subsidiaries which do not expire. The Company also has a capital loss related to
the 2003 sale of the Company's UK MRO business. A valuation allowance was
recorded for a portion of the $22,441 capital loss due to the uncertainty of the
Company's ability to realize the capital loss against future capital gains prior
to expiration in 2008. Significant components of the Company's deferred tax
assets and liabilities as of December 31 are as follows:
Deferred Tax Assets: 2004 2003
- -------------------------------------------------- -------------- --------------
Compensation and benefits $16,185 $15,237
Inventory 3,447 3,011
Net operating loss carryforwards of subsidiaries 2,619 2,619
Capital Loss 5,580 5,697
Accounts receivable 762 669
Other - 345
- -------------------------------------------------- -------------- --------------
Total Deferred Tax Assets 28,593 27,578
Valuation allowance for deferred tax assets (8,199) (8,316)
- -------------------------------------------------- -------------- --------------
Net Deferred Tax Assets 20,394 19,262
- -------------------------------------------------- -------------- --------------
Deferred Tax Liabilities:
- -------------------------------------------------- -------------- --------------
Property, plant & equipment 1,191 2,381
Other 2,694 1,705
- -------------------------------------------------- -------------- --------------
Total Deferred Tax Liabilities 3,886 4,086
- -------------------------------------------------- -------------- --------------
Total Net Deferred Tax Assets $16,508 $15,176
================================================== ============== ==============
-25-
Net Deferred Tax Assets: 2004 2003
- -------------------------------------------------- -------------- --------------
Total Current Deferred Income Taxes $ 1,729 $ 1,975
Total Noncurrent Deferred Income Taxes 14,779 13,201
- -------------------------------------------------- -------------- --------------
Total Net Deferred Tax Assets $16,508 $15,176
================================================== ============== ==============
Net deferred tax assets include the tax impact of items in
comprehensive income of $(214) and $345 at December 31, 2004 and 2003,
respectively.
Income (loss) before income taxes for the years ended December 31, consisted of
the following:
2004 2003 2002
- ------------------------ ----------------- ----------------- -------------------
United States $32,182 $27,728 $27,906
Foreign 1,256 (2,836) (4,717)
- ------------------------ ----------------- ----------------- -------------------
$33,438 $24,892 $23,189
======================== ================= ================= ===================
The provisions for income taxes for the years ended December 31, consisted of
the following:
2004 2003 2002
- ---------------------------- -------------- --------------- ------------------
Current:
Federal $11,652 $7,422 $10,972
State 2,136 1,750 1,947
- ---------------------------- -------------- --------------- ------------------
13,788 9,172 12,919
Deferred benefit (1,775) (476) (2,177)
- ---------------------------- -------------- --------------- ------------------
$12,013 $8,696 $10,742
==============================================================================
The reconciliation between the effective income tax rate and the statutory
federal rate is as follows:
2004 2003 2002
- ------------------------------------- ------------- ------------- --------------
Statutory federal rate 35.0% 35.0% 35.0%
Increase (decrease) resulting from:
State income taxes, net of
federal income tax benefit 4.2 4.6 5.5
Foreign losses 1.2 6.7 9.3
Capital loss carryback --- (8.7) ---
Executive life insurance (2.0) (2.9) 2.1
Other items, net (2.5) 0.2 (5.6)
- ------------------------------------- ------------- ------------- --------------
Provision for income taxes 35.9% 34.9% 46.3%
===================================== ============= ============= ==============
Income taxes paid for the years ended December 31, 2004, 2003, and 2002
amounted to $12,097, $10,523 and $13,392, respectively.
NOTE M - COMMITMENTS
The Company's minimum rental commitments, principally for equipment,
under noncancelable leases in effect at December 31, 2004, amounted to
approximately $14,349. Such rentals are payable as follows:
2005 2006 2007 2008 2009 2010 and thereafter
- ----------- ---------- ---------- ---------- ------------- ---------------------
$3,502 $2,936 $2,488 $1,685 $1,482 $2,256
=========== ========== ========== ========== ============= =====================
Total rental expense for the years ended December 31, 2004, 2003 and
2002 amounted to $3,009, $3,977 and $3,669 respectively.
-26-
NOTE N - INCOME PER SHARE
The computation of basic and diluted earnings per share consisted of
the following:
Year ended December 31, 2005, 2004 2003 2002
- ---------------------------------------------- ----------------- ----------------- --------------
Numerator:
Net income $21,425 $16,196 $12,447
============================================== ================= ================= ==============
Denominator:
Denominatorand 2003.
| | | Consolidated Statements of Changes in Stockholders’ Equity for basic income per
share - weighted average shares 9,410 9,492 9,570
Effect of dilutive securities:
Stock option plans 20 19 26
- ---------------------------------------------- ----------------- ----------------- --------------
Denominator for diluted
income per share -
adjusted weighted average shares 9,430 9,511 9,596
============================================== ================= ================= ==============
Basic income per share $2.28 $1.71 $1.30
============================================== ================= ================= ==============
Diluted income per share $2.27 $1.70 $1.30
============================================== ================= ================= ==============
|
NOTE O - SEGMENT REPORTING
The Company has four reportable segments: Maintenance, Repair and
Replacement distribution in the U.S. (MRO-US), International Maintenance, Repair
and Replacement distribution in Canada (MRO-CAN), Original Equipment
Manufacturer distribution and manufacturing in the U.S. (OEM-US), and
International Original Equipment Manufacturer distribution in the United Kingdom
and Mexico (OEM-INTL). The operations of the Company's MRO distribution segments
distribute a wide range of MRO parts to repair and maintenance organizations by
the Company's force of independent sales agents.
The operations of the Company's OEM segments manufacture and distribute
component parts to OEM manufacturers through a network of independent sales
agents as well as internal sales employees.
The Company's reportable segments are distinguished by the nature of
products distributed and sold, types of customers, manner of servicing them, and
geographical location.
The Company evaluates performance and allocates resources to reportable
segments primarily based on operating income. The accounting polices of the
reportable segments are the same as those described in the summary of
significant policies except that the Company records its federal and state
deferred tax assets and liabilities at corporate. Intersegment sales are not
significant.
Financial information for the Company's reportable segments consisted of the
following:
Year Ended December 31,
2004 2003 2002
- -------------------------------------- -------------------- -------------------- ------------------
Net sales
MRO - US $316,099 $302,047 $306,863
MRO - CAN 21,806 18,976 16,505
OEM - US 64,632 54,147 55,547
OEM - INTL 17,115 13,921 8,541
- -------------------------------------- -------------------- -------------------- ------------------
Consolidated total $419,652 $389,091 $387,456
- -------------------------------------- -------------------- -------------------- ------------------
Operating Income (loss)
MRO - US $ 27,112 $ 24,993 $ 23,828
MRO - CAN 2,313 1,494 1,051
OEM - US 2,326 537 2,490
OEM - INTL (940) (4,283) (5,558)
- -------------------------------------- -------------------- -------------------- ------------------
Consolidated total $ 30,811 $ 22,741 $ 21,811
- -------------------------------------- -------------------- -------------------- ------------------
Capital expenditures
MRO - US $ 2,798 $ 2,792 $ 4,634
MRO - CAN 323 1,234 944
OEM - US 561 1,565 869
OEM - INTL 102 143 208
-27-
- -------------------------------------- -------------------- -------------------- ------------------
Consolidated total $ 3,784 $ 5,734 $ 6,655
- -------------------------------------- -------------------- -------------------- ------------------
Depreciation and amortization
MRO - US $ 5,345 $ 5,592 $ 5,650
MRO - CAN 253 175 121
OEM - US 856 804 799
OEM - INTL 238 532 257
- -------------------------------------- -------------------- -------------------- ------------------
Consolidated total $ 6,692 $ 7,103 $ 6,827
- -------------------------------------- -------------------- -------------------- ------------------
Total assets
MRO - US $174,777 $168,783 $154,832
MRO - CAN 18,519 17,137 13,989
OEM - US 40,275 36,076 33,181
OEM - INTL 10,471 9,771 8,379
- -------------------------------------- -------------------- -------------------- ------------------
Segment total 244,042 231,767 210,381
- -------------------------------------- -------------------- -------------------- ------------------
Corporate 16,508 15,176 15,450
- -------------------------------------- -------------------- -------------------- ------------------
Consolidated total $260,550 $246,943 $225,831
- -------------------------------------- -------------------- -------------------- ------------------
Goodwill
MRO - US $ 22,104 $22,104 $22,104
MRO - CAN 4,294 4,294 4,294
OEM - US 2,251 2,251 2,251
OEM - INTL - - -
- -------------------------------------- -------------------- -------------------- ------------------
Consolidated total $ 28,649 $28,649 $28,649
====================================== ==================== ==================== ==================
The reconciliation of segment profit to consolidated income before income taxes
consisted of the following:
Year Ended December 31,
2004 2003 2002
- -------------------------------------- -------------------- -------------------- ------------------
Total operating income for
reportable segments $30,811 $22,741 $21,811
Interest and dividend income 122 194 53
Interest expense (184) (131) (154)
Other - net 2,689 2,088 1,479
- -------------------------------------- -------------------- -------------------- ------------------
Income before income taxes $33,438 $24,892 $23,189
====================================== ==================== ==================== ==================
Financial information related to the Company's operations by geographic area
consisted of the following:
Year Ended December 31,
2004 2003 2002
- -------------------------------------- -------------------- -------------------- ------------------
Net sales
United States $380,731 $356,194 $362,410
Canada 21,806 18,976 16,505
Other foreign countries 17,115 13,921 8,541
- -------------------------------------- -------------------- -------------------- ------------------
Consolidated total $419,652 $389,091 $387,456
====================================== ==================== ==================== ==================
Year Ended December 31,
2004 2003 2002
- -------------------------------------- -------------------- -------------------- ------------------
Long-lived assets
United States $62,677 $65,064 $62,157
Canada 8,269 8,199 7,139
Other foreign countries 155 291 376
- -------------------------------------- -------------------- -------------------- ------------------
Consolidated total $71,101 $73,554 $69,672
====================================== ==================== ==================== ==================
Net sales are attributed to countries based on the location of
customers. Long-lived assets consist of total property, plant and equipment and
goodwill.
-28-
NOTE P - SUMMARY OF UNAUDITED QUARTERLY RESULTS OF OPERATIONS
Unaudited quarterly results of operations for the years ended December 31, 2004
and 2003 are summarized as follows:
Quarter ended
2004 Mar. 31 Jun. 30 Sept. 30 Dec. 31
- --------------------------------------- --------------- -------------- ------------- ------------
(Dollars in thousands, except per
share data)
Net sales $100,658 $104,443 $107,380 $107,171
Cost of goods sold 35,261 38,796 40,667 41,247
Income before income taxes1 10,527 8,726 9,048 5,137
Provision for income taxes2 4,001 3,409 3,462 1,141
Net income 6,526 5,317 5,586 3,996
Net income per share of common stock
Basic and Diluted 0.69 0.56 0.59 0.43
Diluted weighted average shares
outstanding 9,515 9,475 9,422 9,343
Quarter ended
2003 Mar. 31 Jun. 30 Sept. 30 Dec. 31
- --------------------------------------- --------------- -------------- ------------- ------------
(Dollars in thousands, except per
share data)
Net sales $96,075 $97,109 $99,301 $96,606
Cost of goods sold 34,548 35,034 35,349 36,193
Income before income taxes3 6,621 6,705 7,488 4,078
Provision for income taxes4 2,863 2,564 3,124 145
Net income5 3,758 4,141 4,364 3,933
Net income per share of common stock
Basic and Diluted 0.40 0.44 0.46 0.41
Diluted weighted average shares
outstanding 9,511 9,506 9,511 9,519
1 The fourth quarter includes incentive compensation expense of $1,736
related to stock performance rights and a $881 increase to employee
compensation accruals.
2 The fourth quarter includes a $560 reduction of the tax provision to
reflect tax exempt income related to executive life insurance and
charitable contributions of inventory.
3 The fourth quarter includes a $2,789 pre tax loss related to the sale
of Lawson Products Limited, the Company's former UK subsidiary.
4 The fourth quarter includes a $2,157 reduction of the tax provision to
reflect the partial utilization of a capital loss generated by the sale
of the Company's former UK subsidiary.
5 The second, third and fourth quarters, respectively, included $751,
$240 and $486 of charges for compensation arrangements related to
management personnel reductions.
-29-
SCHEDULE II
LAWSON PRODUCTS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
BALANCE AT CHARGED TO COSTS DEDUCTIONS - BALANCE AT END
DESCRIPTION BEGINNING OF PERIOD AND EXPENSES DESCRIBE (A) OF PERIOD
----------- ------------------- ------------ ------------ ---------
Allowance deducted from assets
to which it applies:
Allowance for doubtful
accounts:
YearYears ended December 31, 2005, 2004 $2,121 $1,108 $1,243 $1,986
Yearand 2003.
| | | Consolidated Statements of Cash Flows for the Years ended December 31, 2003 1,830 1,578 1,287 2,121
Year ended December 31, 2002 1,803 1,585 1,558 1,830
Note A - Uncollected receivables written off, net of recoveries.
(In Thousands)
BALANCE AT CHARGED TO COSTS DEDUCTIONS - BALANCE AT END
DESCRIPTION BEGINNING OF PERIOD AND EXPENSES DESCRIBE (B) OF PERIOD
----------- ------------------- ------------ ------------ ---------
Reserve for excess2005, 2004 and obsolete
inventory:
Year ended December 31, 2004 $5,141 $631 $2,700 $3,072
Year ended December 31, 2003 5,420 1,445 1,724 5,141
Year ended December 31, 2002 2,344 3,076 0 5,420
Note B - Disposal of excess and obsolete inventory
2003. | | | Notes to Consolidated Financial Statements. | | | Schedule II |
-30-
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES-19-
Management’s Report on Internal Control Over Financial Reporting The Company's chief executive officer and chief financial officer have
concluded, based on their evaluation as of the end of the period covered by this
report, that the Company's "disclosure controls and procedures" (as defined in
the Securities Exchange Act of 1934, as amended, Rules 13a-15(e) and 15d-15(e))
were effective to ensure that information required to be disclosed by the
Company (including its consolidated subsidiaries) in the reports that the
Company files or submits under the Securities Exchange Act of 1934 was recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company'sCompany’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). The Company'sCompany’s management conducted an evaluation, with the participation of the Company'sCompany’s chief executive officer and chief financial officer, of the effectiveness of its internal control over financial reporting based on the framework in Internal Control--IntegratedControl-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"(“COSO”). Based on this evaluation, described above under COSO criteria, the Company'sCompany’s management concluded that our internal control over financial reporting was effective as of December 31, 2004.2005. Ernst & Young LLP, the Company'sCompany’s independent registered public accounting firm, havehas issued an attestation report on the Company'sCompany’s management assessment of the effectiveness of the Company'sCompany’s internal control over financial reporting as of December 31, 2004,2005, which is included herein.
CHANGES IN INTERNAL CONTROLS
There were no changes in our internal control over financial reporting that
occurred during -20-
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting To the our last fiscal quarter that have materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER
FINANCIAL REPORTING
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS
LAWSON PRODUCTS, INC.Stockholders and Board of Directors Lawson Products, Inc. We have audited management'smanagement’s assessment, included in the accompanying consolidated financial statements,Management’s Report on Internal Control Over Financial Reporting, that Lawson Products, Inc. and subsidiaries maintained effective internal control over financial reporting as of December 31, 20042005, based on criteria established in Internal Control -— Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"(“COSO”). Lawson Products, Inc. 's’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management'smanagement’s assessment and an opinion on the effectiveness of the Company'sCompany’s internal control over financial reporting based on our audit.
-31-
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management'smanagement’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company'scompany’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company'scompany’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that the transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company'scompany’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management'smanagement’s assessment that Lawson Products, Inc. and subsidiaries maintained effective internal control over financial reporting as of December 31, 2004,2005, is fairly stated, in all material respects based on the COSO criteria. Also, in our opinion, Lawson Products, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004,2005, based on the COSO criteria. We have also audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Lawson Products, Inc. and subsidiaries as of December 31, 20042005 and 20032004 and the related consolidated statements of income, changes in stockholders'stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 20042005 of Lawson Products, Inc. and subsidiaries and our report dated March 10, 20052006 expressed an unqualified opinion thereon.
/s/Ernst & Young LLP
Chicago, Illinois March 10, 2006 -21-
Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements To the Stockholders and Board of Directors Lawson Products, Inc. We have audited the accompanying consolidated balance sheets of Lawson Products, Inc. and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2005. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Lawson Products, Inc. and subsidiaries at December 31, 2005 and 2004, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with U.S. 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. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Lawson Products, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 10, 2006, expressed an unqualified opinion thereon. Chicago, Illinois March 10, 2006 -22-
Lawson Products, Inc. Consolidated Balance Sheets | | | | | | | | | | | | | | | December 31, | | | | | | | | | | 2005 | | | 2004 | | | | | | | | | | | | | (Dollars in thousands) | | | ASSETS | | Current assets: | | | | | | | | | | | Cash and cash equivalents | | $ | 15,467 | | | $ | 28,470 | | | | Accounts receivable, less allowance for doubtful accounts (2005 — $1,545; 2004 — $1,651) | | | 60,102 | | | | 49,786 | | | | Inventories | | | 79,125 | | | | 59,556 | | | | Miscellaneous receivables | | | 5,263 | | | | 3,135 | | | | Prepaid expenses | | | 5,695 | | | | 3,732 | | | | Deferred income taxes | | | 912 | | | | 1,729 | | | | Discontinued current assets | | | 1,462 | | | | 8,298 | | | | | | | | | | | | | Total Current Assets | | | 168,026 | | | | 154,706 | | | | | | | | | | | Property, plant and equipment, at cost, less allowances for depreciation and amortization (2005 — $55,852; 2004 — $52,461) | | | 45,662 | | | | 41,431 | | | | | | | | | | | Other assets: | | | | | | | | | | | Cash value of life insurance | | | 17,431 | | | | 15,089 | | | | Deferred income taxes | | | 18,212 | | | | 15,642 | | | | Goodwill, less accumulated amortization | | | 27,999 | | | | 27,999 | | | | Other intangible assets, less accumulated amortization (2005 — $637; 2004 — $587) | | | 1,763 | | | | 813 | | | | Other | | | 128 | | | | 11 | | | | Discontinued non current assets | | | 3 | | | | 4,859 | | | | | | | | | | | | | | 65,536 | | | | 64,413 | | | | | | | | | | | | | $ | 279,224 | | | $ | 260,550 | | | | | | | | | | | | | LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | Current liabilities: | | | | | | | | | | | Accounts payable | | $ | 9,380 | | | $ | 6,477 | | | | Accrued expenses and other | | | 41,495 | | | | 32,470 | | | | Discontinued current liabilities | | | 1,668 | | | | 4,000 | | | | | | | | | | | | | Total Current Liabilities | | | 52,543 | | | | 42,947 | | | | | | | | | | | Noncurrent liabilities and deferred credits: | | | | | | | | | | | Accrued liability under security bonus plans | | | 23,866 | | | | 21,528 | | | | Deferred compensation and other liabilities | | | 17,390 | | | | 15,544 | | | | Discontinued non current liabilities | | | — | | | | 199 | | | | | | | | | | | | | | 41,256 | | | | 37,271 | | | | | | | | | | | Stockholders’ equity: | | | | | | | | | | | Preferred Stock, $1 par value: Authorized — 500,000 shares; Issued and outstanding — None | | | — | | | | — | | | | Common Stock, $1 par value: Authorized — 35,000,000 shares; Issued — 2005 — 8,972,041 shares; 2004 — 9,280,935 shares | | | 8,972 | | | | 9,281 | | | | Capital in excess of par value | | | 4,137 | | | | 3,467 | | | Retained earnings | | | 172,668 | | | | 167,187 | | | | | | | | | | | | | | 185,777 | | | | 179,935 | | | Accumulated other comprehensive income (loss) | | | (352 | ) | | | 397 | | | | | | | | | | | Stockholders’ equity | | | 185,425 | | | | 180,332 | | | | | | | | | | | | | $ | 279,224 | | | $ | 260,550 | | | | | | | | | |
See notes to consolidated financial statements -23-
Lawson Products, Inc. Consolidated Statements of Income | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | | | | | | | | | 2005 | | | 2004 | | | 2003 | | | | | | | | | | | | | | | | (Dollars in thousands, except | | | | | per share data) | | | Net sales | | $ | 450,185 | | | $ | 409,565 | | | $ | 379,561 | | | Cost of goods sold | | | 170,426 | | | | 149,247 | | | | 135,420 | | | | | | | | | | | | | | Gross profit | | | 279,759 | | | | 260,318 | | | | 244,141 | | | Selling, general and administrative expenses | | | 243,601 | | | | 227,237 | | | | 213,539 | | | Other charges | | | — | | | | — | | | | 2,459 | | | Provision for doubtful accounts | | | 792 | | | | 894 | | | | 1,532 | | | | | | | | | | | | | | | Operating Income | | | 35,366 | | | | 32,187 | | | | 26,611 | | | | | | | | | | | | | | Interest and dividend income | | | 354 | | | | 135 | | | | 187 | | | Interest expense | | | (7 | ) | | | (13 | ) | | | (7 | ) | | Other income — net | | | 842 | | | | 738 | | | | 1,005 | | | | | | | | | | | | | | | | | 1,189 | | | | 860 | | | | 1,185 | | | | | | | | | | | | | | Income from continuing operations before income taxes | | | 36,555 | | | | 33,047 | | | | 27,796 | | | Income tax expense | | | 15,095 | | | | 11,603 | | | | 8,316 | | | | | | | | | | | | | | Income from continuing operations | | | 21,460 | | | | 21,444 | | | | 19,480 | | | | | | | | | | | | | | Discontinued Operations (net of income taxes): | | | | | | | | | | | | | | | Gain on sale of real estate | | | 12,189 | | | | — | | | | — | | | | Income from operations of real estate partnership | | | 584 | | | | 732 | | | | 303 | | | | Loss on closure of UK business | | | (6,656 | ) | | | — | | | | — | | | | Loss from operations of UK business | | | (839 | ) | | | (751 | ) | | | (3,587 | ) | | | | | | | | | | | | | Income (loss) from discontinued operations | | | 5,278 | | | | (19 | ) | | | (3,284 | ) | | | | | | | | | | | | | | | Net Income | | $ | 26,738 | | | $ | 21,425 | | | $ | 16,196 | | | | | | | | | | | | | | Basic Income (Loss) Per Share of Common Stock: | | | | | | | | | | | | | | | Continuing Operations | | $ | 2.36 | | | $ | 2.28 | | | $ | 2.05 | | | | Discontinued Operations | | | 0.58 | | | | 0.00 | | | | (0.35 | ) | | | | | | | | | | | | | | | Net Income | | $ | 2.94 | | | $ | 2.28 | | | $ | 1.71 | | | | | | | | | | | | | | Diluted Income (Loss) Per Share of Common Stock: | | | | | | | | | | | | | | | Continuing Operations | | $ | 2.36 | | | $ | 2.27 | | | $ | 2.05 | | | | Discontinued Operations | | | 0.58 | | | | 0.00 | | | | (0.35 | ) | | | | | | | | | | | | | | | Net Income | | $ | 2.94 | | | $ | 2.27 | | | $ | 1.70 | | | | | | | | | | | | |
See notes to consolidated financial statements -24-
Lawson Products, Inc. Changes in Stockholders’ Equity Consolidated Statements | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Accumulated | | | | | | | | | | | | | Other | | | | | | | Common | | | Capital in | | | | | Comprehensive | | | | | | | Stock, | | | Excess of | | | Retained | | | Income | | | Comprehensive | | | | | $1 Par Value | | | Par Value | | | Earnings | | | (Loss) | | | Income | | | | | | | | | | | | | | | | | | | | | | (Dollars in thousands) | | | Balance at January 1, 2003 | | $ | 9,494 | | | $ | 2,387 | | | $ | 152,495 | | | $ | (2,033 | ) | | | | | | Net income | | | | | | | | | | | 16,196 | | | | | | | $ | 16,196 | | | Other comprehensive income, net of tax: | | | | | | | | | | | | | | | | | | | | | | | Adjustment for foreign currency translation | | | | | | | | | | | | | | | 1,392 | | | | 1,392 | | | | | | | | | | | | | | | | | | | | Comprehensive income for the year | | | | | | | | | | | | | | | | | | $ | 17,588 | | | | | | | | | | | | | | | | | | | | Cash dividends declared | | | | | | | | | | | (6,265 | ) | | | | | | | | | | Stock issued under employee stock plans | | | 20 | | | | 285 | | | | | | | | | | | | | | | Purchase and retirement of common stock | | | (20 | ) | | | (5 | ) | | | (595 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance at December 31, 2003 | | | 9,494 | | | | 2,667 | | | | 161,831 | | | | (641 | ) | | | | | | | | | | | | | | | | | | | | | | | Net income | | | | | | | | | | | 21,425 | | | | | | | $ | 21,425 | | | Other comprehensive income, net of tax: | | | | | | | | | | | | | | | | | | | | | | | Adjustment for foreign currency translation | | | | | | | | | | | | | | | 1,038 | | | | 1,038 | | | | | | | | | | | | | | | | | | | | Comprehensive income for the year | | | | | | | | | | | | | | | | | | $ | 22,463 | | | | | | | | | | | | | | | | | | | | Cash dividends declared | | | | | | | | | | | (6,751 | ) | | | | | | | | | | Stock issued under employee stock plans | | | 36 | | | | 884 | | | | | | | | | | | | | | | Purchase and retirement of common stock | | | (249 | ) | | | (84 | ) | | | (9,318 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance at December 31, 2004 | | | 9,281 | | | | 3,467 | | | | 167,187 | | | | 397 | | | | | | | | | | | | | | | | | | | | | | | | Net income | | | | | | | | | | | 26,738 | | | | | | | $ | 26,738 | | | Other comprehensive income, net of tax: | | | | | | | | | | | | | | | | | | | | | | | Cumulative translation adjustment related to closure of UK business | | | | | | | | | | | | | | | 435 | | | | 435 | | | | Adjustment for foreign currency translation | | | | | | | | | | | | | | | (1,184 | ) | | | (1,184 | ) | | | | | | | | | | | | | | | | | | | Comprehensive income for the year | | | | | | | | | | | | | | | | | | $ | 25,989 | | | | | | | | | | | | | | | | | | | | Cash dividends declared | | | | | | | | | | | (7,235 | ) | | | | | | | | | | Stock issued under employee stock plans | | | 25 | | | | 801 | | | | | | | | | | | | | | | Purchase and retirement of common stock | | | (334 | ) | | | (131 | ) | | | (14,022 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance at December 31, 2005 | | $ | 8,972 | | | $ | 4,137 | | | $ | 172,668 | | | $ | (352 | ) | | | | | | | | | | | | | | | | | | | | | |
See notes to consolidated financial statements -25-
Lawson Products, Inc. Consolidated Statements of Cash Flows | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | | | | | | | | | 2005 | | | 2004 | | | 2003 | | | | | | | | | | | | | | | | (Dollars in thousands) | | | Operating activities | | | | | | | | | | | | | | | Net income | | $ | 26,738 | | | $ | 21,425 | | | $ | 16,196 | | | | Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | | | | | Depreciation | | | 5,041 | | | | 5,299 | | | | 5,359 | | | | | Amortization | | | 1,577 | | | | 1,393 | | | | 1,744 | | | | | Provision for allowance for doubtful accounts | | | 809 | | | | 1,108 | | | | 1,578 | | | | | Deferred income taxes | | | (2,397 | ) | | | (1,775 | ) | | | (476 | ) | | | | Deferred compensation and security bonus plans | | | 5,668 | | | | 5,060 | | | | 5,466 | | | | | Payments under deferred compensation and security bonus plans | | | (1,543 | ) | | | (2,832 | ) | | | (2,099 | ) | | | | Gain on sale of real estate | | | (12,189 | ) | | | — | | | | — | | | Changes in operating assets and liabilities: | | | | | | | | | | | | | | | Accounts receivable | | | (9,345 | ) | | | (5,265 | ) | | | (5,888 | ) | | | Inventories | | | (151 | ) | | | (5,870 | ) | | | 4,902 | | | | Prepaid expenses and other assets | | | (5,860 | ) | | | 450 | | | | (2,499 | ) | | | Accounts payable and accrued expenses | | | 10,187 | | | | 5,998 | | | | 3,176 | | | | Other | | | (739 | ) | | | 1,383 | | | | 631 | | | | | | | | | | | | | | | | Net Cash Provided by Operating Activities | | | 17,796 | | | | 26,374 | | | | 28,090 | | | | | | | | | | | | | | Investing activities | | | | | | | | | | | | | | | Purchases of property, plant and equipment | | | (9,271 | ) | | | (4,323 | ) | | | (5,913 | ) | | | Proceeds from sale of real estate | | | 15,707 | | | | — | | | | — | | | | Acquisition of Rutland Tool & Supply Co., net of cash acquired | | | (14,562 | ) | | | — | | | | — | | | | Other | | | 100 | | | | 250 | | | | 286 | | | | | | | | | | | | | | | | Net Cash Used in Investing Activities | | | (8,026 | ) | | | (4,073 | ) | | | (5,627 | ) | | | | | | | | | | | | | Financing Activities | | | | | | | | | | | | | | | Proceeds from revolving line of credit | | | — | | | | — | | | | 4,000 | | | | Payments on revolving line of credit | | | — | | | | — | | | | (4,000 | ) | | | Payments on mortgage payable | | | (1,573 | ) | | | (1,462 | ) | | | (805 | ) | | | Purchases of common stock | | | (14,487 | ) | | | (9,651 | ) | | | (620 | ) | | | Proceeds from exercise of stock options and other common stock transactions | | | 826 | | | | 920 | | | | 305 | | | | Dividends paid | | | (7,111 | ) | | | (6,791 | ) | | | (6,075 | ) | | | | | | | | | | | | | | | Net Cash Used in Financing Activities | | | (22,345 | ) | | | (16,984 | ) | | | (7,195 | ) | | | | | | | | | | | | | Increase (decrease) in cash and cash equivalents | | | (12,575 | ) | | | 5,317 | | | | 15,268 | | | Cash and cash equivalents at beginning of year | | | 28,872 | | | | 23,555 | | | | 8,287 | | | | | | | | | | | | | | Cash and cash equivalents at end of year | | | 16,297 | | | | 28,872 | | | | 23,555 | | | Cash held by discontinued operations | | | (830 | ) | | | (402 | ) | | | (965 | ) | | | | | | | | | | | | | Cash and cash equivalents held by continuing operations at end of year | | $ | 15,467 | | | $ | 28,470 | | | $ | 22,590 | | | | | | | | | | | | |
See notes to consolidated financial statements -26-
Lawson Products, Inc. Notes to Consolidated Financial Statements (Dollars in Thousands) Note A — Description of Business Lawson Products, Inc. (“Lawson” or the “Company”) is a North American distributor and marketer of systems, services and products to the industrial, commercial and institutional maintenance, repair and replacement marketplace. The Company also manufactures, sells and distributes specialized component parts to the original equipment marketplace. Note B — Summary of Major Accounting Policies Principles of Consolidation: The accompanying consolidated financial statements include the accounts and transactions of the Company and its wholly owned and majority owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Revenue Recognition: Sales and associated cost of goods sold are recognized when products are shipped and title passes to customers. Shipping and Handling Fees and Costs: Costs related to shipping and handling fees are included on the Consolidated Statements of Income in the caption Selling, general and administrative expenses and totaled $12,940, $11,561 and $11,157 in 2005, 2004 and 2003, respectively. Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. Investment in Real Estate Partnership: The Company’s investment in real estate, represented by a limited partnership interest, was accounted for using the equity method until June 30, 2003. The Company adopted FIN 46 as of July 1, 2003, which resulted in the consolidation of the Company’s 98.5% investment in a limited partnership that owned an office building in Chicago, Illinois. An officer and member of the Board of Directors of the Company is the 1.5% general partner. The operations of the partnership consist of renting the building under a long-term lease and the servicing of the non-recourse mortgage. The Company sold the real estate held in this partnership in the fourth quarter of 2005 (See Note C). Inventories: Inventories which consist of principally finished goods are stated at the lower of cost(first-in, first-out method) or market (See Note E). Property, Plant and Equipment: Provisions for depreciation and amortization are computed by the straight-line method for buildings and improvements using useful lives of 20 to 30 years and using the double declining balance method for machinery and equipment, furniture and fixtures and vehicles using useful lives of 3 to 10 years. Capitalized software is amortized over estimated useful lives of 3 to 5 years using the straight-line method. Cash Equivalents: The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Stock Options: Stock options are accounted for under Accounting Principles Board Opinion No. 25 (APB 25), “Accounting For Stock Issued to Employees.” Under APB 25, the Company uses the intrinsic value method where no compensation expense is recognized because the exercise price of the stock options granted equals the market price of the underlying stock at the date of grant. Goodwill and Other Intangibles: Goodwill represents the cost of business acquisitions in excess of the fair value of identifiable net tangible and intangible assets acquired. (See Note G) -27-
Lawson Products, Inc. Notes to Consolidated Financial Statements — (Continued) Foreign Currency Translation: The financial statements of foreign entities have been translated in accordance with Statement of Financial Accounting Standards No. 52 and, accordingly, unrealized foreign currency translation adjustments are reflected as a component of stockholders’ equity. Realized foreign currency transaction gains and losses were not significant for the years ended December 31, 2005, 2004 and 2003. Income Per Share: Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution from the exercise or conversion of securities into common stock, such as stock options. The following table shows the effect on net income and earnings per share if the Company had applied the fair value recognition provision of FASB Statement No. 123, “Accounting for Stock-Based Compensation.” | | | | | | | | | | | | | | | | | | 2005 | | | 2004 | | | 2003 | | | | | | | | | | | | | | Net income — as reported | | $ | 26,738 | | | $ | 21,425 | | | $ | 16,196 | | | | Stock based compensation (income) expense included in income, net of tax | | | (274 | ) | | | 1,666 | | | | 263 | | | | Stock based employee compensation (income) expense determined under fair value method, net of tax | | | 274 | | | | (1,672 | ) | | | (290 | ) | | | | | | | | | | | | | Net income — pro forma | | | 26,738 | | | | 21,419 | | | | 16,169 | | | Basic earnings per share — as reported | | | 2.94 | | | | 2.28 | | | | 1.71 | | | Diluted earnings per share — as reported | | | 2.94 | | | | 2.27 | | | | 1.70 | | | Basic earnings per share — pro forma | | | 2.94 | | | | 2.28 | | | | 1.70 | | | Diluted earnings per share — pro forma | | | 2.94 | | | | 2.27 | | | | 1.70 | |
For purposes of pro forma disclosures, the estimated fair value of options granted is amortized as an expense over the option’s vesting period. The pro forma effect on net income is not representative of the pro forma effect on net income in future years because grants made in 1996 and later years have an increasing vesting period. New Accounting Standards: In December 2004, the Financial Accounting Standards Board (FASB) issued a revision of Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock Based Compensation,” (“Statement”) which also supersedes Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to its Employees,” and its related implementation guidance. This Statement requires an entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award, and recognize the cost over the period during which an employee is required to provide service in exchange for the award. This Statement is effective for 2006 for the Company and applies to all awards granted after the required effective date and to unvested awards at that date. The Company is currently evaluating the provisions of this Statement and will adopt it in the first quarter of 2006. Reclassifications: Certain amounts have been reclassified in the 2004 and 2003 financial statements to conform with the 2005 presentation. Note C — Business Combination and Discontinued Operations The Company closed its UK business and a real estate partnership in the fourth quarter of 2005. As all of the requirements of SFAS No. 144, “Accounting for the Impairment or Disposal of Long Lived Assets” have been met, the Company has classified these closures as discontinued operations. Accordingly the Consolidated Statements of Income and Balance Sheets presented have been reclassified to present these results as discontinued operations. -28-
Lawson Products, Inc. Notes to Consolidated Financial Statements — (Continued) | | | Discontinued Operations of UK Business: |
In the fourth quarter of 2005, the Company closed its UK business which was engaged primarily in the business of OEM sales. In 2005, the UK business had pretax losses of approximately $11,534, largely related to inventory write-offs, goodwill and intangible write offs, and termination costs associated with the closing. The tax benefit of these losses was $4,039, resulting in a net loss of $7,495. Net sales were $4,308, $9,692, and $8,538 in 2005, 2004 and 2003, respectively. In the fourth quarter of 2003, the Company sold its UK subsidiary, Lawson Products Limited, engaged primarily in the business of MRO sales, to a third party for approximately $647. The purchase price was in the form of a note payable to the Company over two years. Prior to the sale, the Company transferred certain assets and liabilities related to the OEM portion of this business to a newly formed subsidiary, Assembly Components Systems Limited, which was closed in 2005 as discussed above. The sale of Lawson Products Limited resulted in a pre-tax loss of approximately $2,789, largely related to inventory write-offs and termination costs associated with the sale, which is also reflected in discontinued operations. The 2003 sale also generated approximately $22,441 in capital losses for tax purposes. The Company was able to carryback $6,163 of the capital loss to offset capital gains in prior years tax returns. The effect of the carryback resulted in $2,157 of tax benefit in 2003 for financial statement purposes. Capital losses of $14,507 were utilized in fiscal 2005 to offset capital gains generated by the sale of real estate as discussed in the next paragraph. In the fourth quarter of 2005, the Company sold real estate held in a limited partnership and closed the partnership’s operations. The Company made its initial investment in this partnership in 1984. The sale resulted in a net gain of $12,189 which was substantially tax free as a result of prior year tax capital loss carryforwards. The Company’s share of cash proceeds from the sale was approximately $15,707. In conjunction with this transaction, Robert J. Washlow, currently Chairman and Chief Executive Officer of the Company, an employee of the Company since July 1998, received a $2,000 management fee from the partnership as its founding general partner. The operations of the real estate partnership resulted in pre-tax income of $1,056, $1,126 and $496 and tax expense of $472, $394 and $193 in fiscal 2005, 2004 and 2003, respectively. Activities of the partnership were not material to any period presented. | | | Purchase of Rutland Tool & Supply Co.: |
On December 1, 2005, the Company purchased the business and substantially all of the assets, except for accounts receivable, and assumed certain liabilities of Rutland Tool & Supply Co. (Rutland) for the purchase price of $14,562, net of cash acquired. This cash transaction was accounted for as a purchase; accordingly, the accounts and transactions of Rutland have been included in the consolidated financial statements since the date of acquisition. The assets acquired were recorded at fair values as determined by the Company’s management as follows: cash $2; inventory $13,356; prepaid assets $128; property, plant and equipment $936; intangibles $1,000; and accrued liabilities of $858. As Rutland was a consolidated subsidiary of its prior owner, the Company is unable to provide any meaningful pro forma information of prior period results. Net sales attributed to the acquired division represented approximately $4,058 for December 2005, and net sales would approximate $50,000 for its most recent fiscal year. Note D — Other Charges In 2003 and 2002, the Company recorded charges for severance payable to several members of management. The remaining benefits outstanding as of December 31, 2005 will be paid out by the end of 2006. -29-
Lawson Products, Inc. Notes to Consolidated Financial Statements — (Continued) The table below shows an analysis of the Company’s reserves for other charges: | | | | | | | | | Severance and | | | Description of Item | | Related Expenses | | | | | | | | Balance January 1, 2003 | | $ | 876 | | | Charged to earnings 2003 | | | 2,459 | | | Cash paid in 2003 | | | (859 | ) | | | | | | | Balance December 31, 2003 | | | 2,476 | | | Cash paid in 2004 | | | (1,434 | ) | | | | | | | Balance December 31, 2004 | | | 1,042 | | | Cash paid in 2005 | | | (826 | ) | | | | | | | Balance December 31, 2005 | | $ | 216 | | | | | | |
Note E — Inventories The following is a summary of inventories and reserve for excess and obsolete inventory. | | | | | | | | | | | | | 2005 | | | 2004 | | | | | | | | | | | Inventories | | $ | 83,321 | | | $ | 62,628 | | | Reserve for excess and obsolete inventory | | | (4,196 | ) | | | (3,072 | ) | | | | | | | | | | | | $ | 79,125 | | | $ | 59,556 | | | | | | | | | |
Note F — Property, Plant and Equipment Property, plant and equipment consists of: | | | | | | | | | | | | | 2005 | | | 2004 | | | | | | | | | | | Land | | $ | 9,248 | | | $ | 6,873 | | | Buildings and improvements | | | 44,081 | | | | 43,903 | | | Machinery and equipment | | | 30,980 | | | | 29,990 | | | Furniture and fixtures | | | 4,903 | | | | 4,614 | | | Vehicles | | | 313 | | | | 318 | | | Capitalized software | | | 6,394 | | | | 4,371 | | | Construction in progress | | | 5,595 | | | | 3,823 | | | | | | | | | | | | | | 101,514 | | | | 93,892 | | | Accumulated depreciation and amortization | | | (55,852 | ) | | | (52,461 | ) | | | | | | | | | | | | $ | 45,662 | | | $ | 41,431 | | | | | | | | | |
Note G — Goodwill and Other Intangibles As required under FASB statement No. 142 “Goodwill and Other Intangibles”, the Company performed its annual impairment test in the fourth quarter of 2005, 2004 and 2003 and determined the Company’s goodwill was not impaired. -30-
Lawson Products, Inc. Notes to Consolidated Financial Statements — (Continued) Intangible assets subject to amortization were as follows: | | | | | | | | | | | | | | | | | Gross | | | Accumulated | | | Net Carrying | | | December 31, 2005 | | Balance | | | Amortization | | | Amount | | | | | | | | | | | | | | Trademarks and tradenames | | $ | 1,400 | | | $ | 637 | | | $ | 763 | | | Non-compete covenant | | | 1,000 | | | | — | | | | 1,000 | | | | | | | | | | | | | | | | $ | 2,400 | | | $ | 637 | | | $ | 1,763 | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | Gross | | | Accumulated | | | Net Carrying | | | December 31, 2004 | | Balance | | | Amortization | | | Amount | | | | | | | | | | | | | | Trademarks and tradenames | | $ | 1,400 | | | $ | 587 | | | $ | 813 | | | | | | | | | | | | |
Trademarks and tradenames are being amortized over a weighted average life of 15.14 years. The non-compete covenant will be amortized over 5 years. Amortization expense, all of which was included in the MRO distribution segment, for these intangible assets was $50, $83 and $183 in 2005, 2004 and 2003, respectively. Amortization expense for each of the next five years is estimated to be $250 per year. Note H — Accrued Expenses and Other Accrued expenses and other liabilities consist of the following: | | | | | | | | | | | | | 2005 | | | 2004 | | | | | | | | | | | Salaries, commissions and other compensation | | $ | 14,282 | | | $ | 11,369 | | | Accrued other charges | | | 216 | | | | 1,042 | | | Accrued and withheld taxes, other than income taxes | | | 2,724 | | | | 2,644 | | | Accrued profit sharing contributions | | | 4,012 | | | | 3,626 | | | Accrued stock performance rights | | | 1,336 | | | | 2,081 | | | Accrued self-insured health benefits | | | 1,404 | | | | 1,560 | | | Cash dividends payable | | | 1,795 | | | | 1,670 | | | Other | | | 15,726 | | | | 8,478 | | | | | | | | | | | | | $ | 41,495 | | | $ | 32,470 | | | | | | | | | |
Note I — Long Term Debt On June 15, 2005, the Company’s multi-currency line of credit was amended to increase the maximum borrowing capacity to $75 million from $50 million, extend the maturity date to March 27, 2009 and amend certain financial covenants. Amounts outstanding under the line carry interest at 1.5% below the prime rate or .75% over LIBOR. The line contains certain financial covenants regarding interest coverage, minimum stockholders’ equity and working capital, all of which were met on December 31, 2005. The Company had no loans outstanding under the line at December 31, 2005 and 2004. The Company paid interest of $7, $13 and $7, respectively, in 2005, 2004 and 2003. Note J — Stock Plans The Incentive Stock Plan (Plan), provides for the issuance of incentive compensation to non-employee directors, officers and key employees in the form of stock options, stock performance rights (SPRs), stock purchase agreements and stock awards. As of December 31, 2005, 493,859 shares of Common Stock were available for issuance under the Plan. -31-
Lawson Products, Inc. Notes to Consolidated Financial Statements — (Continued) In 2005 and 2003, the Company granted SPRs pursuant to the Plan. These SPRs have exercise prices ranging from $24.64 to $41.55 per share. These SPRs vest at 20% to 33% per year and entitle the recipient to receive a cash payment equal to the excess of the market value of the Company’s common stock over the SPR exercise price when the SPRs are surrendered. Compensation expense (income) for the SPRs in 2005, 2004 and 2003 was $(431), $2,620 and $410, respectively. Additional information with respect to SPRs is summarized as follows: | | | | | | | | | | | | | Average SPR | | | | | | | Exercise Price | | | # of SPR’s | | | | | | | | | | | Outstanding January 1, 2003 | | $ | 27.18 | | | | 248,350 | | | Granted | | | 27.85 | | | | 31,500 | | | Exercised | | | 26.77 | | | | (1,900 | ) | | | | | | | | | | Outstanding December 31, 2003(1) | | | 27.26 | | | | 277,950 | | | Exercised | | | 26.76 | | | | (66,450 | ) | | Canceled | | | 27.45 | | | | (22,500 | ) | | | | | | | | | | Outstanding December 31, 2004(2) | | | 27.41 | | | | 189,000 | | | Granted | | | 41.46 | | | | 31,000 | | | Exercised | | | 26.69 | | | | (13,750 | ) | | | | | | | | | | Outstanding December 31, 2005(3) | | $ | 29.57 | | | | 206,250 | | | | | | | | | |
| | | (1) | Includes 107,350 SPRs vested at December 31, 2003 at a weighted average exercise price of $26.98 per share. | | | (2) | Includes 90,760 SPRs vested at December 31, 2004 at a weighted average exercise price of $27.26 per share. | | | (3) | Includes 128,180 SPRs vested at December 31, 2005 at a weighted average exercise price of $27.31 per share. |
The Plan permits the grant of incentive stock options, subject to certain limitations, with substantially the same terms as non-qualified stock options. Non-employee directors are not eligible to receive incentive stock options. Stock options are not exercisable within six months from date of grant and may not be granted with exercise prices less than the fair market value of the shares at the dates of grant. Benefits may be granted under the Plan through December 16, 2006. -32-
Lawson Products, Inc. Notes to Consolidated Financial Statements — (Continued) Additional information with respect to the Plan is summarized as follows: | | | | | | | | | | | | | Average | | | | | | | Price | | | Option Shares | | | | | | | | | | | Outstanding January 1, 2003 | | $ | 22.93 | | | | 122,036 | | | Exercised | | | 22.50 | | | | (19,686 | ) | | | | | | | | | | Outstanding December 31, 2003 | | | 23.01 | | | | 102,350 | | | Exercised | | | 23.62 | | | | (31,350 | ) | | Canceled or expired | | | 22.70 | | | | (21,450 | ) | | | | | | | | | | Outstanding December 31, 2004 | | | 22.75 | | | | 49,550 | | | Exercised | | | 22.50 | | | | (10,750 | ) | | Canceled or expired | | | 22.50 | | | | (1,600 | ) | | | | | | | | | | Outstanding December 31, 2005 | | $ | 22.83 | | | | 37,200 | | | | | | | | | |
| | | | | | | | | | | | | Weighted | | | | | | | Average | | | | | Exercisable Options at: | | Price | | | Option Shares | | | | | | | | | | | December 31, 2005 | | $ | 22.83 | | | | 37,200 | | | December 31, 2004 | | $ | 22.75 | | | | 49,550 | | | December 31, 2003 | | $ | 22.99 | | | | 99,600 | |
As of December 31, 2005, the Company had the following outstanding options: | | | | | | | | | | | | | | | | Exercise Price | | $ | 22.44-$22.50 | | | $ | 23.56 | | | $ | 26.75 | | | | | | | | | | | | | | Options Outstanding | | | 28,200 | | | | 8,000 | | | | 1,000 | | | | Weighted Average Exercise Price | | $ | 22.48 | | | $ | 23.56 | | | $ | 26.75 | | | | Weighted Average Remaining Life | | | 1.2 | | | | 4.4 | | | | 2.3 | | | Options Exercisable | | | 28,200 | | | | 8,000 | | | | 1,000 | | | | Weighted Average Exercise price | | $ | 22.48 | | | $ | 23.56 | | | $ | 26.75 | |
Disclosure of pro forma information regarding net income and net income per share is required by FASB Statement No. 123, “Accounting for Stock-Based Compensation,” and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value of these options was estimated at the date of grant using the Black-Scholes options pricing model. No options were granted in 2005, 2004 or 2003. See Note B Stock Options for impact of options granted prior to 2001 on pro forma earnings per share. Note K — Profit Sharing and Security Bonus Plans The Company and certain subsidiaries have a profit sharing plan for office and warehouse personnel. The amounts of the companies’ annual contributions are determined by the board of directors subject to limitations based upon operating results. The plan also has a 401(k) defined contribution saving feature. This feature, available to all participants, was provided to give employees a pre-tax investment vehicle to save for retirement. The Company does not match the contributions made by plan participants. The Company and its subsidiaries also have in effect security bonus plans for the benefit of their regional managers and independent sales representatives, under the terms of which participants are credited with a percentage of their yearly earnings. Of the aggregate amounts credited to participants’ accounts, 25% vests -33-
Lawson Products, Inc. Notes to Consolidated Financial Statements — (Continued) after five years and an additional 5% vests each year thereafter. For financial reporting purposes, amounts are charged to operations over the vesting period. Provisions for profit sharing and security bonus plans aggregated $7,153, $5,979 and $5,301 for the years ended December 31, 2005, 2004 and 2003, respectively. Note L — Income Taxes Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. In addition, deferred income taxes include net operating loss carryforwards of a foreign subsidiary which do not expire. The Company also had a $16,278 capital loss carryforward remaining related to the 2003 sale of the Company’s UK MRO business. A valuation allowance was recorded for all of the capital loss due to the uncertainty of the Company’s ability to realize the capital loss against future capital gains prior to expiration in 2008. For 2005, $14,507 of this capital loss carryforward was utilized in 2005 in conjunction with a gain realized from the sale of real estate (see Note C), and the valuation allowance was adjusted accordingly. Significant components of the Company’s deferred tax assets and liabilities as of December 31 are as follows: | | | | | | | | | | | | Deferred Tax Assets: | | 2005 | | | 2004 | | | | | | | | | | | Compensation and benefits | | $ | 18,759 | | | $ | 16,185 | | | Inventory | | | 3,537 | | | | 3,447 | | | Net operating loss carryforwards of subsidiaries | | | 744 | | | | 2,619 | | | Capital loss | | | 957 | | | | 5,580 | | | Accounts receivable | | | 553 | | | | 762 | | | Other | | | 72 | | | | — | | | | | | | | | | | | Total Deferred Tax Assets | | | 24,622 | | | | 28,593 | | | Valuation allowance for deferred tax assets | | | (1,701 | ) | | | (8,199 | ) | | | | | | | | | | | Net Deferred Tax Assets | | | 22,921 | | | | 20,394 | | | | | | | | | | Deferred Tax Liabilities: | | | | | | | | | | Property, plant & equipment | | | 619 | | | | 329 | | | Goodwill | | | 2,324 | | | | 1,743 | | | Other | | | 854 | | | | 951 | | | | | | | | | | | | Total Deferred Tax Liabilities | | | 3,797 | | | | 3,023 | | | | | | | | | | | | Total Net Deferred Tax Assets | | $ | 19,124 | | | $ | 17,371 | | | | | | | | | | Net Deferred Tax Assets: | | | | | | | | | | Total Current Deferred Income Taxes | | $ | 912 | | | $ | 1,729 | | | Total Noncurrent Deferred Income Taxes | | | 18,212 | | | | 15,642 | | | | | | | | | | | | Total Net Deferred Tax Assets | | $ | 19,124 | | | $ | 17,371 | | | | | | | | | |
Net deferred tax assets include the tax impact of items in comprehensive income of $72 and $10 at December 31, 2005 and 2004, respectively. Income from continuing operations before income taxes for the years ended December 31, consisted of the following: | | | | | | | | | | | | | | | | | 2005 | | | 2004 | | | 2003 | | | | | | | | | | | | | | United States | | $ | 34,077 | | | $ | 31,009 | | | $ | 26,744 | | | Foreign | | | 2,478 | | | | 2,038 | | | | 1,052 | | | | | | | | | | | | | | | | $ | 36,555 | | | $ | 33,047 | | | $ | 27,796 | | | | | | | | | | | | |
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Lawson Products, Inc. Notes to Consolidated Financial Statements — (Continued) The provisions for income taxes for continuing operations for the years ended December 31, consisted of the following: | | | | | | | | | | | | | | | | | | 2005 | | | 2004 | | | 2003 | | | | | | | | | | | | | | Current: | | | | | | | | | | | | | | | Federal | | $ | 13,736 | | | $ | 11,041 | | | $ | 6,978 | | | | State | | | 2,893 | | | | 2,136 | | | | 1,688 | | | | | | | | | | | | | | | | | 16,629 | | | | 13,177 | | | | 8,666 | | | Deferred benefit | | | (1,534 | ) | | | (1,574 | ) | | | (350 | ) | | | | | | | | | | | | | | | $ | 15,095 | | | $ | 11,603 | | | $ | 8,316 | | | | | | | | | | | | |
The reconciliation between the effective income tax rate and the statutory federal rate for continuing operations is as follows: | | | | | | | | | | | | | | | | | | 2005 | | | 2004 | | | 2003 | | | | | | | | | | | | | | Statutory federal rate | | | 35.0 | % | | | 35.0 | % | | | 35.0 | % | | Increase (decrease) resulting from: | | | | | | | | | | | | | | | State income taxes, net of federal income tax benefit | | | 5.1 | | | | 4.2 | | | | 3.9 | | | | Foreign losses | | | 0.5 | | | | 0.4 | | | | 1.1 | | | | Capital loss carryback | | | — | | | | — | | | | (7.8 | ) | | | Executive life insurance | | | (1.0 | ) | | | (2.0 | ) | | | (2.6 | ) | | | Other items, net | | | 1.7 | | | | (2.5 | ) | | | 0.3 | | | | | | | | | | | | | | Provision for income taxes | | | 41.3 | % | | | 35.1 | % | | | 29.9 | % | | | | | | | | | | | |
Income taxes paid for the years ended December 31, 2005, 2004, and 2003 amounted to $15,793, $12,080 and $10,544, respectively. Note M — Commitments & Contingencies The Company’s minimum rental commitments, principally for equipment, under non-cancelable leases in effect at December 31, 2005, are as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2011 and | | | 2006 | | 2007 | | | 2008 | | | 2009 | | | 2010 | | | Thereafter | | | | | | | | | | | | | | | | | | | | $3,838 | | | $3,378 | | | | $2,450 | | | | $1,920 | | | | $1,299 | | | | $2,119 | | | | | | | | | | | | | | | | | | |
Total rental expense for the years ended December 31, 2005, 2004 and 2003 amounted to $2,971, $2,615 and $3,583, respectively. In December, 2005, the FBI executed a search warrant for records at the Company’s offices and informed the Company that it was conducting an investigation whether the Company’s representatives improperly provided gifts or awards to purchasing agents (including government purchasing agents) through the Company’s customer loyalty programs. The U.S. Attorney’s office for the Northern District of Illinois subsequently issued a subpoena for documents in connection with this investigation. In conjunction with the Company’s own internal investigation regarding these matters, several customer loyalty programs have been suspended pending review and analysis. The Company is cooperating with the ongoing investigation of the U.S. Attorney, however, the Company cannot predict when the investigation will be completed or what the effect of the investigation will be. The outcome of the investigation could result in criminal sanctions or civil remedies against the Company, including material fines, injunctions or the loss of the Company’s ability to conduct business with governmental entities. Any such adverse outcome could materially adversely affect the Company’s financial condition or results of operations and the trading price of the Company’s common stock. -35-
Lawson Products, Inc. Notes to Consolidated Financial Statements — (Continued) In addition, any adverse publicity related to this action may harm the Company’s reputation and impair its ability to attract and retain customers. The Company presently estimates that it will incur substantial legal fees in 2006 related to this matter. Note N — Income Per Share The computation of basic and diluted earnings per share consisted of the following: | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | | | | | | | | | 2005 | | | 2004 | | | 2003 | | | | | | | | | | | | | | Numerator: | | | | | | | | | | | | | | Income from continuing operations | | $ | 21,460 | | | $ | 21,444 | | | $ | 19,480 | | | | | | | | | | | | | | Denominator: | | | | | | | | | | | | | | | Denominator for basic income per share — weighted average shares | | | 9,082 | | | | 9,410 | | | | 9,492 | | | | Effect of dilutive securities: | | | | | | | | | | | | | | | | Stock option plans | | | 17 | | | | 20 | | | | 19 | | | | | | | | | | | | | | Denominator for diluted income per share — adjusted weighted average shares | | | 9,099 | | | | 9,430 | | | | 9,511 | | | | | | | | | | | | | | Basic income per share | | $ | 2.36 | | | $ | 2.28 | | | $ | 2.05 | | | | | | | | | | | | | | Diluted income per share | | $ | 2.36 | | | $ | 2.27 | | | $ | 2.05 | | | | | | | | | | | | |
Note O — Segment Reporting The Company has aggregated its reporting segments into two reportable segments: Maintenance, Repair and Replacement distribution in North America (MRO), and Original Equipment Manufacturer distribution and manufacturing in North America (OEM). The operations of the Company’s MRO distribution segment distributes a wide range of MRO parts to repair and maintenance organizations by the Company’s force of independent sales agents and distributors. The operations of the Company’s OEM segment manufactures and distributes component parts to OEM manufacturers both through a network of independent manufacturers representatives and Company employees. The Company changed its reportable segments from four in prior periods to two in the current period to align with changes in the business which occurred in 2005, including the closing of the UK business. All prior periods have been restated to conform to the 2005 presentation and only include amounts for continuing operations. The Company’s two reportable segments are distinguished by the nature of products distributed and sold, types of customers and manner of servicing them. The Company evaluates performance and allocates resources to reportable segments primarily based on operating income. The accounting polices of the reportable segments are the same as those described in the summary of significant policies except that the Company records its federal and state deferred tax assets and liabilities at corporate. Intersegment sales are not significant. -36-
Lawson Products, Inc. Notes to Consolidated Financial Statements — (Continued) Financial information for the Company’s reportable segments consisted of the following: | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | | | | | | | | | 2005 | | | 2004 | | | 2003 | | | | | | | | | | | | | | Net sales | | | | | | | | | | | | | | | MRO | | $ | 368,615 | | | $ | 337,905 | | | $ | 321,023 | | | | OEM | | | 81,570 | | | | 71,660 | | | | 58,538 | | | | | | | | | | | | | | | | Consolidated total | | $ | 450,185 | | | $ | 409,565 | | | $ | 379,561 | | | | | | | | | | | | | | Operating income (loss) | | | | | | | | | | | | | | | MRO | | $ | 31,159 | | | $ | 30,035 | | | $ | 26,832 | | | | OEM | | | 4,207 | | | | 2,152 | | | | (221 | ) | | | | | | | | | | | | | | | Consolidated total | | $ | 35,366 | | | $ | 32,187 | | | $ | 26,611 | | | | | | | | | | | | | | Capital expenditures | | | | | | | | | | | | | | | MRO | | $ | 8,682 | | | $ | 3,660 | | | $ | 4,176 | | | | OEM | | | 589 | | | | 604 | | | | 1,574 | | | | | | | | | | | | | | | | Consolidated total | | $ | 9,271 | | | $ | 4,264 | | | $ | 5,750 | | | | | | | | | | | | | | Depreciation and amortization | | | | | | | | | | | | | | | MRO | | $ | 5,236 | | | $ | 4,989 | | | $ | 5,430 | | | | OEM | | | 823 | | | | 895 | | | | 848 | | | | | | | | | | | | | | | | Consolidated total | | $ | 6,059 | | | $ | 5,884 | | | $ | 6,278 | | | | | | | | | | | | | | Total assets | | | | | | | | | | | | | | | MRO | | $ | 208,333 | | | $ | 188,444 | | | $ | 179,962 | | | | OEM | | | 50,302 | | | | 41,578 | | | | 36,825 | | | | | | | | | | | | | | | | Segment total | | | 258,635 | | | | 230,022 | | | | 216,787 | | | | Corporate | | | 19,124 | | | | 17,371 | | | | 16,239 | | | | | | | | | | | | | | | | Consolidated total | | $ | 277,759 | | | $ | 247,393 | | | $ | 233,026 | | | | | | | | | | | | | | Goodwill | | | | | | | | | | | | | | | MRO | | $ | 25,748 | | | $ | 25,748 | | | $ | 25,748 | | | | OEM | | | 2,251 | | | | 2,251 | | | | 2,251 | | | | | | | | | | | | | | | | Consolidated total | | $ | 27,999 | | | $ | 27,999 | | | $ | 27,999 | | | | | | | | | | | | |
The reconciliation of segment profit to consolidated income from continuing operations before income taxes consisted of the following: | | | | | | | | | | | | | | | | | | Year Ended December 31, | | | | | | | | | | 2005 | | | 2004 | | | 2003 | | | | | | | | | | | | | | Operating income | | $ | 35,366 | | | $ | 32,187 | | | $ | 26,611 | | | | Interest and dividend income | | | 354 | | | | 135 | | | | 187 | | | | Interest expense | | | (7 | ) | | | (13 | ) | | | (7 | ) | | | Other — net | | | 842 | | | | 738 | | | | 1,005 | | | | | | | | | | | | | | Income from continuing operations before income taxes | | $ | 36,555 | | | $ | 33,047 | | | $ | 27,796 | | | | | | | | | | | | |
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Lawson Products, Inc. Notes to Consolidated Financial Statements — (Continued) Financial information related to the Company’s operations by geographic area consisted of the following: | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | | | | | | | | | 2005 | | | 2004 | | | 2003 | | | | | | | | | | | | | | Net sales | | | | | | | | | | | | | | | United States | | $ | 416,876 | | | $ | 380,336 | | | $ | 355,202 | | | | Canada | | | 26,753 | | | | 21,806 | | | | 18,976 | | | | Mexico | | | 6,556 | | | | 7,423 | | | | 5,383 | | | | | | | | | | | | | | | | Consolidated total | | $ | 450,185 | | | $ | 409,565 | | | $ | 379,561 | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | Year Ended December 31, | | | | | | | | | | 2005 | | | 2004 | | | 2003 | | | | | | | | | | | | | | Long-lived assets | | | | | | | | | | | | | | | United States | | $ | 65,471 | | | $ | 61,102 | | | $ | 62,710 | | | | Canada | | | 8,158 | | | | 8,269 | | | | 8,199 | | | | Mexico | | | 32 | | | | 59 | | | | 54 | | | | | | | | | | | | | | | | Consolidated total | | $ | 73,661 | | | $ | 69,430 | | | $ | 70,963 | | | | | | | | | | | | |
Net sales are attributed to countries based on the location of customers. Long-lived assets consist of total property, plant and equipment and goodwill. Note P — Summary of Unaudited Quarterly Results of Operations Unaudited quarterly results of operations for the years ended December 31, 2005 and 2004 are summarized as follows: | | | | | | | | | | | | | | | | | | | | | | Quarter Ended | | | | | | | | 2005 | | Mar. 31 | | | Jun. 30 | | | Sept. 30 | | | Dec. 31 | | | | | | | | | | | | | | | | | | | (Dollars in thousands, except per share data) | | | Net sales(1) | | $ | 105,658 | | | $ | 111,957 | | | $ | 116,965 | | | $ | 115,605 | | | Cost of goods sold(1) | | | 40,497 | | | | 42,552 | | | | 42,883 | | | | 44,494 | | | Income from continuing operations before income taxes(1,2) | | | 8,733 | | | | 9,776 | | | | 11,216 | | | | 6,830 | | | Provision for income taxes | | | 3,523 | | | | 3,929 | | | | 4,338 | | | | 3,305 | | | Income from continuing operations | | | 5,210 | | | | 5,847 | | | | 6,878 | | | | 3,525 | | | Income (loss) from discontinued operations(3) | | | (254 | ) | | | (239 | ) | | | (289 | ) | | | 6,060 | | | Net income | | | 4,956 | | | | 5,608 | | | | 6,590 | | | | 9,584 | | | Basic income (loss) per share of common stock | | | | | | | | | | | | | | | | | | | Continuing operations | | $ | 0.57 | | | $ | 0.64 | | | $ | 0.76 | | | $ | 0.39 | | | | Discontinued operations | | | (0.03 | ) | | | (0.03 | ) | | | (0.03 | ) | | | 0.67 | | | | Net income | | $ | 0.54 | | | $ | 0.62 | | | $ | 0.73 | | | $ | 1.07 | | | Diluted income (loss) per share of common stock | | | | | | | | | | | | | | | | | | | Continuing operations | | $ | 0.56 | | | $ | 0.64 | | | $ | 0.76 | | | $ | 0.39 | | | | Discontinued operations | | | (0.03 | ) | | | (0.03 | ) | | | (0.03 | ) | | | 0.67 | | | | Net income | | $ | 0.54 | | | $ | 0.61 | | | $ | 0.73 | | | $ | 1.07 | | | Diluted weighted average shares outstanding | | | 9,232 | | | | 9,126 | | | | 9,035 | | | | 9,001 | |
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Lawson Products, Inc. Notes to Consolidated Financial Statements — (Continued) | | | | | | | | | | | | | | | | | | | | | | Quarter Ended | | | | | | | | 2004 | | Mar. 31 | | | Jun. 30 | | | Sept. 30 | | | Dec. 31 | | | | | | | | | | | | | | | | | | | (Dollars in thousands, except per share data) | | | Net sales | | $ | 97,751 | | | $ | 101,587 | | | $ | 104,881 | | | $ | 105,346 | | | Cost of goods sold | | | 33,448 | | | | 36,902 | | | | 38,982 | | | | 39,915 | | | Income from continuing operations before income taxes(4) | | | 10,243 | | | | 8,503 | | | | 8,923 | | | | 5,378 | | | Provision for income taxes(5) | | | 3,894 | | | | 3,317 | | | | 3,360 | | | | 1,032 | | | Income from continuing operations | | | 6,349 | | | | 5,186 | | | | 5,563 | | | | 4,346 | | | Income (loss) from discontinued operations | | | 177 | | | | 131 | | | | 23 | | | | (350 | ) | | Net income | | | 6,526 | | | | 5,317 | | | | 5,586 | | | | 3,996 | | | Basic and Diluted income per share of common stock Continuing operations | | $ | 0.67 | | | $ | 0.55 | | | $ | 0.59 | | | $ | 0.47 | | | | Discontinued operations | | | 0.02 | | | | 0.01 | | | | 0.00 | | | | (0.04 | ) | | | Net income | | $ | 0.69 | | | $ | 0.56 | | | $ | 0.59 | | | $ | 0.43 | | | Diluted weighted average shares outstanding | | | 9,515 | | | | 9,475 | | | | 9,422 | | | | 9,343 | |
| | | (1) | The fourth quarter includes the results of Rutland Tool & Supply Co. (“Rutland”) for the month of December. Rutland accounted for $4,058 of sales, $2,746 of cost of goods sold and $207 of income from continuing operations before income taxes. | | | (2) | The fourth quarter includes incentive compensation expense of $1,100 related to stock performance rights and a stock award, a $1,000 cash charitable contribution and approximately $2,500 lower MRO contribution margin resulting from fewer sales days in the fourth quarter as compared to the third quarter. | | | (3) | The Company closed its operations in the United Kingdom and sold its real estate in the fourth quarter of 2005 (See Note C). | | | (4) | The fourth quarter includes incentive compensation expense of $1,736 related to stock performance rights and a $881 increase to employee compensation accruals. | | | (5) | The fourth quarter includes a $560 reduction of the tax provision to reflect tax exempt income related to executive life insurance and charitable contributions of inventory. |
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Lawson Products, Inc. and Subsidiaries Schedule II — Valuation and Qualifying Accounts | | | | | | | | | | | | | | | | | | | | | | Balance at | | | Charged to | | | | | Balance at | | | | | Beginning | | | Costs and | | | Deductions — | | | End of | | | Description | | of Period | | | Expenses | | | Describe (A) | | | Period | | | | | | | | | | | | | | | | | | | (In thousands) | | | Allowance for doubtful accounts: | | | | | | | | | | | | | | | | | | | Year ended December 31, 2005 | | $ | 1,651 | | | $ | 792 | | | $ | 898 | | | $ | 1,545 | | | | | | | | | | | | | | | | | | Year ended December 31, 2004 Year ended | | | 1,905 | | | | 894 | | | | 1,148 | | | | 1,651 | | | | | | | | | | | | | | | | | | December 31, 2003 | | | 1,769 | | | | 1,532 | | | | 1,396 | | | | 1,905 | | | | | | | | | | | | | | | |
Note A — Uncollected receivables written off, net of recoveries. | | | | | | | | | | | | | | | | | | | | | | Balance at | | | Charged to | | | | | Balance at | | | | | Beginning | | | Costs and | | | Deductions — | | | End of | | | Description | | of Period | | | Expenses | | | Describe (B) | | | Period | | | | | | | | | | | | | | | | | | | (In thousands) | | | Reserve for excess and obsolete inventory: | | | | | | | | | | | | | | | | | | | Year ended December 31, 2005 | | $ | 3,072 | | | $ | 2,132 | | | $ | 1,008 | | | $ | 4,196 | | | | | | | | | | | | | | | | | | Year ended December 31, 2004 Year ended | | | 3,448 | | | | 631 | | | | 1,007 | | | | 3,072 | | | | | | | | | | | | | | | | | | December 31, 2003 | | | 3,226 | | | | 1,445 | | | | 1,223 | | | | 3,448 | | | | | | | | | | | | | | | |
Note B — Disposal of excess and obsolete inventory. -40-
| | | ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. |
None. | | | ITEM 9A. | CONTROLS AND PROCEDURES. |
Evaluation of disclosure controls and procedures The Company’s chief executive officer and chief financial officer have concluded, based on their evaluation as of the end of the period covered by this report, that the Company’s “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934, as amended, Rules 13a-15(e) and15d-15(e)) was effective to ensure that information required to be disclosed by the Company (including its consolidated subsidiaries) in the reports that the Company files or submits under the Securities Exchange Act of 1934 were recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our chief financial officer, as appropriate, to allow timely decisions regarding financial disclosures. Management’s Report on Internal Control over Financial Reporting The report of management under Item 9A is contained in Item 8 of this 2005 Annual Report on Form 10-K under the heading “Management’s Report on Internal Control over Financial Reporting”. Changes in internal controls There were no changes in our internal control over financial reporting that occurred during the our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting The attestation report required under Item 9A is contained in Item 8 of this 2005 Annual Report on Form 10-K under the heading Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting. ITEM 9B. OTHER INFORMATIONINFORMATION. PART III
ITEM 10. | | | ITEM 10. | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. |
a. Directors
--------- The information required by this Item is set forth in the Company'sCompany’s Proxy Statement for the Annual Meeting of Stockholders to be held on May 10,
2005,9, 2006, under the caption "Election“Election of Directors"Directors” and "Section“Section 16(a), Beneficial Ownership Reporting Compliance,"” which information is incorporated herein by reference.
b b. Executive Officers
------------------ The information required by this Item is set forth under the caption Item 1 -— Business under "Executive“Executive Officers of the Registrant."” c. Audit Committee
--------------- -41-
Information on the Company'sCompany’s Audit Committee is contained under the caption "Board“Board of Directors Meetings and Committees"Committees” in the Company'sCompany’s Proxy Statement for the Annual Meeting of Stockholders to be held on May 10, 2005,9, 2006, which is incorporated herein by reference. The Company had determined that Mitchell Saranow, member of the Audit Committee of the Board of Directors, qualifies as an "audit“audit committee financial expert"expert” as defined in Item 401(h) of Regulation S-K, and that Mr. Saranow is "independent"“independent” as the term is used in Item 7(d)(3)(iv) of Schedule 14A under the Securities Exchange Act. d. Code of Business Conduct
------------------------Ethics The Company has adopted a Code of Ethics applicable to all employees. This code is applicable to Senior Financial Executives including the principleprincipal executive officer, principleprincipal financial officer and principleprincipal accounting officer of the Company. The Company'sCompany’s Code of Ethics is available on the Company's web
siteCompany’s website at www.lawsonproducts.com. The Company intends to post on its web sitewebsite any amendments to, or waivers from its Code of Ethics applicable to Senior Financial Executives. The Company will provide shareholdersstockholders with a copy of its Code of Ethics without charge upon written request directed to the Company'sCompany’s Secretary at the Company'sCompany’s address. The Audit, Compensation and Nominating and Corporate Governance committees have each adopted a charter for their respective committees. These charters may be viewed on the Corporation'sCorporation’s website, www.lawsonproducts.com, and copies may be obtained by request to the Secretary of the Company at the Company'sCompany’s address.
ITEM 11. | | | ITEM 11. | EXECUTIVE COMPENSATION. |
The information required by this Item is set forth in the Company'sCompany’s Proxy Statement for the Annual Meeting of Stockholders to be held on May 10,
2005,9, 2006, under the caption "Remuneration“Remuneration of Executive Officers,"” which information is incorporated herein by reference.
ITEM 12. | | | ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. |
The information required by this Item is set forth in the Company'sCompany’s Proxy Statement for the Annual Meeting of Stockholders to be held on May 10,
20059, 2006 under the captions "Securitiescaption “Securities Beneficially Owned by Principal Stockholders -33-
and Management," and "Equity Compensation Plan Information",Management” which information is incorporated herein by reference.
ITEM 13. Equity Compensation Plan Information The following table provides information as of December 31, 2005 regarding the number of shares of common stock that were available for issuance under the Company’s equity compensation plans. | | | | | | | | | | | | | | | | | | | | | Number of Securities | | | | | | | | | Remaining Available for | | | | | | | | | Future Issuance Under | | | | | Number of Securities to | | | Weighted-Average | | | Equity Compensation | | | | | be Issued upon Exercise | | | Exercise Price of | | | Plans (Excluding | | | | | of Outstanding Options, | | | Outstanding Options, | | | Securities Reflected in | | | Plan Category | | Warrants and Rights | | | Warrants and Rights | | | the First Column) | | | | | | | | | | | | | | Equity compensation plans approved by security holders | | | 37,200 | | | $ | 23.65 | | | | 456,659 | | | Equity compensation plans not approved by security holders | | | 0 | | | | 0 | | | | 0 | | | | | | | | | | | | | | Total | | | 37,200 | | | $ | 23.65 | | | | 456,659 | | | | | | | | | | | | |
-42-
| | | ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. |
The information required by this Item is set forth in the Company'sCompany’s Proxy Statement for the Annual Meeting of stockholders to be held on May 10,
20059, 2006 under the caption "Election“Election of Directors"Directors” and "Certain“Certain Relationships and Related Transactions"Transactions” which information is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES | | | ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES. |
The information required under this Item is set forth in the Company'sCompany’s Proxy Statement for the Annual Meeting of stockholders to be held on May 10, 20059, 2006 under the caption "Fees“Fees Paid to Independent Auditors"Auditors” which information is incorporated herein by reference. PART IV
ITEM 15. | | | ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. |
(a)(1)Financial Statements
-------------------- The following information is presented in Item 8 of this report:
Consolidated Balance Sheets as of December 31, 2004 and 2003.
Consolidated Statements of Income for the Years ended December
31, 2004, 2003 and 2002.
Consolidated Statements of Changes in Stockholders' Equity for
the Years ended December 31, 2004, 2003 and 2002.
Consolidated Statements of Cash Flows for the Years ended
December 31, 2004, 2003 and 2002. | | | Consolidated Balance Sheets as of December 31, 2005 and 2004. | | | Consolidated Statements of Income for the Years ended December 31, 2005, 2004 and 2003. |
| | | Consolidated Statements of Changes in Stockholders’ Equity for the Years ended December 31, 2005, 2004 and 2003. |
| | | Consolidated Statements of Cash Flows for the Years ended December 31, 2005, 2004 and 2003. | | | Notes to Consolidated Financial Statements. |
(2) Financial Statement Schedule
---------------------------- The following consolidated financial statement schedule of Lawson Products, Inc. and subsidiaries is included in Item 15(d):
Schedule II - Valuation and Qualifying Accounts is submitted with this report.
8: | | | Schedule II — Valuation and Qualifying Accounts. |
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not submitted because they are not applicable or are not required under Regulation S-X or because the required information is included in the financial statements or notes thereto. (3) Exhibits.
--------
3(a) Certificate of Incorporation of the Company, as amended,
incorporated herein by reference to Exhibit 3(a) to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1988.
3(b) Amended and Restated By-laws of the Company, incorporated
herein by reference to Exhibit 3(b) to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
2003.
-34-
*10(c)(1) Lawson Products, Inc. Incentive Stock Plan, incorporated
herein by reference to Appendix A to the Company's Proxy
Statement for the Annual Meeting of Stockholders held on May
11, 1999.
*10(c)(2) Salary Continuation Agreement between the Company and Mr.
Sidney L. Port dated January 7, 1980 incorporated herein by
reference from Exhibit 10(c)(2) to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1991.
*10(c)(3) Employment Agreement between the Company and Mr. Jerome
Shaffer, incorporated herein by reference from Exhibit
10(c)(9) to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1985.
*10(c)(3.1) First Amendment to Employment Agreement between the Company
and Mr. Jerome Shaffer, dated as of August 1, 1996,
incorporated herein by reference from Exhibit 10(c)(6.1) to
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996.
*10(c)(4) Employment Agreement between the Company and Jeffrey B.
Belford dated March 1, 2005, incorporated herein by reference
from Exhibit 10(c)(4) to the Company's Current Report on Form
8-K dated March 4, 2005.
*10(c)(5) Amended and Restated Executive Deferral Plan, incorporated
herein by reference from Exhibit 10(c)(7) to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1995.
*10(c)(6) Employment Agreement dated March 1, 2005 between the Company
and Roger F. Cannon, incorporated herein by reference to
Exhibit 10(c)(6) to the Company's Current Report on Form 8-K
dated March 4, 2005.
*10(c)(7) Agreement between the Company and Bernard Kalish dated July
31, 1999, incorporated herein by reference from Exhibit
10(c)(8) to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1999.
*10(c)(8) Lawson Products, Inc. Stock Performance Plan, incorporated
herein by reference from Exhibit 10(c)(8) to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 2000.
*10(c)(9) Lawson Products, Inc. 2002 Stock Equivalents Plan for Non
Employee Directors, incorporated herein by reference from
Exhibit 10(c)(9) to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 2002.
*10(c)(10) Lawson Products, Inc. Long-Term Capital Accumulation Plan,
incorporated herein by reference from Exhibit 10(c)(10) to
the Company's Current Report on Form 8-K dated October 21,
2004.
*10(c)(11) Employment Agreement dated January 1, 2004 between the
Company and Robert Washlow, incorporated herein by reference
to Exhibit 10(c)(10) to the Company's Current Report on Form
8-K dated December 28, 2004.
*10(c)(12) Employment Agreement dated March 9, 2005 between the Company
and Thomas J. Neri, incorporated herein by reference to
Exhibit 10(c)(12) to the Company's Current Report on Form 8-K
dated March 14, 2005.
*10(c)(13) Employment Agreement dated March 9, 2005 between the Company
and Neil E. Jenkins, incorporated herein by reference to
Exhibit 10(c)(13) to the Company's Current Report on Form 8-K
dated March 14, 2005.
*10(c)(14) Form of Shareholder Value Appreciation Rights Award Agreement
- ------------------------------
*Indicates management employment contracts or compensatory plans or
arrangements.
-35-
*10(c)(15) Form of Restricted Stock Award and Acknowledgement
*10(c)(16) Form Letter regarding Stock Performance Rights
14 Code of Ethics of the Company, incorporated herein by
reference from Exhibit 14 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2003.
21 Subsidiaries of the Company.
23 Consent of Ernst & Young LLP.
31.1 Certification of Chief Executive Officer pursuant to
18 U.S.C. Section 1350 as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to
18 U.S.C. Section 1350 as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
- ------------------------------
*Indicates management employment contracts or compensatory plans or
arrangements.
-36-
| | | | | | 3(a) | | | Certificate of Incorporation of the Company, as amended, incorporated herein by reference to Exhibit 3(a) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1988. | | 3(b) | | | Amended and Restated By-laws of the Company, incorporated herein by reference to Exhibit 3(b) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003. | | *10(c)(1) | | | Lawson Products, Inc. Incentive Stock Plan, incorporated herein by reference to Appendix A to the Company’s Proxy Statement for the Annual Meeting of Stockholders held on May 11, 1999. | | *10(c)(2) | | | Salary Continuation Agreement between the Company and Mr. Sidney L. Port dated January 7, 1980 incorporated herein by reference from Exhibit 10(c)(2) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1991. | | *10(c)(3) | | | Employment Agreement between the Company and Mr. Jerome Shaffer, incorporated herein by reference from Exhibit 10(c)(9) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1985. |
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| | | | | | *10(c)(3.1) | | | First Amendment to Employment Agreement between the Company and Mr. Jerome Shaffer, dated as of August 1, 1996, incorporated herein by reference from Exhibit 10(c)(6.1) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1996. | | *10(c)(4) | | | Employment Agreement between the Company and Jeffrey B. Belford dated March 1, 2005, incorporated herein by reference from Exhibit 10(c)(4) to the Company’s Current Report on Form 8-K dated March 4, 2005. | | *10(c)(5) | | | Amended and Restated Executive Deferral Plan, incorporated herein by reference from Exhibit 10(c)(7) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1995. | | *10(c)(6) | | | Employment Agreement dated March 1, 2005 between the Company and Roger F. Cannon, incorporated herein by reference to Exhibit 10(c)(6) to the Company’s Current Report on Form 8-K dated March 4, 2005. | | *10(c)(7) | | | Agreement between the Company and Bernard Kalish dated July 31, 1999, incorporated herein by reference from Exhibit 10(c)(8) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1999. | | *10(c)(8) | | | Lawson Products, Inc. Stock Performance Plan, incorporated herein by reference from Exhibit 10(c)(8) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000. | | *10(c)(9) | | | Lawson Products, Inc. 2002 Stock Equivalents Plan for Non Employee Directors, incorporated herein by reference from Exhibit 10(c)(9) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002. | | *10(c)(10) | | | Lawson Products, Inc. Long-Term Capital Accumulation Plan, incorporated herein by reference from Exhibit 10(c)(10) to the Company’s Current Report on Form 8-K dated October 21, 2004. | | *10(c)(11) | | | Employment Agreement dated January 1, 2004 between the Company and Robert Washlow, incorporated herein by reference to Exhibit 10(c)(10) to the Company’s Current Report on Form 8-K dated December 28, 2004. | | *10(c)(12) | | | Employment Agreement dated March 9, 2005 between the Company and Thomas J. Neri, incorporated herein by reference to Exhibit 10(c)(12) to the Company’s Current Report on Form 8-K dated March 14, 2005. | | *10(c)(13) | | | Employment Agreement dated March 9, 2005 between the Company and Neil E. Jenkins, incorporated herein by reference to Exhibit 10(c)(13) to the Company’s Current Report on Form 8-K dated March 14, 2005. | | *10(c)(14) | | | Form of Shareholder Value Appreciation Rights Award Agreement, incorporated by reference to Exhibit 10(c)(14) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004. | | *10(c)(15) | | | Form of Restricted Stock Award and Acknowledgement, incorporated by reference to Exhibit 10(c)(15) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004. | | *10(c)(16) | | | Form Letter regarding Stock Performance Rights, incorporated by reference to Exhibit 10(c)(16) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004. | | 10(c)(17) | | | Credit Agreement dated March 27,2001 between Lawson Products, Inc. and LaSalle Bank National Association, as amended by the First Amendment to Credit Agreement dated August 12, 2002 as amended by Second Modification to Loan Documents dated July 11, 2003, and as further amended by Third Modification to Credit Agreement dated as of June 15, 2005, incorporated by reference to Exhibit 10(c)(17) to the Company’s Form 10-Q for the quarter ended June 30, 2005. | | *10(c)(18) | | | Employment Agreement dated July 27, 2005 between the Company and Mr. Michael W. Ruprich, incorporated herein by reference to Exhibit 10(c)(18) to the Company’s Current Report on Form 8-K dated July 26, 2005. |
-44-
| | | | | | *10(c)(19) | | | Employment Agreement dated September 14, 2005 between the Company and Mr. Kenneth E. Malik, incorporated herein by reference to Exhibit 10(c)(19) to the Company’s Current Report on Form 8-K dated September 14, 2005. | | 10(c)(20) | | | Real Estate Sales Agreement, dated October 24, 2005, by and between the City of Chicago and Superior and Sedgwick Associates, incorporated by reference to Exhibit 10(c)(20) to the Company’s Current Report on Form 8-K dated October 24, 2005. | | 10(c)(21) | | | Agreement of Limited Partnership of Superior and Sedgwick Associates, an Illinois Limited Partnership, dated November 1, 1984, incorporated by reference to Exhibit 10(c)(21) to the Company’s Current Report on Form 8-K dated October 24, 2005. | | 14 | | | Code of Ethics of the Company, incorporated herein by reference from Exhibit 14 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003. | | 21 | | | Subsidiaries of the Company. | | 23 | | | Consent of Ernst & Young LLP. | | 31.1 | | | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | | 31.2 | | | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | | 31.3 | | | Certification of Executive Vice President, Finance, Planning and Corporate Development pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | | 32 | | | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | | * | Indicates management employment contracts or compensatory plans or arrangements. |
-45-
SIGNATURES
- ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
LAWSON PRODUCTS, INC.
Date: March 16, 2005
By: /s/ Robert J. Washlow
-------------------------------
Robert J. Washlow, Chairman of
the | | | | By: | /s/ Robert J. Washlow |
| | | | | Robert J. Washlow, Chairman of the | | Board and Chief Executive Officer |
Date: March 16, 2006 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below this 16th day of March, 16, 2005,2006, by the following persons on behalf of the registrant and in the capacities indicated.
Signature Title
--------- -----
/s/ Robert J. Washlow Chairman of the Board,
- ------------------------------------ Chief Executive Officer and
Robert J. Washlow Director
(principal executive officer)
/s/ Thomas Neri Executive Vice President, Finance,
- --------------------------------- Planning and Corporate Development;
Thomas Neri Chief Financial Officer; and Treasurer
(principal financial officer)
/s/ Joseph L. Pawlick Senior Vice President-Accounting
- ---------------------------------
Joseph L. Pawlick (principal accounting officer)
/s/ Jerome Shaffer Vice President and Special Advisor to
- --------------------------------- the Chief Executive Officer and
Jerome Shaffer Director
/s/ James T. Brophy Director
- ---------------------------------
James T. Brophy
/s/ Ronald B. Port, M.D. Director
- ---------------------------------
Ronald B. Port, M.D.
/s/ Sidney L. Port Director
- ---------------------------------
Sidney L. Port
/s/ Robert G. Rettig Director
- ----------------------------------
Robert G. Rettig
/s/ Mitchell H. Saranow Director
- ---------------------------------
Mitchell H. Saranow
-37-
/s/ Lee S. Hillman Director
- ---------------------------------
Lee S. Hillman
/s/ Wilma J. Smelcer Director
- ---------------------------------
Wilma J. Smelcer
-38-
| | | | | | Signature | | Title | | | | | /s/ Robert J. Washlow
Robert J. Washlow | | Chairman of the Board, Chief Executive Officer and Director (principal executive officer) | | /s/ Scott F. Stephens
Scott F. Stephens | | Chief Financial Officer and principal accounting officer | | /s/ Thomas J Neri
Thomas J. Neri | | Executive Vice President, Finance, Planning and Corporate Development | | /s/ James T. Brophy
James T. Brophy | | Director | | /s/ Ronald B. Port, M.D.
Ronald B. Port, M.D. | | Director | | /s/ Sidney L. Port
Sidney L. Port | | Director | | /s/ Robert G. Rettig
Robert G. Rettig | | Director | | /s/ Mitchell H. Saranow
Mitchell H. Saranow | | Director | | /s/ Lee S. Hillman
Lee S. Hillman | | Director |
-46-
| | | | | | Signature | | Title | | | | | /s/ Wilma J. Smelcer
Wilma J. Smelcer | | Director | | /s/ Thomas Postek
Thomas Postek | | Director |
-47-
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
3(a) Certificate of Incorporation of the Company, as amended,
incorporated herein by reference to Exhibit 3(a) to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1988.
3(b) Amended and Restated By-laws of the Company, incorporated
herein by reference to Exhibit 3(b) to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2003.
*10(c)(1) Lawson Products, Inc. Incentive Stock Plan, incorporated herein
by reference to Appendix A to the Company's Proxy Statement for
the Annual Meeting of Stockholders held on May 11, 1999.
*10(c)(2) Salary Continuation Agreement between the Company and Mr. Sidney
L. Port, dated January 7, 1980, incorporated herein by reference
from Exhibit 10(c)(2) to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1991.
*10(c)(3) Employment Agreement between the Company and Mr. Jerome Shaffer,
incorporated herein by reference from Exhibit 10(c)(9) to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1985.
*10(c)(3.1) First Amendment to Employment Agreement between the Company and
Mr. Jerome Shaffer, dated as of August 1, 1996, incorporated
herein by reference from Exhibit 10(c)(6.1) to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1996.
*10(c)(4) Employment Agreement between the Company and Jeffrey B. Belford
dated March 1, 2005, incorporated herein by reference to Exhibit
10(c)(4) to the Company's Current Report on Form 8-K dated March
4, 2005.
*10(c)(5) Amended and Restated Executive Deferral Plan, incorporated
herein by reference from Exhibit 10(c)(7) to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1995.
*10(c)(6) Employment Agreement dated March 1, 2005 between the Company and
Roger F. Cannon, incorporated herein by reference to Exhibit
10(c)(6) to the Company's Current Report on Form 8-K dated March
4, 2005.
*10(c)(7) Agreement between the Company and Bernard Kalish dated July 31,
1999, incorporated herein by reference from Exhibit 10(c)(8) to
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1999.
*10(c)(8) Lawson Products, Inc. Stock Performance Plan, incorporated
herein by reference from Exhibit 10(c)(8) to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 2000.
*10(c)(9) Lawson Products, Inc. 2002 Stock Equivalents Plan for Non
Employee Directors, incorporated herein by reference from
Exhibit 10(c)(9) to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 2002.
*10(c)(10) Lawson Products, Inc. Long-Term Capital Accumulation Plan,
incorporated herein by reference from Exhibit 10(c)(10) to the
Company's Current Report on Form 8-K dated October 21, 2004.
*10(c)(11) Employment Agreement dated January 1, 2004 between the Company
and Robert Washlow, incorporated herein by reference to Exhibit
10(c)(10) to the Company's Current Report on Form 8-K dated
December 28, 2004.
*10(c)(12) Employment Agreement dated March 9, 2005 between the Company and
Thomas J. Neri, incorporated herein by reference to Exhibit
10(c)(12) to the Company's Current Report on Form 8-K dated
March 14, 2005.
-39-
*10(c)(13) Employment Agreement dated March 9, 2005 between the Company and
Neil E. Jenkins, incorporated herein by reference to Exhibit
10(c)(13) to the Company's Current Report on Form 8-K dated
March 14, 2005.
*10(c)(14) Form of Shareholder Value Appreciation Rights Award Agreement
*10(c)(15) Form of Restricted Stock Award and Acknowledgment
*10(c)(16) Form Letter regarding Stock Performance Rights
14 Code of Ethics of the Company, incorporated herein by reference
from Exhibit 14 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 2003.
21 Subsidiaries of the Company.
23 Consent of Ernst & Young LLP.
31.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002
32 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
- ----------------------------------
Indicates management employment contracts or compensatory plans or arrangements.
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| | | | | | Exhibit | | | | Number | | Description of Exhibit | | | | | 3(a) | | | Certificate of Incorporation of the Company, as amended, incorporated herein by reference to Exhibit 3(a) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1988. | | 3(b) | | | Amended and Restated By-laws of the Company, incorporated herein by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003. | | *10(c)(1) | | | Lawson Products, Inc. Incentive Stock Plan, incorporated herein by reference to Appendix A to the Company’s Proxy Statement for the Annual Meeting of Stockholders held on May 11, 1999. | | *10(c)(2) | | | Salary Continuation Agreement between the Company and Mr. Sidney L. Port, dated January 7, 1980, incorporated herein by reference from Exhibit 10(c)(2) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1991. | | *10(c)(3) | | | Employment Agreement between the Company and Mr. Jerome Shaffer, incorporated herein by reference from Exhibit 10(c)(9) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1985. | | *10(c)(3.1) | | | First Amendment to Employment Agreement between the Company and Mr. Jerome Shaffer, dated as of August 1, 1996, incorporated herein by reference from Exhibit 10(c)(6.1) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1996. | | *10(c)(4) | | | Employment Agreement between the Company and Jeffrey B. Belford dated March 1, 2005, incorporated herein by reference to Exhibit 10(c)(4) to the Company’s Current Report on Form 8-K dated March 4, 2005. | | *10(c)(5) | | | Amended and Restated Executive Deferral Plan, incorporated herein by reference from Exhibit 10(c)(7) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1995. | | *10(c)(6) | | | Employment Agreement dated March 1, 2005 between the Company and Roger F. Cannon, incorporated herein by reference to Exhibit 10(c)(6) to the Company’s Current Report on Form 8-K dated March 4, 2005. | | *10(c)(7) | | | Agreement between the Company and Bernard Kalish dated July 31, 1999, incorporated herein by reference from Exhibit 10(c)(8) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1999. | | *10(c)(8) | | | Lawson Products, Inc. Stock Performance Plan, incorporated herein by reference from Exhibit 10(c)(8) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000. | | *10(c)(9) | | | Lawson Products, Inc. 2002 Stock Equivalents Plan for Non Employee Directors, incorporated herein by reference from Exhibit 10(c)(9) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002. | | *10(c)(10) | | | Lawson Products, Inc. Long-Term Capital Accumulation Plan, incorporated herein by reference from Exhibit 10(c)(10) to the Company’s Current Report on Form 8-K dated October 21, 2004. | | *10(c)(11) | | | Employment Agreement dated January 1, 2004 between the Company and Robert Washlow, incorporated herein by reference to Exhibit 10(c)(10) to the Company’s Current Report on Form 8-K dated December 28, 2004. | | *10(c)(12) | | | Employment Agreement dated March 9, 2005 between the Company and Thomas J. Neri, incorporated herein by reference to Exhibit 10(c)(12) to the Company’s Current Report on Form 8-K dated March 14, 2005. |
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| | | | | | Exhibit | | | | Number | | Description of Exhibit | | | | | *10(c)(13) | | | Employment Agreement dated March 9, 2005 between the Company and Neil E. Jenkins, incorporated herein by reference to Exhibit 10(c)(13) to the Company’s Current Report on Form 8-K dated March 14, 2005. | | *10(c)(14) | | | Form of Shareholder Value Appreciation Rights Award Agreement, incorporated by reference to Exhibit 10(c)(14) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004. | | *10(c)(15) | | | Form of Restricted Stock Award and Acknowledgment, incorporated by reference to Exhibit 10(c)(15) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004. | | *10(c)(16) | | | Form Letter regarding Stock Performance Rights, incorporated by reference to Exhibit 10(c)(16) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004. | | 10(c)(17) | | | Credit Agreement dated March 27,2001 between Lawson Products, Inc. and LaSalle Bank National Association, as amended by the First Amendment to Credit Agreement dated August 12, 2002 as amended by Second Modification to Loan Documents dated July 11, 2003, and as further amended by Third Modification to Credit Agreement dated as of June 15, 2005, incorporated by reference to Exhibit 10(c)(17) to the Company’s Form 10-Q for the quarter ended June 30, 2005. | | *10(c)(18) | | | Employment Agreement dated July 27, 2005 between the Company and Mr. Michael W. Ruprich, incorporated herein by reference to Exhibit 10(c)(18) to the Company’s Current Report on Form 8-K dated July 26, 2005. | | *10(c)(19) | | | Employment Agreement dated September 14, 2005 between the Company and Mr. Kenneth E. Malik, incorporated herein by reference to Exhibit 10(c)(19) to the Company’s Current Report on Form 8-K dated September 14, 2005. | | 10(c)(20) | | | Real Estate Sales Agreement, dated October 24, 2005, by and between the City of Chicago and Superior and Sedgwick Associates, incorporated by reference to Exhibit 10(c)(20) to the Company’s Current Report on Form 8-K dated October 24, 2005. | | 10(c)(21) | | | Agreement of Limited Partnership of Superior and Sedgwick Associates, an Illinois Limited Partnership, dated November 1, 1984, incorporated by reference to Exhibit 10(c)(21) to the Company’s Current Report on Form 8-K dated October 24, 2005. | | 14 | | | Code of Ethics of the Company, incorporated herein by reference from Exhibit 14 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003. | | 21 | | | Subsidiaries of the Company. | | 23 | | | Consent of Ernst & Young LLP. | | 31.1 | | | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | | 31.2 | | | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | | 31.3 | | | Certification of Executive Vice President, Finance, Planning and Corporate Development pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | | 32 | | | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | | * | Indicates management employment contracts or compensatory plans or arrangements. |
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