SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 2003
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
Commission file number: 0-10546
LAWSON PRODUCTS, INC.
(Exact Name of Registrant as Specified in Charter)
DELAWARE 36-2229304
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1666 EAST TOUHY AVENUE, DES PLAINES, ILLINOIS 60018
(Address of principal executive offices)
Registrant's telephone number, including area code: (847) 827-9666
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of Each Class on which registered
------------------- -------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $1.00 PAR VALUE
(Title of class)
Indicate by check mark whether the Registrant (l) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No ......
The aggregate market value of the Registrant's voting stock held by
non-affiliates (based upon the per share closing price of $27.41) on June 30,
2003 was approximately $133,966,000.
As of March 1, 2004, 9,488,369 shares of Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated into this Form 10-K by reference:
Portions of the Proxy Statement for Annual Meeting of Stockholders to be held on
May 11, 2004 filed with the SEC Part III
TABLE OF CONTENTS
PART I PAGE
----
Item 1. Business 2
Item 2. Properties 6
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security Holders 7
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 8
Item 6. Selected Financial Data 9
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 7a. Quantitative and Qualitative Disclosures About
Market Risk 14
Item 8. Financial Statements and Supplementary Data 15
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 33
Item 9A. Controls and Procedures 33
PART III
Item 10. Directors and Executive Officers of the Registrant 33
Item 11. Executive Compensation 34
Item 12. Security Ownership of Certain Beneficial Owners
and Management 34
Item 13. Certain Relationships and Related Transactions 34
Item 14. Principal Accountant Fees and Services 34
PART IV
Item 15. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 34
EXHIBITS
SIGNATURE PAGE 37
"SAFE HARBOR" STATEMENT UNDER THE SECURITIES LITIGATION REFORM ACT OF 1995: This
Annual Report on Form 10-K contains certain forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995 that involve
risks and uncertainties. The terms "may," "should," "could," "anticipate,"
"believe," "continues", "estimate," "expect," "intend," "objective," "plan,"
"potential," "project" and similar expressions are intended to identify
forward-looking statements. These statements are not guarantees of future
performance and involve risks, uncertainties and assumptions that are difficult
to predict. These statements are based on management's current expectations,
intentions or beliefs and are subject to a number of factors, assumptions and
uncertainties that could cause actual results to differ materially from those
described in the forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, those related to
general economic conditions and market conditions in the original equipment
manufacturers and maintenance, repair and replacement distribution industries in
North America and to a lesser extent, the United Kingdom, the Company's ability
to obtain new customers and manage growth, material or labor cost increases,
competition in the Company's business, operating margin risk due to competitive
pricing and operating efficiencies, successful integration of acquisitions, the
Company's dependence on key personnel and the length of economic downturns in
the Company's markets. In the event of continued economic downturn, the Company
could experience additional customer bankruptcies, reduced volume of business
from its existing customers and lost volume due to plant shutdowns or
consolidations by the Company's customers or other factors that may be referred
to or noted in the Company's reports filed with the Securities and Exchange
Commission from time to time. The Company undertakes no obligation to update any
such factor or to publicly announce the results of any revisions to any
forward-looking statements contained herein whether as a result of new
information, future events or otherwise.
PART I
ITEM 1. BUSINESS.
Lawson Products, Inc. was incorporated in Illinois in 1952 and reincorporated in
Delaware in 1982. The Company has four reportable segments: (i) maintenance,
repair and replacement distribution in the U.S.; (ii) international maintenance,
repair and replacement distribution in Canada; (iii) original equipment
manufacturer ("OEM") distribution and manufacturing in the U.S. and (iv)
international original equipment manufacturer distribution in the United Kingdom
and Mexico. Please see Note O in the notes to the consolidated financial
statements for additional information regarding segment results.
PRODUCTS
The Company is a seller and distributor of systems, services and
products. The Company also manufactures and distributes production and
specialized component parts to the OEM marketplace. The Company offers to
customers over 900,000 expendable maintenance, repair and replacement products.
These products may be divided into three broad categories: Fasteners, Fittings
and Related Parts, such as screws, nuts, rivets and other fasteners; Industrial
Supplies, such as hoses and hose fittings, lubricants, cleansers, adhesives and
other chemicals, as well as files, drills, welding products and other shop
supplies; and Automotive and Equipment Maintenance Parts, such as primary
wiring, connectors and other electrical supplies, exhaust and other automotive
parts. The Company estimates that these categories of products accounted for the
indicated percentages of its total consolidated net sales for 2003, 2002 and
2001 respectively:
PERCENTAGE OF
CONSOLIDATED
NET SALES
-------------------------
2003 2002 2001
---- ---- ----
Fasteners, Fittings and Related Parts............... 43% 44% 45%
Industrial Supplies................................. 48 47 47
Automotive and Equipment Maintenance Parts.......... 9 9 8
---- -- --
100% 100% 100%
Substantially all of the Company's maintenance and repair products are
manufactured by others and must meet the Company's specifications. Approximately
90% of the Company's products are sold under the Company label. Substantially
all maintenance and repair items which the Company distributes are purchased by
the Company in bulk and subsequently repackaged in smaller quantities. The
Company regularly uses a large number of suppliers but has no long-term or fixed
price contracts with any of them. Most maintenance and repair items which the
Company distributes are purchased from several sources, and the Company believes
that the loss of any single supplier would not significantly affect its
operations. No single supplier accounted for more than 2.9% of the Company's
purchases in 2003.
Production components sold to the OEM marketplace may be manufactured
to customers' specification or purchased from other sources.
MARKETS
The Company's principal markets are as follows:
Heavy Duty Equipment Maintenance. Customers in this market include
operators of trucks, buses, agricultural implements, construction and road
building equipment, mining, logging and drilling equipment and other
off-the-road equipment. The Company estimates that approximately 25% of 2003
sales were made to customers in this market.
In-Plant and Building Maintenance. This market includes plants engaged
in a broad range of manufacturing and processing activities, as well as
institutions such as hospitals, universities, school districts and government
units. The Company estimates that approximately 42% of 2003 sales were made to
customers in this market.
Vehicle Maintenance and Transportation. Customers in this market
include automobile service center chains, independent garages, automobile
dealers, car rental agencies and other fleet operators. The Company estimates
that approximately 17% of 2003 sales were made to customers in this market.
Original Equipment Manufacturers. This market includes plants engaged
in a broad range of manufacturing and processing activities. The Company
estimates that approximately 16% of 2003 sales were made to customers in this
market.
At December 31, 2003, the Company had approximately 267,000 customers,
the largest of which accounted for approximately one percent of net sales during
2003. Sales were made through a force of approximately 1,800 sales
representatives at December 31, 2003. Included in this group were 260 district
and zone managers, each of whom, in addition to his or her own sales activities,
acted in an advisory capacity to other sales representatives in a designated
area and 47 regional managers who coordinate regional marketing efforts. Sales
representatives, including district and zone managers, are compensated on a
commission basis and are responsible for repayment of commissions on their
respective uncollectible accounts. In addition to the sales representatives and
district, zone and regional managers discussed above, the Company had
approximately 1,370 employees at December 31, 2003.
The Company's products are sold in all 50 states, Mexico, Puerto Rico,
the District of Columbia, Canada and the United Kingdom. The Company believes
that an important factor in its success is its ability to service customers
promptly. During the past five years, more than 99.2% of all stocked orders were
shipped to the customer within 24 hours after an order was received by the
Company. This rapid delivery is facilitated by computer controlled order entry
and inventory control systems in each general distribution center. In addition,
the receipt of customer orders at the distribution facilities has been
accelerated by portable facsimile transmission equipment, personal computer
systems and other electronic devices used by sales representatives. Customer
orders are delivered by common carriers.
INVENTORY
The Company is required to carry significant amounts of inventory in
order to meet its high standards of rapid processing of customer orders. The
Company has historically funded its working capital requirements internally.
Such internally generated funds, along with a $50 million unsecured revolving
line of credit, are expected to finance the Company's future growth and working
capital requirements.
DISTRIBUTION AND MANUFACTURING FACILITIES
Substantially all of the Company's maintenance products are stocked in
and distributed from each of its eight general distribution centers in: Addison,
Illinois; Reno, Nevada; Farmers Branch, Texas; Suwanee, Georgia; Fairfield, New
Jersey; Mississauga, Ontario, Canada; Bradley Stoke (Bristol) England and
Guadalajara, Mexico. Chemical products are distributed from a facility in Vernon
Hills, Illinois and welding products are distributed from a facility in
Charlotte, North Carolina. Production components are stocked in and distributed
from five centers located in Decatur, Alabama; Des Plaines, Illinois; Memphis,
Tennessee; Lenexa, Kansas and Cincinnati, Ohio. Production components are
manufactured in Decatur, Alabama. In the opinion of the Company, all existing
facilities are in good condition and are well maintained. All are being used
substantially to capacity on a single shift basis, except the manufacturing
facility in Decatur, Alabama which operates two shifts and the inbound facility
in Des Plaines, Illinois, which operates two shifts. Further expansion of
warehousing capacity may require new or expanded warehouses, some of which may
be located in new geographical areas.
INTERNATIONAL OPERATIONS
Approximately 8% of the Company's net sales came from international
sales, primarily in Canada, the United Kingdom and Mexico.
Canadian operations are conducted at the Company's 95,000 square foot
general distribution center in Mississauga, Ontario, a suburb of Toronto. These
operations constituted less than 5% of the Company's net sales during 2003.
Operations in the United Kingdom are conducted under the name of
Assembly Component Systems Limited from a 10,000 square foot general
distribution center in Bradley Stoke (Bristol) England. Prior to December 2003,
the operations were conducted under the name Lawson Products Limited. These
operations constituted less than 3% of the Company's net sales during 2003.
Operations in Mexico are conducted under the name of Lawson Products de
Mexico S.A. de C.V. from a 10,000 square foot facility in Guadalajara, Mexico.
These operations constituted less than 2% of the Company's net sales during
2003.
COMPETITION
The Company encounters intense competition from several national
distributors and manufacturers and a large number of regional and local
distributors. Due to the nature of its business and the absence of reliable
trade statistics, the Company cannot estimate its position in relation to its
competitors. However, the Company recognizes that some competitors may have
greater financial and personnel resources, handle more extensive lines of
merchandise, operate larger facilities and price some merchandise more
competitively than the Company. Although the Company believes that the prices of
its products are competitive, it endeavors to meet competition primarily through
the quality of its product line, its response time and its delivery systems.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers all of whose terms of office expire on May 11,
2004, are as follows:
YEAR FIRST
NAME AND PRESENT ELECTED TO OTHER OFFICES HELD
POSITION WITH COMPANY AGE PRESENT OFFICE DURING THE PAST FIVE YEARS
- --------------------- --- -------------- --------------------------
Robert J. Washlow 59 1999 Mr. Washlow has been Chairman of the Board and Chief
Chairman of the Board, Executive Officer since August 1999. Prior thereto,
Chief Executive Officer Mr. Washlow was Executive Vice President-Corporate
and Director Affairs beginning in 1998, Secretary beginning in
1985. Mr. Washlow was a member of the Office of the
President from 1999 to 2003.
Sidney L. Port 93 2003 Mr. Port has been Vice Chairman of the Board since
Vice Chairman of the Board of 2003. Prior thereto, Mr. Port was Chairman of the
Directors and Director Executive Committee for more than five years.
Jeffrey B. Belford 57 2004 Mr. Belford became Chief Operating Officer in 1999
President and Chief Operating Officer and President in 2004. Mr. Belford was a member of
the Office of the President from 1999 to 2003.
Prior to 1999, Mr. Belford was Executive Vice
President - Operations, Chief Operating Officer
since 1989.
Roger F. Cannon 55 2004 Mr. Cannon was elected Vice President, Field Sales
Executive Vice President, Field Sales Strategy and Development in 2004. He was a member
Strategy and Development of the Office of the President from 1999 to 2003.
Prior to 1999, Mr. Cannon was Executive Vice President,
Sales - Marketing from 1997-1999, and Vice President
Central Field Sales from 1991-1997.
Thomas J. Neri 52 2004 Mr. Neri was elected Executive Vice President,
Executive Vice President, Finance, Finance, Planning and Corporate Development; Chief
Planning and Corporate Development; Financial Officer and Treasurer in 2004. Prior
Chief Financial Officer; and Treasurer thereto, Mr. Neri was a business consultant from
2000 to 2003. From 1993 to 2000, Mr. Neri was
President and Publisher of Pioneer Newspapers, Inc.,
a subsidiary of Hollinger International, a publicly
held international publishing company.
John J. Murray 48 2004 Mr. Murray was elected Group President, MRO and New
Group President, MRO and New Channels Channels in 2004. From 2001 to 2003, Mr. Murray was
the Vice President - Corporate Affairs. From 1998 to
2001, Mr. Murray served as a consultant and outside
director for KMR Industries, Inc., an internet
company. From 1992 to 1997, Mr. Murray was President
and Chief Operating Officer for Park Ohio
Industries, a diversified public company.
Neil E. Jenkins 54 2004 Mr. Jenkins was elected Executive Vice President in
Executive Vice President; Secretary 2004. From 2000 to 2003 Mr. Jenkins has served as
and General Counsel Secretary and General Counsel of the Company. From
1996 to 2000, Mr. Jenkins operated a golf travel
business and was a business consultant.
YEAR FIRST
NAME AND PRESENT ELECTED TO OTHER OFFICES HELD
POSITION WITH COMPANY AGE PRESENT OFFICE DURING THE PAST FIVE YEARS
- --------------------- --- -------------- --------------------------
Jerome Shaffer 76 2004 Mr. Shaffer was elected Vice President and Special
Vice President and Special Advisor to Advisor to the Chief Executive Officer in 2004. For
the Chief Executive Officer and more than five years prior thereto, Mr. Shaffer was
Director Vice President and Treasurer of the Company. Mr.
Shaffer has been a director of the Company since 1987.
Joseph L. Pawlick 61 2003 Mr. Pawlick was elected Senior Vice President,
Senior Vice President, Accounting Accounting in 2003. From 1999 to 2003, Mr. Pawlick
was the Chief Financial Officer of the Company.
Prior to 1999, Mr. Pawlick was Vice President,
Controller and Assistant Secretary of the Company
since 1987.
Victor G. Galvez 47 1999 Mr. Galvez has been Vice President and Controller
Vice President, Controller since 1999. From 1999 to 1994, Mr. Galvez was
Assistant Controller of the Company.
AVAILABLE INFORMATION
The Company's Internet Address is: www.lawsonproducts.com. The Company makes
available free of charge through its website its annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to
those reports filed pursuant to Section 13(a) or 15(d) of the Exchange Act and
Section 16 reports as soon as reasonably practicable after such documents are
electronically filed with the SEC. Our internet website and the information
contained therein or incorporated therein are not intended to be incorporated
into this Annual Report on Form 10-K.
ITEM 2. PROPERTIES.
The Company owns two facilities located in Des Plaines, Illinois,
(152,600 and 27,000 square feet, respectively). These buildings contain the
Company's main administrative activities and an inbound warehouse facility that
principally supports the Addison, Illinois facility and all Lawson distribution
facilities. The Company also leases a facility in Des Plaines, Illinois (114,000
square feet). This building contains administrative and warehouse activities.
Additional administrative, warehouse and distribution facilities owned by the
Company are located in Addison, Illinois (90,000 square feet); Fairfield, New
Jersey (61,000 square feet); Reno, Nevada (97,000 square feet); Suwanee, Georgia
(105,000 square feet); Farmers Branch, Texas (54,500 square feet); and
Mississauga, Ontario, Canada (95,000 square feet). The Company also leases
administrative office space (25,300 square feet) in Independence, Ohio. Chemical
products are distributed from a 105,400 square foot owned facility in Vernon
Hills, Illinois and welding products are distributed from a 40,000 square foot
owned facility located in Charlotte, North Carolina. Administrative, warehouse
and distribution facilities in Bradley Stoke (Bristol) England (10,000 square
feet) are leased by the Company. Administrative and distribution facilities in
Guadalajara, Mexico (10,000 square feet) are leased by the Company. Production
components are distributed from leased facilities in Des Plaines, Illinois
(21,400 sq. ft.) Memphis, Tennessee, (26,300 sq. ft.), Lenexa, Kansas (40,500
sq. ft.) and Cincinnati, Ohio (16,800 sq. ft.). The leased facilities in Des
Plaines, Illinois represent a portion of the 114,000 square foot facility noted
above. The Company owns a 61,000 square foot facility in Decatur, Alabama which
manufacturers and distributes production components. From time to time, the
Company leases additional warehouse space near its present facilities.
Management believes that the current facilities are adequate to meet its needs.
See Item 1, "Business - Distribution and Manufacturing Facilities" for further
information regarding the Company's properties.
ITEM 3. LEGAL PROCEEDINGS.
There is no material pending litigation to which the Company, or any of
its subsidiaries, is a party or to which any of their property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this Report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded on the NASDAQ National Market
System under the symbol of "LAWS." The approximate number of stockholders of
record at December 31, 2003 was 871. The following table sets forth the high and
low closing sale prices as reported on the NASDAQ National Market System during
the last two years. The table also indicates the cash dividends for each
outstanding share of common stock paid by the Company during such periods.
2003 2002
----------------------------------- ------------------------------------
CASH DIVIDENDS CASH DIVIDENDS
HIGH LOW PAID PER SHARE HIGH LOW PAID PER SHARE
---- --- -------------- ---- --- --------------
First Quarter $30.81 $23.04 $.16 $29.00 $25.71 $.16
Second Quarter 28.48 24.40 .16 33.09 26.80 .16
Third Quarter 29.87 25.76 .16 30.31 25.68 .16
Fourth Quarter 34.74 27.47 .16 31.90 27.55 .16
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data should be read in conjunction
with the Financial Statements of the Company and notes thereto included
elsewhere in this Annual Report. The income statement data and balance sheet
data is for, and as of the end of each of, the years in the five-year period
ended December 31, 2003, are derived from the audited Financial Statements of
the Company.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
2003 2002 2001 2000 1999
------ ------ ------ ------ ------
Net Sales (1) $389,091 $387,456 $379,407 $348,967 $328,987
Income Before Income Taxes (2) 24,892 23,189 17,142 47,566 40,270
Net Income (3) 16,196 12,447 8,787 28,136 23,928
Total Assets 246,943 225,831 234,206 222,721 215,991
Return on Assets (percent) 6.6 5.5 3.8 12.6 11.1
Noncurrent Liabilities 36,714 31,765 40,520 28,946 27,525
Stockholders' Equity 173,351 162,343 159,898 159,912 150,040
Return on Average
Equity (percent) 9.6 7.7 5.4 18.6 16.5
Per Share of Common Stock (4):
Basic Net Income $1.71 $1.30 $0.91 $2.85 $2.29
Diluted Net Income 1.70 1.30 0.91 2.85 2.29
Stockholders' Equity 18.26 16.96 16.51 16.22 14.37
Cash Dividends Declared 0.66 0.64 0.64 0.60 0.57
Basic Weighted Average
Shares Outstanding 9,492 9,570 9,685 9,860 10,444
Diluted Weighted Average
Shares Outstanding 9,511 9,596 9,708 9,874 10,446
(1) Net sales for 2003, 2002 and 2001 were positively impacted by the
acquisition of the North American Industrial Products and Kent Automotive
Divisions in March 2001. In addition, net sales for the years 2000 and 1999
were also positively impacted by the acquisition of ACS/SIMCO in the third
quarter of 1999.
(2) During 2003, the Company recorded a $2,789 pre tax loss related to the sale
of Lawson Products Limited, the Company's former UK subsidiary.
(3) In 2003, the tax provision includes a $2,157 reduction to reflect the
partial utilization of a capital loss generated by the sale of the
Company's former UK subsidiary. In 2003, 2002 and 1999, the Company
recorded $1,477, $421 and $1760, respectively, after tax, of charges for
compensation arrangements related to management personnel reductions. The
Company adopted SFAS No. 142 as of January 1, 2002. Therefore, the Company
discontinued amortization of goodwill for 2002 and thereafter. Net income
for 2001 was reduced by $731 related to goodwill amortization. In 2001, the
Company recorded non-recurring charges for the write-off of capitalized
software and implementation costs related to an enterprise information
system project which the Company decided to discontinue as well as a
promotional program related to the acquisition of Premier operations. These
charges reduced net income by $5,138 and $2,021, respectively. During 2000,
the Company recorded a gain of $2,136 as a result of the sale of the
Company's interest in a real estate investment. In 1999, a gain of $554 was
recorded on the sale of marketable securities.
(4) These per share amounts were computed using basic weighted average shares
outstanding for all periods presented.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
SUMMARY OF FINANCIAL PERFORMANCE
2003 2002 2001
- ----------------------------------------- ----------- ------------ ------------
(Dollars in thousands, except per share
data)
Net sales $389,091 $387,456 $379,407
Income before taxes 24,892 23,189 17,142
Net income 16,196 12,447 8,787
Total assets 246,943 225,831 234,206
Return on assets (%) 6.6 % 5.5 % 3.8 %
Stockholders' equity 173,351 162,343 159,898
Return on avg. equity (%) 9.6 % 7.7 % 5.4 %
Diluted earnings per share $1.70 $1.30 $ 0.91
- ----------------------------------------- ----------- ------------ ------------
Lawson Products, Inc. ("Lawson", the "Company") achieved net income growth of
30.1% in 2003 to $16,196. Diluted net income per share for the year 2003 was
$1.70 compared to $1.30 in 2002.
OVERVIEW
Lawson is an international distributor and marketer of systems, services and
products to the industrial, commercial and institutional maintenance, repair and
replacement ("MRO") marketplace. The Company also manufactures and markets
specialized component parts to the original equipment marketplace ("OEM"),
including automotive, appliance, aerospace, construction and transportation
industries.
Lawson markets its products through a network of approximately 1,800 independent
and inside sales representatives. Lawson delivers "the right product, at the
right place, at the right time" through its state-of-the-art distribution
systems.
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
As further described in the Notes to Consolidated Financial Statements, Note O -
Segment Reporting, the Company distributes Maintenance, Repair and Replacement
consumables, reporting this activity as the "MRO-US" segment in the United
States and as the "MRO-CAN" segment in Canada. The manufacture and distribution
of specialized component parts in the United States is reported as the "OEM-US"
segment. Distribution of specialized component parts in Mexico and the United
Kingdom is reported as the "OEM-INTL" segment.
The following table presents the Company's net sales results for its MRO and OEM
segments for the past three years:
2003 2002 2001
- ------------------------------- ----------- ----------- ----------
MRO $321.0 $323.4 $320.9
OEM 68.1 64.1 58.5
- ------------------------------- ----------- ----------- ----------
$389.1 $387.5 $379.4
=============================== =========== =========== ==========
The segment sales table above illustrates that OEM sales increased $4.0 million
(6.2%) in 2003 while MRO sales declined $2.4 million (0.7%). In the OEM segment,
the Company increased key account penetration and expanded its international
business. Overall, international sales growth in the OEM segment offset a slight
decline in U.S. OEM sales in 2003. The MRO segment continued to face difficult
market conditions in 2003, particularly in the United States. MRO sales gains in
Canada for 2003 were offset by sales declines in domestic MRO business in 2003.
Gross profit declined by $2.3 million, or 0.9%, to $248.0 million during 2003
from $250.3 million in 2002. Gross profit as a percent of total sales, declined
to 63.7% in 2003 from 64.6% in 2002. This decrease resulted partially from
product mix, as the Company sold a lower percentage of MRO products as a percent
of total sales in 2003 as compared to 2002. In 2003, MRO gross profit was 71.3%
of sales, compared to 72.4% in 2002. OEM gross profit increased in 2003 to 28.0%
of sales, compared to 25.3% in 2002.
Selling, general and administrative (S,G&A) expenses decreased by $5.4 million,
or 2.4%, to $221.2 million (56.8% of sales) in 2003 from $226.6 million (58.5%
of sales) in 2002. The decline in S,G&A was attributable to the Company's
continuing efforts to contain and reduce costs. Lower sales agent compensation
and benefit costs more than offset increases in other S,G&A expenses,
principally wages and a loss of approximately $2.8 million in connection with
the sale of the MRO operations of the Company's former UK subsidiary. The
decrease in sales agent compensation and benefits resulted principally from the
expiration of a special promotional program ending in the second quarter of
2002.
During 2003, the Company incurred $2.5 million in charges for the retirement and
severance of certain management personnel compared to $0.4 million in 2002.
Operating income increased by $0.9 million, or 4.3%, to $22.7 million in 2003
from $21.8 million in 2002. The increase resulted primarily from lower S,G&A
expenses noted above, partially offset by lower gross profit and higher other
charges.
The effective income tax rates were approximately 34.9% and 46.3%, respectively,
for 2003 and 2002. The decrease in the effective tax rate was primarily
attributable to a $2.2 million reduction of the income tax provision to reflect
the partial utilization of a capital loss carryback generated by the 2003 sale
of Lawson Products Limited, the Company's former subsidiary in the United
Kingdom.
Net income increased by $3.7 million, or 30.1%, to $16.2 million during 2003
from $12.5 million in 2002, while income per share increased 31.0% to $1.70 in
2003 from $1.30 in 2002. The principal factors affecting net income and earnings
per share were lower income taxes and higher operating income, as discussed
above. Per share net income for 2003 and 2002 was positively impacted by the
Company's share repurchase program.
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
In 2002, total sales increased by $8.1 million, or 2.1%, to $387.5 million from
$379.4 million in 2001, comprising an increase of $2.5 million, or 0.8% in the
MRO segments and $5.6 million, or 9.6% in the OEM segments. The MRO increase was
attributable to sales generated by the addition of field and inside sales
representatives from the IPD and Kent divisions of the North American business
of Premier Farnell, acquired March 30, 2001, partially offset by the effects of
difficult market conditions and a planned reduction in the number of
under-performing domestic sales agents from 2001 levels. The sales increase in
the OEM segments was attributable to increased penetration of existing accounts
as well as new customer development efforts, both domestically and
internationally in these business segments.
Gross profit increased by $2.0 million, or 0.8%, to $250.3 million during 2002
from $248.3 million in 2001. This increase resulted from the sales increase
noted above, partially offset by a decline in gross profit as a percent of total
sales, to 64.6% from 65.5%. This reduction in gross profit percentage is due to
relatively higher growth in the OEM segments, which traditionally carry a lower
gross profit rate than MRO but also have lower operating costs. In 2002, OEM
gross profit was 25.2% of sales, compared to 30.2% in 2001. In 2002, OEM gross
profit was negatively impacted by a $2.1 million inventory write-off,
principally resulting from a change in the inventory profile by our U.K.
business to better serve our then current customer base. Excluding this
write-off, OEM gross profit was 28.5% and total gross profit was 65.1%. The MRO
segments gross profit percentage was 72.4% of sales in 2002, compared to 71.9%
in 2001.
Selling, general and administrative (S,G&A) expenses increased by $4.8 million,
or 2.2%, to $226.6 million (58.5% of sales) in 2002 from $221.7 million (58.4%
of sales) in 2001. The increase in S,G&A was attributable to wage and operating
cost increases, and to continued investment in various selling and product
education initiatives, coupled with higher health costs. The increase was
partially offset by the cessation of amortization of goodwill pursuant to
adoption of FASB Statement No. 142 by the Company at the beginning of 2002,
expired MRO promotional program costs put in place during 2001 to support the
newly acquired Premier business and the absence of non-recurring costs
associated with the IPD/Kent acquisition. If FASB Statement No.142 had been
adopted at the beginning of 2001, the non-amortization of goodwill would have
resulted in decreased S,G&A expenses of approximately $1.2 million.
Operating income increased by $5.6 million, or 34.6%, to $21.8 million in 2002
from $16.2 million in 2001. The increase resulted primarily from higher net
sales, the absence of the $8.5 million write-off of an enterprise information
system included in 2001 results and the absence of goodwill amortization and
acquisition costs, partially offset by the higher wages and health costs and
continued investment in various selling and product education initiatives noted
above.
Interest expense was $0.2 million in 2002 compared to $0.7 million in 2001. The
decrease was attributable to the Company's repayment of all of its outstanding
debt from a revolving line of credit, coupled with lower interest rates in 2002.
The effective income tax rates were approximately 46.3% and 48.7%, respectively,
for 2002 and 2001.
Net income increased by $3.6 million, or 41.6%, to $12.4 million during 2002
from $8.8 million in 2001, while income per share increased 42.9% to $1.30 in
2002 from $0.91 in 2001. The principal factors affecting net income and earnings
per share are stated above. Per share net income for 2002 and 2001 was
positively impacted by the Company's share repurchase program.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operations and a $50 million unsecured line of credit entered
into in February 2001 have continued to be sufficient to fund operating
requirements, cash dividends and capital improvements. Cash flows from
operations and the line of credit are also expected to finance the Company's
future growth.
Cash flows provided by operations for 2003, 2002 and 2001 were $26.4 million,
$29.0 million and $6.4 million, respectively. The decline in 2003 was
principally attributable to increasing operating assets, primarily accounts
receivable and cash value of life insurance, more than offsetting the $3.7
million increase in net income. The improvement in 2002 over 2001 was due
primarily to decreasing operating assets, increasing operating liabilities, as
well as the gain in net income noted above. Working capital at December 31, 2003
and 2002 was approximately $107.9 million and $98.0 million, respectively. At
December 31, 2003 the current ratio was 3.9 to 1 as compared to 4.1 to 1 at
December 31, 2002.
Over the past three years, the Company has made the following purchases of its
common stock:
Year Purchased Shares Purchased Cost (In millions) Year Authorized by Board
- ---------------- ------------------ ------------------- ------------------------
2003 20,186 $0.6 2000
2002 196,250 5.6 1999/2000
2001 84,497 2.2 1999
- ---------------- ------------------ ------------------- ------------------------
In 1999, the Board authorized the purchase of up to 500,000 shares of the
Company's common stock. In 2000, the Board authorized 500,000 additional shares.
At December 31, 2003, 286,399 shares were available for purchase pursuant to the
2000 Board authorization. Funds to purchase these shares were provided by
investments and cash flows from operations.
Additions to property, plant and equipment were $4.2 million, $6.0 million and
$5.2 million, respectively, for 2003, 2002 and 2001. Consistent with prior
years, capital expenditures were incurred principally for improvement of
existing facilities and for the purchase of related equipment. Capital
expenditures during 2002 were incurred primarily for improvement of existing
facilities and for the purchase of related equipment, as well as for the
improvement of new leased facilities. Capital expenditures during 2001 primarily
reflect purchases of computer equipment and improvement of existing facilities
and purchases of related equipment.
Future contractual obligations consisted of the following at December 31, 2003:
(In thousands) 2009 and
2004 2005 2006 2007 2008 thereafter Total
- --------------------------------------- --------- --------- --------- --------- -------- ----------- ----------
Rents $3,056 $2,528 $2,209 $1,874 $1,081 $3,223 $13,971
Mortgage payable 1,462 1,573 - - - - 3,035
Deferred compensation 745 736 555 311 312 11,002 13,661
Security bonus plan (1) - - - - - 20,823 20,823
- --------------------------------------- --------- --------- --------- --------- -------- ----------- ----------
Total contractual cash $5,263 $4,837 $2,764 $2,185 $1,393 $35,048 $51,490
obligations
- --------------------------------------- --------- --------- --------- --------- -------- ----------- ----------
(1) Payments to beneficiaries of the security bonus plan are made on a lump sum basis at time of retirement.
No such obligations exist at December 31, 2003.
BUSINESS COMBINATIONS AND DISPOSALS
Sale of MRO Operations in United Kingdom: During the fourth quarter of 2003, the
Company completed the sale of its United Kingdom MRO subsidiary. As stated
above, in connection with the sale of this operation, the Company incurred a
loss of $2.8 million, including inventory write-offs of $1.8 million. The
Company's OEM customers in the United Kingdom will be serviced through a newly
formed entity, Assembly Component Systems Limited.
Purchase of Industrial Products and Kent Automotive: On March 30, 2001, the
Company purchased certain assets of Premier Farnell's Cleveland based North
American Industrial Products ("IPD") and Kent Automotive Divisions for
approximately $28.4 million plus approximately $7.2 million for related
inventories. The all-cash transaction was accounted for as a purchase;
accordingly the accounts and transactions of the acquired business have been
included in the consolidated financial statements since the date of acquisition.
Under the agreement, the Company acquired the field sales, telephone sales and
customer service professionals, the customer accounts, certain administrative
executives, and use of various intellectual properties, including trademarks and
trade names of the Industrial Products and Kent Automotive divisions in certain
territories. Premier Farnell's Premier Fastener, Rotanium Products, Certainium
Alloys, CT Engineering, JI Holcomb and Kent Automotive business units in the
United States, Canada, Mexico, Central America and the Caribbean were combined
with the Company's existing operations.
The assets acquired were recorded at fair values based on actual purchase cost
of inventories and valuations of various intellectual properties, including
trademarks and trade names of the IPD and Kent divisions. This acquisition did
not require a significant investment by the Company in facilities or equipment.
The acquisition generated approximately $41.2 million of incremental sales in
2001. The Company only acquired inventory and portions of the IPD and Kent
business, and is therefore unable to provide any meaningful pro forma
information of prior period results.
ADOPTION OF RECENTLY ISSUED ACCOUNTING STANDARDS
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities," which addresses the financial reporting by companies involved with
variable interest entities ("VIE"). A VIE is a corporation, partnership, trust
or any other legal structure used for business purposes that either (a) does not
have equity investors with voting rights or (b) has equity investors that do not
provide sufficient financial resources for the entity to support its activities.
FIN No. 46 requires a VIE to be consolidated by a company if that company is
subject to a majority of the risk of loss from the VIE's activities or entitled
to receive the majority of the entity's residual returns or both. Previously, a
company generally included an entity in its consolidated financial statements
only if it controlled the entity through voting interests. The consolidation
requirements of FIN No. 46 apply immediately to VIE's created after January 31,
2003. Existing VIE's must be consolidated in the first fiscal year or interim
period beginning after March 15, 2004.
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 general partner of this VIE and holds a 1.5%
interest in the partnership. The operations of the partnership consist of rental
of the building under a long-term lease and the servicing of the non-recourse
mortgage. 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, of approximately $3.0 million at December 31, 2003.
The building and land have a net carrying value of $4.4 million, which are
included in property, plant and equipment. The remaining assets, none of which
are significant, are recorded in other assets.
CRITICAL ACCOUNTING POLICIES
The Company has disclosed its accounting policies in Note B to the consolidated
financial statements. The following provides supplemental information to these
accounting policies as well as information on the accounts requiring more
significant estimates.
Allowance for Doubtful Accounts - Methodology: The Company evaluates the
collectibility of accounts receivable based on a combination of factors. In
circumstances where the Company is aware of a specific customer's inability to
meet its financial obligations (e.g., bankruptcy filings, substantial
down-grading of credit ratings), a specific reserve for bad debts is recorded
against amounts due to reduce the receivable to the amount the Company
reasonably believes will be collected. For all other customers, the Company
recognizes reserves for bad debts based on the Company's historical experience
of bad debt write-offs as a percent of accounts receivable outstanding. If
circumstances change (i.e., higher than expected defaults or an unexpected
material adverse change in a major customer's ability to meet its financial
obligations), the estimates of the recoverability of amounts due the Company
could be revised by a material amount.
Inventories - Slow Moving and Obsolescence: The Company carries significant
amounts of inventories, which is a part of the Company's strategy as a
competitive advantage in its ability to fulfill the vast majority of our
customers' orders the same day received. However, this strategy also increases
the chances that portions of the inventory have decreased in value below their
carrying cost. To reduce inventory to a lower of cost or market value, the
Company records a reserve for slow-moving and obsolete inventory. The Company
defines obsolete as those inventory parts on hand which the Company plans to
discontinue to offer to its customers. Slow-moving inventory is monitored by
examining reports of parts which have not been sold for extended periods. The
Company records the reserve needed based on its historical experience of how
much the selling prices must be reduced to move these obsolete and slow-moving
products. If experience or market conditions change, estimates of the reserves
needed could be revised by a material amount.
Impact of Inflation and Changing Prices: The Company has continued to pass on to
its customers most increases in product costs. Accordingly, gross margins have
not been materially impacted. The impact from inflation has been more
significant on the Company's fixed and semi-variable operating expenses,
primarily wages and benefits, although to a lesser degree in recent years due to
moderate inflation levels.
Although the Company expects that future costs of replacing warehouse and
distribution facilities will rise due to inflation, such higher costs are not
anticipated to have a material effect on future earnings.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company, through its foreign subsidiaries, distributes products in
Canada, the United Kingdom and Mexico. As a result, the Company is from time to
time exposed to market risk relating to the impact of foreign currency exchange
rates. A hypothetical 10% adverse movement in exchange rates would increase
income by $319,000 in 2003 to offset the loss by the foreign subsidiaries.
The Company had nothing outstanding as of December 31, 2003 under its
revolving line of credit.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following information is presented in this report:
Report of Independent Auditors
Consolidated Balance Sheets as of December 31, 2003 and 2002.
Consolidated Statements of Income for the Years ended December
31, 2003, 2002 and 2001.
Consolidated Statements of Changes in Stockholders' Equity for
the Years ended December 31, 2003, 2002 and 2001.
Consolidated Statements of Cash Flows for the Years ended
December 31, 2003, 2002 and 2001.
Notes to Consolidated Financial Statements.
Schedule II
REPORT OF INDEPENDENT AUDITORS
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, 2003 and 2002, 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, 2003. 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, 2003 and 2002, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2003, in conformity with generally accepted
accounting principles in the United States. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
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.
As discussed in Note G to the financial statements, in 2002 the Company changed
its method of accounting for goodwill and other intangible assets.
/s/Ernst & Young LLP
Chicago, Illinois
February 25, 2004
LAWSON PRODUCTS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands) DECEMBER 31,
---------------------------------------------
2003 2002
---- ----
Assets
Current assets:
Cash and cash equivalents $ 21,399 $ 7,591
Marketable securities 2,156 696
Accounts receivable, less allowance for doubtful accounts
(2003 -$2,121, 2002 - $1,830) 47,972 42,990
Inventories 59,817 63,851
Miscellaneous receivables 4,773 3,202
Prepaid expenses 6,666 7,968
Deferred income taxes 1,975 3,463
---------------------------------------------
Total Current Assets 144,758 129,761
---------------------------------------------
Property, plant and equipment, at cost, less allowances for
depreciation and amortization (2003 - $53,880;
2002 - $49,499) 42,946 39,519
---------------------------------------------
Other assets:
Cash value of life insurance 13,201 10,933
Investments in real estate -- 1,305
Deferred income taxes 13,201 11,987
Goodwill, less accumulated amortization 28,649 28,649
Other intangible assets, less accumulated amortization
(2003 - $1,219; 2002 - $701) 1,481 1,999
Other 2,707 1,678
---------------------------------------------
59,239 56,551
---------------------------------------------
$ 246,943 $ 225,831
=============================================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 8,240 $ 8,085
Accrued expenses and other liabilities 27,176 23,638
Current Portion of long term debt 1,462 --
---------------------------------------------
Total Current Liabilities 36,878 31,723
---------------------------------------------
Noncurrent liabilities and deferred credits:
Accrued liability under security bonus plans 20,823 20,614
Long term debt 1,573 --
Deferred compensation and other liabilities 14,318 11,151
---------------------------------------------
36,714 31,765
---------------------------------------------
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 - 2003- 9,493,511 shares; 2002 - 9,494,011 shares 9,494 9,494
Capital in excess of par value 2,667 2,387
Retained earnings 161,831 152,495
---------------------------------------------
173,992 164,376
Accumulated other comprehensive loss (641) (2,033)
---------------------------------------------
Stockholders' equity 173,351 162,343
---------------------------------------------
$ 246,943 $ 225,831
=============================================
See notes to consolidated financial statements
LAWSON PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
2003 2002 2001
---------------- --------------- --------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales $389,091 $387,456 $379,407
Cost of goods sold 141,124 137,129 131,065
--------------------------------------------------------
Gross profit 247,967 250,327 248,342
Selling, general and administrative expenses 221,189 226,571 221,743
Other charges 2,459 360 8,496
Provision for doubtful accounts 1,578 1,585 1,901
--------------------------------------------------------
Operating Income 22,741 21,811 16,202
--------------------------------------------------------
Interest and dividend income 194 53 654
Interest expense (131) (154) (706)
Other income - net 2,088 1,479 992
--------------------------------------------------------
2,151 1,378 940
--------------------------------------------------------
Income Before Income Taxes 24,892 23,189 17,142
Income tax expense 8,696 10,742 8,355
--------------------------------------------------------
Net Income $ 16,196 $ 12,447 $ 8,787
========================================================
Net Income Per Share of Common Stock:
Basic $ 1.71 $ 1.30 $0.91
========================================================
Diluted $ 1.70 $ 1.30 $0.91
========================================================
See notes to consolidated financial statements
LAWSON PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS) ACCUMULATED
COMMON CAPITAL OTHER
STOCK, IN EXCESS OF RETAINED COMPREHENSIVE COMPREHENSIVE
$1 PAR VALUE PAR VALUE EARNINGS LOSS INCOME
------------ ------------- ---------------- ---------------- ---------------
Balance at January 1, 2001 $9,706 $762 $151,066 $(1,622) $ --
Net income 8,787 8,787
Other comprehensive loss, net of tax:
Adjustment for foreign currency (576) (576)
--------------
translation
Comprehensive income for the year $8,211
--------------
Cash dividends declared (6,191)
Stock issued under employee stock plans 7 159
Purchase and retirement of common stock (84) (8) (2,108)
- ------------------------------------------ ------------------- -------------- ----------------- ------------------ ----------------
Balance at December 31, 2001 9,629 913 151,554 (2,198)
- ------------------------------------------ ------------------- -------------- ----------------- ------------------ ----------------
Net income 12,447 $12,447
Other comprehensive income, net of tax:
Adjustment for foreign currency 165 165
--------------
translation
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)
- ------------------------------------------ ------------------- -------------- ----------------- ------------------ ----------------
See notes to consolidated financial statements
LAWSON PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS) YEAR ENDED DECEMBER 31,
---------------------------------------------------------
2003 2002 2001
---------------- --------------- -----------------
Operating activities
Net income $16,196 $ 12,447 $ 8,787
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 5,359 5,506 5,741
Amortization 1,744 1,321 2,405
Provision for allowance for doubtful accounts 1,578 1,585 1,901
Deferred income taxes (476) (2,177) (1,771)
Deferred compensation and security bonus plans 5,466 2,704 3,399
Payments under deferred compensation
and security bonus plans (2,099) (1,635) (2,395)
Losses (Gains) from sale of marketable securities -- (300) (13)
Income from investments in real estate (360) (600) (480)
Changes in operating assets and liabilities
(Exclusive of effect of acquisition):
Accounts receivable (5,888) 1,165 (5,392)
Inventories 4,902 1,692 (3,093)
Prepaid expenses and other assets (4,171) 4,867 3,259
Accounts payable and accrued expenses 3,176 1,958 (2,970)
Income taxes payable -- -- (2,615)
Other 991 429 (316)
-----------------------------------------------------
Net Cash Provided by Operating Activities 26,418 28,962 6,447
-----------------------------------------------------
Investing activities
Additions to property, plant and equipment (4,241) (5,965) (5,229)
Purchases of marketable securities (5,129) (8,340) (13,268)
Proceeds from sale of marketable securities 3,669 9,681 41,917
Acquisition of businesses, net of cash acquired -- -- (36,891)
Other 286 456 240
-----------------------------------------------------
Net Cash Used in Investing Activities (5,415) (4,168) (13,231)
-----------------------------------------------------
Financing Activities
Proceeds from revolving line of credit 4,000 36,500 71,800
Payments on revolving line of credit (4,000) (50,500) (57,800)
Payments on mortgage payable (805) -- --
Purchases of common stock (620) (5,623) (2,201)
Proceeds from exercise of stock options 305 1,571 166
Dividends paid (6,075) (6,138) (6,106)
-----------------------------------------------------
Net Cash Provided by (Used in) Financing Activities (7,195) (24,190) 5,859
-----------------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents 13,808 604 (925)
Cash and Cash Equivalents at Beginning of Year 7,591 6,987 7,912
-----------------------------------------------------
Cash and Cash Equivalents at End of Year $ 21,399 $ 7,591 $ 6,987
=====================================================
See notes to consolidated financial statements
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.
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 inter-company accounts and
transactions have been eliminated in consolidation.
Revenue Recognition: Sales and associated cost of goods sold are
recognized when products are shipped and title passes to customers.
Shipping and Handling Fees and Costs: Costs related to shipping and
handling fees are included on the Income Statement in the caption Selling,
general and administrative expenses and totaled $11,159, $11,898 and $11,460 in
2003, 2002 and 2001, respectively. Amounts billed to customers for shipping fees
are included in net sales.
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. (See New Accounting Standards)
Marketable Securities: Marketable equity and debt securities are
classified as available-for-sale and are carried at fair value, with the
unrealized gains and losses, net of tax, recorded in stockholders' equity.
Realized gains and losses, declines in value judged to be other-than-temporary,
and interest and dividends are included in investment income. The cost of
securities sold is based on the specific identification method.
Inventories: Inventories which consist of principally finished goods
are stated at the lower of cost (first-in, first-out method) or market.
Property, Plant and Equipment: Provisions for depreciation and
amortization are computed by the straight-line method for buildings using useful
lives of 20 to 30 years and by the double declining balance method for machinery
and equipment, furniture and fixtures and vehicles using useful lives of 3 to 10
years.
Investment Tax Credits: Investment tax credits on assets leased to
others (see Investment in Real Estate Partnership) are deferred and amortized
over the useful life of the related asset.
Cash Equivalents: The Company considers all highly liquid investments
with a maturity of three months or less when purchased to be cash equivalents.
Stock Options: Stock options are accounted for under Accounting
Principles Board (APB) Opinion No. 25, "Accounting For Stock Issued to
Employees." Under APB 25, 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."
2003 2002 2001
- -------------------------------------------------------------------------------
Net income - as reported 16,196 $12,447 $8,787
Deduct: Total stock based
employee compensation
expense determined under
fair value method, net of tax (27) (38) (49)
- ------------------------------------------------------------------------------
Net income - pro forma 16,169 12,409 8,738
Basic earnings per share - as reported 1.71 1.30 .91
Diluted earnings per share - as reported 1.70 1.30 .91
Basic earnings per share - pro forma 1.70 1.30 .90
Diluted earnings per share - pro forma 1.70 1.29 .90
For purposes of pro forma disclosures, the estimated fair value of
options granted is amortized to expense over the option's vesting period. The
pro forma effect on net income is not representative of the pro forma effect on
net income in future years because grants made in 1996 and later years have an
increasing vesting period.
Goodwill and Other Intangibles: Goodwill represents the cost of
business acquisitions in excess of the fair value of identifiable net tangible
assets acquired. Goodwill was amortized over 20 years using the straight-line
method until the end of 2001.
In June 2001, the FASB issued Statement No. 141, "Business
Combinations" and Statement No. 142 "Goodwill and Other Intangibles," effective
for fiscal years beginning after December 15, 2001. Under the new rules,
goodwill and other intangible assets deemed to have indefinite lives will no
longer be amortized but subject to annual impairment tests. (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, 2003, 2002 and 2001.
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 2002
and 2001 financial statements to conform with the 2003 presentation.
New Accounting Standards: In January 2003, the FASB issued FIN No. 46,
"Consolidation of Variable Interest Entities," which addresses the financial
reporting by companies involved with variable interest entities ("VIE"). A VIE
is a corporation, partnership, trust or any other legal structure used for
business purposes that either (a) does not have equity investors with voting
rights or (b) has equity investors that do not provide sufficient financial
resources for the entity to support its activities. FIN No. 46 requires a VIE to
be consolidated by a company if that company is subject to a majority of the
risk of loss from the VIE's activities or entitled to receive a majority of the
entity's residual returns or both. Previously, a company generally included an
entity in its consolidated financial statements only if it controlled the entity
through voting interests. The consolidation requirements of FIN No. 46 apply
immediately to VIE's created after January 31, 2003. Existing VIE's must be
consolidated in the first fiscal year or interim period beginning after March
15, 2004. the Company adopted FIN 46 as of July 1, 2003, which has resulting 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.
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
International OEM distribution segment.
The sale also generated approximately $22,441 in capital losses. The Company was
able to carryback $6,163 of the capital loss to offset capital gains in prior
years. The effect of the carryback resulted in $2,157 of tax benefit in 2003. A
valuation allowance has been provided for the remainder of the capital loss due
to the uncertainty of utilization.
Purchase of Industrial Products and Kent Automotive:
On March 30, 2001, the Company purchased certain assets of Premier Farnell's
Cleveland based North American Industrial Products (IPD) and Kent Automotive
(Kent) Divisions for approximately $28,369 plus approximately $7,267 for related
inventories. This all-cash transaction was accounted for as a purchase;
accordingly, the accounts and transactions of the acquired business have been
included in the consolidated financial statements since the date of acquisition.
Under the agreement, the Company acquired the field sales, inside sales and
customer service professionals, customer accounts, certain administrative
executives, and various intellectual properties, including trademarks and trade
names of the divisions in certain territories. The identifiable intangibles
acquired in the acquisitions were recorded at an independent appraised value of
approximately $1,400. These intangibles are being amortized over a weighted
average estimated life of 15.14 years. The remaining excess of purchase price
over net assets acquired of approximately $27,100 represents goodwill. The
assets acquired were recorded at fair values as determined by the Company's
management. As the Company only acquired inventory and sales professionals of
the IPD and Kent businesses, the Company is unable to provide any meaningful pro
forma information of prior period results. Net sales attributed to the acquired
division represented approximately $41,252 for 2001.
NOTE D - OTHER CHARGES
In 2003, the Company recorded charges totaling $2,459 for severance of
several members of management. Approximately $422 was paid in 2003 and the
remaining benefits will be paid through 2006.
During 2002, the Company recorded a charge of $568 for severance for
several members of management and a $208 adjustment to the reserve resulting
from a severance settlement. Approximately $155 was paid in 2003 and the
remaining benefits will be paid in 2004.
In 2001, the Company wrote-off capitalized software and implementation
costs of a discontinued enterprise information system project. This write-off
represents a non-cash charge of $8,527 ($5,138 net of tax benefits).
The table below shows an analysis of the company's reserves for other
charges:
Severance
Description of Item and Related Asset
- --------------------------- Expenses Writedown Total
- ------------------------------------------------------------------------------
Balance January 1, 2001 $2,373 $ - $2,373
Charged to earnings 2001 - 8,527 8,527
Cash paid in 2001 (884) - (884)
Non-cash utilization - (8,527) (8,527)
Adjustment to reserves (31) - (31)
- ------------------------------------------------------------------------------
Balance December 31, 2001 1,458 - 1,458
Charged to earnings 2002 568 - 568
Cash paid in 2002 (942) - (942)
Adjustment to reserves (208) - (208)
- -------------------------------------------------------------------------------
Balance December 31, 2002 876 - 876
Charged to earnings 2003 2,459 - 2,459
Cash paid in 2003 (859) - (859)
- -------------------------------------------------------------------------------
Balance December 31, 2003 $2,476 $ - $2,476
===============================================================================
NOTE E - MARKETABLE SECURITIES
The following is a summary of the Company's investments at December 31
which are classified as available-for-sale. The contractual maturity of all
marketable securities at December 31, 2003 is less than one year.
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gain Losses Value
2003
- ------------------------------ ---------- ------------- ------------- ----------
Foreign government securities $ 2,156 $ - $ - $ 2,156
- ------------------------------ ---------- ------------- ------------- ----------
2002
- ------------------------------ ---------- ------------- ------------- ----------
Foreign government securities $ 696 $ - $ - $ 696
- ------------------------------ ---------- ------------- ------------- ----------
The gross realized gains on sales of marketable securities totaled: $0,
$300 and $13 in 2003, 2002 and 2001, respectively.
NOTE F - PROPERTY, PLANT AND EQUIPMENT
The cost of property, plant and equipment consists of:
2003 2002
- ---------------------------------------------------------------------------
Land $8,389 $ 6,608
Buildings and improvements 51,556 42,090
Machinery and equipment 30,143 32,702
Furniture and fixtures 5,749 5,965
Vehicles 432 406
Construction in Progress 557 1,247
- ---------------------------------------------------------------------------
$96,826 $89,018
===========================================================================
NOTE G- GOODWILL AND OTHER INTANGIBLES
As discussed in Note B - Summary of Major Accounting Policies, 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 which determined the Company's goodwill was not impaired.
The Company's pro forma information for intangible assets that are no
longer being amortized effective January 1, 2002 consisted of the following:
2003 2002 2001
- --------------------------------------------------------------------------------
Net income - as reported $16,196 $12,447 $8,787
Goodwill amortization - - 731
- --------------------------------------------------------------------------------
Net income - pro forma 16,196 12,447 9,518
Diluted earnings per share - as reported 1.70 1.30 .91
Diluted earnings per share - pro forma 1.70 1.30 .98
Intangible assets subject to amortization were as follows:
December 31, 2003
Gross Accumulated Net Carrying
Balance Amortization Amount
- --------------------------------------------------------------------------------
Trademarks and tradenames $1,747 $851 $896
Customer lists 953 368 585
- --------------------------------------------------------------------------------
$2,700 $1,219 $1,481
================================================================================
December 31, 2002
Gross Accumulated Net Carrying
Balance Amortization Amount
- --------------------------------------------------------------------------------
Trademarks and tradenames $1,747 $668 $1,079
Customer lists 953 33 920
- --------------------------------------------------------------------------------
$2,700 $701 $1,999
================================================================================
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 $518, $377 and $137 in 2003, 2002 and 2001, respectively.
Amortization expense for each of the next five years is estimated as follows:
2004 2005 2006 2007 2008
- --------------------- ----------- ---------- ---------- ------------ -----------
Amortization expense $116 $83 $83 $83 $83
===================== =========== ========== ========== ============ ===========
NOTE H - ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist of the following:
2003 2002
- ---------------------------------------------- ---------------- ----------------
Salaries, commissions and other compensation $ 6,802 $ 5,875
Accrued other charges 2,476 876
Accrued and withheld taxes, other than income
taxes 2,591 2,757
Accrued profit sharing contributions 3,448 3,269
Accrued self-insured health benefits 1,800 1,500
Cash dividends payable 1,709 1,519
Other 8,350 7,842
- ---------------------------------------------- ---------------- ----------------
$27,176 $23,638
============================================== ================ ================
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 in 7.315%, with a maturity date of January 1,
2006. The building and the land have a net carrying value of $4,425, 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, 2003 amounted to
approximately $3,035. Mortgage payments are payable as follows: 2004-$1,462;
2005-$1,573. Interest expense related to the mortgage totaled $124 for the year
ended December 31, 2003.
On February 21, 2001, the Company entered into a $50 million unsecured
multi-currency line of credit. The Company had nothing outstanding under the
line at December 31, 2003 and 2002. Amounts outstanding under the line carry
interest at 1.5% below the prime rate or .75% over the LIBOR rate as determined
by the Company. The line matures on February 21, 2006. Since the line's interest
rate floats on a variable basis with either prime or LIBOR, the carrying value
of the debt approximates fair value. The line requires the Company to meet
certain covenants, all of which were met on December 31, 2003. The Company paid
interest of $7, $220 and $605, respectively, in 2003, 2002 and 2001.
NOTE J - STOCK PLANS
The Incentive Stock Plan, As Amended (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. 575,673 shares of Common Stock were available for issuance under
the Plan as of December 31, 2003.
In 2003, 2002 and 2001, the Company granted SPRs pursuant to an incentive plan
adopted in 2000. These SPRs have an exercise price 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 2003, 2002 and 2001 was $410, $244 and $0, respectively.
Additional information with respect to SPRs is summarized as follows:
Average SPR
Exercise Price # of SPR's
Outstanding January 1, 2001 $ 26.50 71,250*
Granted 27.09 157,250**
- ---------------------------------------- ------------------ --------------------
Outstanding December 31, 2001 26.90 228,500
Granted 30.74 18,000***
- ---------------------------------------- ------------------ --------------------
Outstanding December 31, 2002 27.18 246,500
Granted 27.85 31,500
Exercised 26.77 (1,900)
- ---------------------------------------- ------------------ --------------------
Outstanding December 31, 2003 $ 27.26 276,100
======================================== ================== ====================
*Includes 42,750 SPRs vested at December 31, 2003 **Includes 62,900 SPRs
vested at December 31, 2003 ***Includes 3,600 SPRs vested at December 31, 2003
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, 2001 $22.86 180,390
Granted -- --
Exercised 22.50 (7,400)
Canceled or expired -- --
- ----------------------------------------- ------------------ ------------------
Outstanding December 31, 2001 22.87 172,990
Granted -- --
Exercised 22.73 (50,954)
Canceled or expired -- --
- ----------------------------------------- ------------------ ------------------
Outstanding December 31, 2002 22.93 122,036
Granted -- --
Exercised 22.50 (19,686)
Canceled or expired -- --
- ----------------------------------------- ------------------ ------------------
Outstanding December 31, 2003 $23.01 102,350
========================================= ================== ==================
Exercisable options at
December 31, 2003 $22.99 99,600
December 31, 2002 $22.90 114,286
December 31, 2001 $22.79 157,990
As of December 31, 2003, the Company had the following outstanding options:
Exercise Price $22.44 - $23.56 $26.75 $27.00
- ------------------------------------------ ---------------- ---------- ---------
Options Outstanding 92,850 9,000 500
Weighted Average Exercise Price $22.62 $26.75 $27.00
Weighted Average Remaining Life 3.1 4.3 3.7
Options Exercisable 90,100 9,000 500
Weighted Average Exercise price $22.59 $26.75 $27.00
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 2003, 2002 or 2001. 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 respective boards of directors subject to
limitations based upon current operating profits (as defined) or participants'
compensation (as defined).
The plan also has a 401(k) defined contribution 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 independent sales representatives and certain regional
managers, under the terms of which participants are credited with a percentage
of their yearly earnings (as defined). Of the aggregate amounts credited to
participants' accounts, 25% vests after five years and an additional 5% vests
each year thereafter. For financial reporting purposes, amounts are charged to
operations over the vesting period.
Provisions for profit sharing and security bonus plans aggregated
$5,301, $5,689 and $5,363 for the years ended December 31, 2003, 2002 and 2001,
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 valuation allowance has been provided
since there is no assurance that the benefit of the net operating loss
carryforwards will be realized. Significant components of the Company's deferred
tax assets and liabilities as of December 31 are as follows:
Deferred Tax Assets: 2003 2002
- -------------------------------------------------- ---------------- ------------
Compensation and benefits $15,237 $13,128
Inventory 3,011 3,258
Net operating loss carryforwards of subsidiaries 2,619 6,587
Capital Loss 5,697 --
Accounts receivable 669 591
Other 345 1,095
- -------------------------------------------------- ---------------- ------------
Total Deferred Tax Assets 27,578 24,659
Valuation allowance for deferred tax assets (8,316) (6,587)
- -------------------------------------------------- ---------------- ------------
Net Deferred Tax Assets 19,262 18,072
- -------------------------------------------------- ---------------- ------------
Deferred Tax Liabilities:
- -------------------------------------------------- ---------------- ------------
Property, plant & equipment 2,381 2,236
Other 1,705 386
- -------------------------------------------------- ---------------- ------------
Total Deferred Tax Liabilities 4,086 2,622
- -------------------------------------------------- ---------------- ------------
Total Net Deferred Tax Assets $15,176 $15,450
================================================== ================ ============
Net Deferred Tax Assets: 2003 2002
- -------------------------------------------------- ---------------- ------------
Total Current Deferred Income Taxes $1,975 $3,463
Total Non Current Deferred Income Taxes 13,201 11,987
- -------------------------------------------------- ---------------- ------------
Total Net Deferred Tax Assets $15,176 $15,450
================================================== ================ ============
Net deferred tax assets include the tax impact of items in
comprehensive income of $345 and $1,095 at December 31, 2003 and 2002,
respectively.
Income (loss) before income taxes for the years ended December 31, consisted of
the following:
2003 2002 2001
- -------------------- ------------------- ----------------- ---------------------
United States $27,728 $27,906 $18,523
Foreign (2,836) (4,717) (1,381)
- -------------------- ------------------- ----------------- ---------------------
$24,892 $23,189 $17,142
==================== =================== ================= =====================
The provisions for income taxes for the years ended December 31, consisted of
the following:
2003 2002 2001
- --------------------- --------------------- ------------------- ---------------
Current:
Federal $7,422 $10,972 $8,348
State 1,750 1,947 1,778
- --------------------- --------------------- ------------------- ---------------
9,172 12,919 10,126
Deferred benefit (476) (2,177) (1,771)
- --------------------- --------------------- ------------------- ---------------
$8,696 $10,742 $ 8,355
===================== ===================== =================== ===============
The reconciliation between the effective income tax rate and the statutory
federal rate is as follows:
2003 2002 2001
- ------------------------------------- ------------- ------------- --------------
Statutory federal rate 35.0% 35.0% 35.0%
Increase (decrease) resulting from:
State income taxes, net of
federal income tax benefit 4.6 5.5 6.7
Foreign losses 6.7 9.3 5.1
Capital loss carryback (8.7) -- --
Other items, net (2.7) (3.5) 1.9
- ------------------------------------- ------------- ------------- --------------
Provision for income taxes 34.9 46.3% 48.7%
===================================== ============= ============= ==============
The decrease in the effective income tax rate in 2003 is due the sale
of the Company's UK MRO business that resulted in $22,441 capital loss. The
portion of the capital loss which the Company was able to carryback to a prior
year capital gain was realized in 2003. A valuation was provided for the
remainder of the capital loss. The capital loss expires in 2008.
Income taxes paid for the years ended December 31, 2003, 2002, and 2001
amounted to $10,523, $13,392 and $13,410, respectively.
NOTE M - COMMITMENTS
The Company's minimum rental commitments, principally for equipment,
under noncancelable leases in effect at December 31, 2003, amounted to
approximately $13,971. Such rentals are payable as follows:
2004 2005 2006 2007 2008 2009 and thereafter
- ----------- ----------- ----------- ----------- ------------ -------------------
$3,056 $2,528 $2,209 $1,874 $1,081 $3,223
=========== =========== =========== =========== ============ ===================
Total rental expense for the years ended December 31, 2003, 2002 and
2001 amounted to $3,977, $3,669, $3,090, respectively.
NOTE N - INCOME PER SHARE
The computation of basic and diluted earnings per share consisted of
the following:
Year ended December 31,
2003 2002 2001
- ------------------------------------------ ------------- ------------ ----------
Numerator:
Net income $16,196 $12,447 $8,787
========================================== ============= ============ ==========
Denominator:
Denominator for basic income per
share - weighted average shares 9,492 9,570 9,685
Effect of dilutive securities:
Stock option plans 19 26 23
- ------------------------------------------ ------------- ------------ ----------
Denominator for diluted
income per share -
adjusted weighted average shares 9,511 9,596 9,708
========================================== ============= ============ ==========
Basic income per share $1.71 $1.30 $0.91
========================================== ============= ============ ==========
Diluted income per share $1.70 $1.30 $0.91
========================================== ============= ============ ==========
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,
2003 2002 2001
- ------------------------------------- --------- --------- ---------
Net sales
MRO - US $ 302,047 $ 306,863 $ 306,917
MRO - CAN 18,976 16,505 13,999
OEM - US 54,147 55,547 52,350
OEM - INTL 13,921 8,541 6,141
- -------------------------------------- --------- --------- ---------
Consolidated total $ 389,091 $ 387,456 $ 379,407
- -------------------------------------- --------- --------- ---------
Operating Income (loss)
MRO - US $ 24,993 $ 23,828 $ 15,167
MRO - CAN 1,494 1,051 870
OEM - US 537 2,490 2,166
OEM - INTL (4,283) (5,558) (2,001)
- -------------------------------------- --------- --------- ---------
Consolidated total $ 22,741 $ 21,811 $ 16,202
- -------------------------------------- --------- --------- ---------
Capital expenditures
MRO - US $ 1,303 $ 3,941 $ 4,496
MRO - CAN 1,229 944 40
OEM - US 1,565 868 684
OEM - INTL 144 211 9
- -------------------------------------- --------- --------- ---------
Consolidated total $ 4,241 $ 5,965 $ 5,229
- -------------------------------------- --------- --------- ---------
Depreciation and amortization
MRO - US $ 5,592 $ 5,650 $ 6,553
MRO - CAN 175 121 278
OEM - US 804 799 1,060
OEM - INTL 532 257 254
- -------------------------------------- --------- --------- ---------
Consolidated total $ 7,103 $ 6,827 $ 8,146
- -------------------------------------- --------- --------- ---------
Total assets
MRO - US $ 168,783 $ 154,832 $ 165,603
MRO - CAN 17,137 13,989 15,023
OEM - US 36,076 33,181 34,932
OEM - INTL 9,771 8,379 5,498
- -------------------------------------- --------- --------- ---------
Segment total 231,767 210,381 221,056
- -------------------------------------- --------- --------- ---------
Corporate 15,176 15,450 13,150
- -------------------------------------- --------- --------- ---------
Consolidated total $ 246,943 $ 225,831 $ 234,206
- -------------------------------------- --------- --------- ---------
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
- -------------------------------------- --------- --------- ---------
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,
2003 2002 2001
- -------------------------------- ------------------ --------------- ------------
Total operating income for
reportable segments $22,741 $21,811 $16,202
Interest and dividend income 194 53 654
Interest expense (131) (154) (706
Other - net 2,088 1,479 992
- -------------------------------- ------------------ --------------- ------------
Income before income taxes $24,892 $23,189 $17,142
================================ ================== =============== ============
Financial information related to the Company's operations by geographic area
consisted of the following:
Year Ended December 31,
2003 2002 2001
- ------------------------------- ------------------ -------------- --------------
Net sales
United States $356,194 $362,410 $359,267
Canada 18,976 16,505 13,999
Other foreign countries 13,921 8,541 6,141
- ------------------------------- ------------------ -------------- --------------
Consolidated total $389,091 $387,456 $379,407
=============================== ================== ============== ==============
Year Ended December 31,
2003 2002 2001
- ---------------------------- ---------------- ------------------ ---------------
Long-lived assets
United States $63,115 $60,678 $61,173
Canada 8,193 7,129 6,300
Other foreign countries 287 361 396
- ---------------------------- ---------------- ------------------ ---------------
Consolidated total $71,595 $68,168 $67,869
============================ ================ ================== ===============
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, 2003
and 2002 are summarized as follows:
Quarter ended
2003 Mar. 31 Jun. 30 Sept. 30 Dec. 31
- --------------------------------------- --------------- -------------- ------------- ------------
(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 taxes1 6,621 6,705 7,488 4,078
Provision for income taxes2 2,863 2,564 3,124 145
Net income3 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
Quarter ended
2002 Mar. 31 Jun. 30 Sept. 30 Dec. 31
- --------------------------------------- --------------- -------------- ------------- ------------
(In thousands, except per share data)
Net sales $95,746 $99,890 $98,474 $93,346
Cost of goods sold 33,704 35,343 35,211 32,871
Income before income taxes 6,410 8,056 6,628 2,095
Provision for income taxes 2,578 3,360 2,869 1,935
Net income4, 5 3,832 4,696 3,759 160
Net income per share of common stock
Basic and Diluted 0.40 0.49 0.39 0.02
Diluted weighted average shares
outstanding 9,657 9,643 9,576 9,526
1 The fourth quarter includes a $2,789 pre tax loss related to the sale
of Lawson Products Limited, the Company's former UK subsidiary.
2 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.
3 The second, third and fourth quarters, respectively, included $751,
$240 and $486 of charges for compensation arrangements related to
management personnel reductions.
4 Inventories and cost of goods sold during interim periods are
determined through the use of estimated gross profit rates. The
difference between actual and estimated gross profit rates used for
interim periods was adjusted in the fourth quarter. This adjustment
increased net income by approximately $1,955.
5 The fourth quarter included $421 of charges for compensation
arrangements related to management personnel reductions.
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:
Year 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
Year ended December 31, 2001 1,659 1,901 1,757 1,803
Note A - Uncollected receivables written off, net of recoveries.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. 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 Rules 13a-15(e) and 15d-15(e)) are effective
to ensure that information required to be disclosed in the reports that the
Company files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms. There have been no
significant changes in our internal controls over financial reporting or in
other factors that could significantly affect these controls subsequent to the
date of the previous mentioned evaluation.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
a. Directors
---------
The information required by this Item is set forth in the Company's
Proxy Statement for the Annual Meeting of Stockholders to be held on May 11,
2004, under the caption "Election of Directors" and "Section 16(a), Beneficial
Ownership Reporting Compliance" which information is incorporated herein by
reference.
b. Executive Officers
------------------
The information required by this Item is set forth in Item 1 - Business
under "Executive Officers of the Registrant."
c. Audit Committee Financial Expert
--------------------------------
The Company had determined that Mitchell Saranow, member of the Audit
Committee of the Board of Directors, qualifies as an "audit committee financial
expert" as defined in Item 401 (h) of Regulation S-K, and that Mr. Saranow is
"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
-------------------------
The Company has adopted a Code of Ethics applicable to all employees.
This code is applicable to Senior Financial Executives including the principle
executive officer, principle financial officer and principle accounting officer
of the Company. The Company's Code of Ethics is available on the Company's web
site at www.lawsonproducts.com. The Company intends to post on its web site any
amendments to, or waivers from its Code of Ethics applicable to Senior Financial
Executives. The Company will provide shareholders with a copy of its Code of
Ethics upon written request directed to the Company's Secretary at the Company'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's website, www.lawsonproducts.com, and
copies may be obtained by request to the Secretary of the Corporation at the
Company's address.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is set forth in the Company's
Proxy Statement for the Annual Meeting of Stockholders to be held on May 11,
2004, under the caption "Remuneration of Executive Officers," which information
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is set forth in the Company's
Proxy Statement for the Annual Meeting of Stockholders to be held on May 11,
2004 under the captions "Securities Beneficially Owned by Principal Stockholders
and Management," and "Equity Compensation Plan Information", which information
is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is set forth in the Company's
Proxy Statement for the Annual Meeting of stockholders to be held on May 11,
2004 under the caption "Election of Directors" and "Certain Relationships and
Related Transactions" which information is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required under this Item is set forth in the Company's Proxy
Statement for the Annual Meeting of stockholders to be held on May 11, 2004
under the caption "Fees Paid to Independent Auditors" which information is
incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) (1) Financial Statements
The following information is presented in this report:
Consolidated Balance Sheets as of December 31, 2003 and 2002.
Consolidated Statements of Income for the Years ended December
31, 2003, 2002 and 2001.
Consolidated Statements of Changes in Stockholders' Equity for
the Years ended December 31, 2003, 2002 and 2001.
Consolidated Statements of Cash Flows for the Years ended
December 31, 2003, 2002 and 2001.
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.
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.
*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 10, 1983, incorporated herein by
reference from Exhibit 10(c)(5) to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1999.
*10(c)(5) Amended and Restated Executive Deferral Plan, incorporated
herein by reference from Exhibit 10(c)(7) to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1995.
*10(c)(6) Employment Agreement dated July 21, 1994 between the Company
and Roger F. Cannon, incorporated herein by reference to
Exhibit 10(c)(8) to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1998.
*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.
14 Code of Ethics of the Company
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.
*Indicates management employment contracts or compensatory plans or
arrangements.
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.
(b) Reports on Form 8-K
-------------------
During the quarter ended December 31, 2003, the Company filed
a Current Report on Form 8-K dated October 22, 2003. This
Form 8-K contained, as an exhibit, a press release pertaining
to the financial results of the Company for the quarter ended
September 30, 2003.
During the quarter ended March 31, 2004, the Company filed a
Current Report on Form 8-K dated March 3, 2004. This Form 8-K
contained, as an exhibit, a press release pertaining to the
financial results of the Company for the year ended December
31, 2003.
(c) Exhibits
--------
See item 15(a)(3) above for a list of exhibits to this
report.
(d) Schedules
---------
See item 15(a)(2) above for a list of schedules filed with
this report.
SIGNATURES
- ----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
LAWSON PRODUCTS, INC.
Date: March 12, 2004
By: /s/ Robert J. Washlow
----------------------------------
Robert J. Washlow, Chairman of the
Board and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below this day of March 12, 2004, by the following
persons on behalf of the registrant and in the capacities indicated.
Signature Title
--------- -----
Chairman of the Board,
Chief Executive Officer and
Director
/s/ Robert J. Washlow (principal executive officer)
- --------------------------------------
Robert J. Washlow
/s/ Thomas Neri Executive Vice President, Finance
- -------------------------------------- and Corporate Planning
Thomas Neri (principal financial officer)
/s/ Joseph L. Pawlick Senior Vice President-Accounting
- -------------------------------------- (principal accounting officer)
Joseph L. Pawlick
/s/ Jerome Shaffer Vice President, Treasurer and Director
- --------------------------------------
Jerome Shaffer
/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
/s/ Lee S. Hillman Director
- --------------------------------------
Lee S. Hillman
/s/ Wilma J. Smelcer Director
- --------------------------------------
Wilma J. Smelcer
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.
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 10, 1983, incorporated herein by reference to
Exhibit 10(c)(5) to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1999.
10(c)(5) Amended and Restated Executive Deferral Plan, incorporated
herein by reference from Exhibit 10(c)(7) to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1995.
10(c)(6) Employment Agreement dated July 21, 1994 between the Company and
Roger F. Cannon, incorporated herein by reference to Exhibit
10(c)(8) to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998.
10(c)(7) Agreement between the Company and Bernard Kalish dated July 31,
1999, incorporated herein by reference from Exhibit 10(c)(8) to
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1999.
10(c)(8) Lawson Products, Inc. Stock Performance Plan, 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.
14 Code of Ethics of the Company.
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
EXHIBIT 3(B)
LAWSON PRODUCTS, INC.
AMENDED AND RESTATED
BY-LAWS
AMENDED AND RESTATED AS OF DECEMBER 31, 2003
* * *
ARTICLE I
OFFICES
Section 1.1. Registered Office. The registered office of the
Corporation shall be maintained in the City of Dover, State of Delaware, and the
registered agent in charge thereof is United States Corporation Company.
Section 1.2. Other Offices. The Corporation may also have an office in
the City of Des Plaines, State of Illinois and at such other places as the Board
of Directors may from time to time determine or the business of the Corporation
may require.
ARTICLE II
STOCKHOLDERS MEETINGS
Section 2.1. Place of Meetings. All meetings of the stockholders,
whether annual or special, shall be held at the offices of the Corporation in
Des Plaines, Illinois, or at such other place as may be fixed from time to time
by the Board of Directors.
Section 2.2. Annual Meetings. An annual meeting of the stockholders
shall be held in May in each year on such date and at such time as may from time
to time be determined by the Board of Directors, at which the stockholders shall
elect directors, and transact such other business as may properly be brought
before the meeting.
Section 2.3. Notice of Meeting. (a) Written notice of the annual
meeting stating the place, date and hour of the meeting, shall be given not less
than ten nor more than sixty days before the date of the meeting to each
stockholder entitled to vote at such meeting, and the means of remote
communication, if any, by which stockholders and proxyholders may be deemed to
be present in person and vote at such meeting.
(b) Notice to stockholders may be given by writing in paper
form or solely in the form of electronic transmission as permitted by this
Section 2.3. If given by writing in paper form, notice may be delivered
personally, may be delivered by mail, or, with the consent of the stockholder
entitled to receive notice, may be delivered by facsimile telecommunication or
any of the other means of electronic transmission specified in this Section 2.3.
If mailed, such notice shall be delivered by postage prepaid envelope directed
to each stockholder at such stockholder's address as it appears in the records
of the Corporation. Any notice to stockholders given by the Corporation shall be
effective if delivered or given by a form of electronic transmission to which
the stockholder to whom the notice is given has consented. Notice given pursuant
to this subsection shall be deemed given: (1) if by facsimile telecommunication,
when directed to a facsimile telecommunication number at which the stockholder
has consented to receive notice; (2) if by electronic mail, when directed to an
electronic mail address at which the stockholder has consented to receive
notice; (3) if by posting on an electronic network together with separate notice
to the stockholder of such specific posting, upon the later of (A) such posting
and (B) the giving of such separate notice; and (4) if by any other form of
electronic transmission, when directed to the stockholder. An affidavit of the
secretary or an assistant secretary or of the transfer agent or other agent of
the Corporation that the notice has been given by personal delivery, by mail, or
by a form of electronic transmission shall, in the absence of fraud, be prima
facie evidence of the facts stated therein.
Section 2.4. Stockholder Nominations and Proposals. At an annual
meeting of the stockholders, only such business shall be conducted as shall have
been properly brought before an annual meeting. To be properly brought before an
annual meeting, business must be (i) specified in the notice of the meeting (or
any supplement thereto) given by or at the direction of the Board of Directors,
(ii) otherwise properly brought before the meeting by or at the direction of the
Board of Directors or (iii) otherwise properly brought before the meeting by a
stockholder of the Corporation who was a stockholder of record at the time of
giving of notice provided for in this Section, who is entitled to vote at the
meeting and who complied with the notice procedures set forth in this Section.
For business to be properly brought before an annual meeting by a stockholder,
the stockholder must have given timely notice thereof in writing to the
Secretary of the Corporation at the principal executive office of the
Corporation. To be timely, a stockholder's notice shall be delivered not less
than 90 days nor more than 110 days prior to the first anniversary of the
preceding year's meeting; provided, however, that in the event that the date of
the annual meeting is advanced by more than 30 days or delayed by more than 60
days from such anniversary date, notice by the stockholder, to be timely, must
be so delivered not later than the 10th day following the day on which public
announcement (as defined herein) of the date of such meeting is first made. Such
stockholder's notice shall set forth as to each matter the stockholder proposes
to bring before the annual meeting (i) a brief description of the business
desired to be brought before the meeting and the reasons for conducting such
business at the meeting and any interest in such business of such stockholder
and the beneficial owner, if any, on whose behalf the proposal is made; and (ii)
as to the stockholder giving the notice and the beneficial owner, if any, on
whose behalf the proposal is made (A) the name and address of such stockholder,
as they appear on the Corporation's books, and the name and address of such
beneficial owner, (B) the class and number of shares of the Corporation which
are owned beneficially and of record by such stockholder and such beneficial
owner as of the date such notice is given, and (C) a representation that such
stockholder intends to appear in person or by proxy at the meeting to propose
such business; (iii) in the event that such business includes a proposal to
amend either the Certificate of Incorporation or the Bylaws of the Corporation,
the language of the proposed amendment and (iv) if the stockholder intends to
solicit proxies in support of such stockholder's proposal, a representation to
that effect. The foregoing notice requirements shall be deemed satisfied by a
stockholder if the stockholder has notified the
Corporation of his or her intention to present a proposal at an annual meeting
and such stockholder's proposal has been included in a proxy statement that has
been prepared by management of the Corporation to solicit proxies for such
annual meeting; provided, however, that if such stockholder does not appear or
send a qualified representative to present such proposal at such annual meeting,
the Corporation need not present such proposal for a vote at such a meeting,
notwithstanding that proxies in respect of such vote may have been received by
the Corporation. Notwithstanding anything in these Bylaws to the contrary, no
business shall be conducted at any annual meeting except in accordance with this
paragraph, and the Chairman of the Board or other person presiding at an annual
meeting of stockholders, may refuse to permit any business to be brought before
an annual meeting without compliance with the foregoing procedures or if the
stockholder solicits proxies in support of such stockholder's proposal without
such stockholder having made the representation required by clause (iv) of the
second preceding sentence. For the purposes of this paragraph "public
announcement" shall mean disclosure in a press release reported by the Dow Jones
News Service, Associated Press or comparable national news service or in a
document publicly filed by the Corporation with the Securities and Exchange
Commission pursuant to Sections 13, 14 or 15(d) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). In addition to the provisions of this
paragraph, a stockholder shall also comply with all applicable requirements of
the Exchange Act and the rules and regulations thereunder with respect to the
matters set forth herein. Nothing in these Bylaws shall be deemed to affect any
rights of the stockholders to request inclusion of proposals in the
Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act.
Section 2.5. Stockholders List. At least ten days before every meeting
of stockholders, a complete list of the stockholders entitled to vote at said
meeting, arranged in alphabetical order and showing the address of each
stockholder and the number of shares registered in the name of each stockholder,
shall be prepared, or caused to be prepared, by the Secretary. Such list shall
be open to the examination of any stockholder, for any purpose germane to the
meeting, during ordinary business hours, for a period of at least ten days prior
to the meeting at the place where the meeting is to be held. The list shall also
be produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
Section 2.6. Special Meetings. Special meetings of the stockholders,
for any purpose or purposes, unless otherwise prescribed by statute or by the
Certificate of Incorporation, may be called by the Chairman of the Executive
Committee, if any, the Chairman of the Board or by the President and shall be
called by the Secretary at the request in writing of a majority of the Board of
Directors. Such request shall state the purpose or purposes of the proposed
meeting. Unless otherwise prescribed by statute or by the Certificate of
Incorporation, stockholders of this Corporation shall not be entitled to request
a special meeting of stockholders.
Section 2.7. Notice of Special Meetings. Except as otherwise provided
by statute, written notice of a special meeting, stating the place, date and
hour of the meeting and the purpose or purposes for which the meeting is called,
shall be given not less than ten nor more than sixty days before the date of the
meeting to each stockholder entitled to vote at such meeting. If given by
writing in paper form, notice may be delivered personally, may be delivered by
mail, or, with the consent of the stockholder entitled to receive notice, may be
delivered by facsimile telecommunication or any of the other means of electronic
transmission specified in this Section 2.7. If mailed, such notice shall be
delivered by postage prepaid envelope directed to each stockholder at such
stockholder's address as it appears in the records of the Corporation. Any
notice to stockholders given by the Corporation shall be effective if delivered
or given by a form of electronic transmission to which the stockholder to whom
the notice is given has consented. Notice given pursuant to this subsection
shall be deemed given: (1) if by facsimile telecommunication, when directed to a
facsimile telecommunication number at which the stockholder has consented to
receive notice; (2) if by electronic mail, when directed to an electronic mail
address at which the stockholder has consented to receive notice; (3) if by
posting on an electronic network together with separate notice to the
stockholder of such specific posting, upon the later of (A) such posting and (B)
the giving of such separate notice; and (4) if by any other form of electronic
transmission, when directed to the stockholder. An affidavit of the secretary or
an assistant secretary or of the transfer agent or other agent of the
Corporation that the notice has been given by personal delivery, by mail, or by
a form of electronic transmission shall, in the absence of fraud, be prima facie
evidence of the facts stated therein.
Section 2.8. Quorum. The holders of a majority of the total voting
power of all outstanding shares of capital stock of the Corporation entitled to
vote thereat, present in person or represented by proxy, shall be requisite and
shall constitute a quorum at all meetings of the stockholders for the
transaction of business except as otherwise provided by statute, by the
Certificate of Incorporation or by these By-Laws. If, however, such quorum shall
not be present or represented at any meeting of the stockholders, the
stockholders entitled to vote thereat, present in person or represented by
proxy, shall have the power to adjourn the meeting from time to time, without
notice other than announcement at the meeting, of the place, date and hour of
the adjourned meeting, until a quorum shall again be present or represented by
proxy. At the adjourned meeting at which a quorum shall be present or
represented by proxy, the Corporation may transact any business which might have
been transacted at the original meeting. If the adjournment is for more than
thirty days, or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting.
Section 2.9. Voting. When a quorum is present at any meeting, and
subject to the provisions of the General Corporation Law of the State of
Delaware, the Certificate of Incorporation or by these By-Laws in respect of the
vote that shall be required for a specified action, the vote of the holders of a
majority of the total voting power of all outstanding shares of capital stock of
the Corporation, present in person or represented by proxy, shall be
determinative of any question brought before such meeting, unless the question
is one upon which, by express provision of the statutes or of the Certificate of
Incorporation or of these By-Laws, a different vote is required in which case
such express provision shall govern and control the decision of such question.
Each stockholder shall have one vote for each share of stock having voting power
registered in his name on the books of the Corporation, except as otherwise
provided in the Certificate of Incorporation.
Section 2.10. Proxies. Each stockholder entitled to vote at a meeting
of stockholders or to express consent or dissent to corporate action in writing
without a meeting may in writing authorize another person or persons to act for
him by proxy, but no such proxy shall be voted or acted upon after three years
from its date, unless the proxy provides for a longer period not to exceed ten
years.
Without limiting the manner in which a stockholder may authorize
another person or persons to act for him as proxy, a stockholder may validly
authorize another person or persons to act for him as proxy by: (a) executing a
writing to that effect, which execution may be accomplished by the stockholder
or his authorized officer, director, employee or agent signing the writing or
causing his signature to be affixed to the writing by any reasonable means
including, but not limited to, by facsimile signature; or (b) transmitting or
authorizing the transmission of a telegram, cablegram, or other means of
electronic transmission to the person who will be the holder of the proxy or to
a proxy solicitation firm, proxy support service organization or like agent duly
authorized by the person who will be the holder of the proxy to receive such
transmission, provided that any telegram, cablegram or other means of electronic
transmission must either set forth or be submitted with information from which
it can be determined that the telegram, cablegram or other electronic
transmission was authorized by the stockholder. If it is determined that any
telegram, cablegram or other electronic transmission submitted pursuant to
clause (b) above is valid, the inspectors shall specify the information upon
which they relied. Any copy, facsimile telecommunication or other reliable
reproduction of the writing or transmission created pursuant to this paragraph
may be substituted or used in lieu of the original writing or transmission for
any and all purposes for which the original writing or transmission could be
used, provided that such copy, facsimile telecommunication or other reproduction
shall be a complete reproduction of the entire original writing or transmission.
Section 2.11. Elimination of Right to Act by Consent. No action
required to be taken or which may be taken at any annual or special meeting of
stockholders of the Corporation may be taken without a meeting, and the power of
stockholders to consent in writing, without a meeting, to the taking of any
action is specifically denied.
Section 2.12. Voting Procedures and Inspectors of Elections.
(a) The Corporation, by action of the Secretary, shall, in advance of
any meeting of stockholders, appoint one or more inspectors to act at the
meeting of stockholders and make a written report thereof. The Corporation may
designate one or more persons as alternate inspectors to replace any inspector
who fails to act. If no inspector or alternate is able to act at a meeting of
stockholders, the person presiding at the meeting shall appoint one or more
inspectors to act at the meeting. Each inspector, before entering upon the
discharge of his duties, shall take and sign an oath faithfully to execute the
duties of inspector with strict impartiality and according to the best of his
ability.
(b) The inspectors shall (i) ascertain the number of shares outstanding
and the voting power of each, (ii) determine the shares represented at a meeting
and the validity of proxies and ballots, (iii) count all votes and ballots, (iv)
determine and retain for a reasonable period a record of the disposition of any
challenges made to any determination by the inspectors, and (v) certify their
determination of the number of shares represented at the meeting and their count
of all votes and ballots. The inspectors may appoint or retain other persons or
entities to assist them in the performance of their duties.
(c) The date and time of the opening and the closing of the polls for
each matter upon which the stockholders will vote at a meeting shall be
announced at the meeting. No ballot, proxies or votes, nor any revocations
thereof or changes thereto, shall be accepted by the inspectors after the
closing of the polls unless the Court of Chancery upon application by a
stockholder shall determine otherwise.
(d) In determining the validity and counting of proxies and ballots,
the inspectors shall be limited to an examination of the proxies, any envelopes
submitted with those proxies, any information provided in accordance with clause
(b) of Section 2.10 of these By-Laws, ballots and the regular books and records
of the Corporation, except that the inspectors may consider other reliable
information for the limited purpose of reconciling proxies and ballots submitted
by or on behalf of banks, brokers, their nominees or similar persons which
represent more votes than the holder of a proxy is authorized by the record
owner to cast or more votes than the stockholder holds of record. If the
inspectors consider other reliable information for the limited purpose permitted
herein, the inspectors, at the time they make their certification pursuant to
subsection (b)(v) of this Section, shall specify the specific information
considered by them, including the person or persons from whom they obtained the
information, when the information was obtained, the means by which the
information was obtained and the basis for the inspectors belief that the
information is accurate and reliable.
Section 2.13. Remote Communication. For the purposes of these Bylaws,
if authorized by the Board of Directors in its sole discretion, and subject to
such guidelines and procedures as the Board of Directors may adopt, stockholders
and proxyholders may, by means of remote communication:
(A) participate in a meeting of stockholders; and
(B) be deemed present in person and vote at a meeting of
stockholders whether such meeting is to be held at a designated place or solely
by means of remote communication, provided that (i) the Corporation shall
implement reasonable measures to verify that each person deemed present and
permitted to vote at the meeting by means of remote communication is a
stockholder or proxyholder, (ii) the Corporation shall implement reasonable
measures to provide such stockholders and proxyholders a reasonable opportunity
to participate in the meeting and to vote on matters submitted to the
stockholders, including an opportunity to read or hear the proceedings of the
meeting substantially concurrently with such proceedings, and (iii) if any
stockholder or proxyholder votes or takes other action at the meeting by means
of remote communication, a record of such vote or other action shall be
maintained by the corporation.
ARTICLE III
DIRECTORS
Section 3.1. General Powers. The business and affairs of the
Corporation shall be managed by or under the direction of the Board of Directors
which may exercise all such powers of the Corporation and do all such acts and
things as are not by the General Corporation Law of the State of Delaware nor by
the Certificate of Incorporation nor by these By-Laws directed or required to be
exercised or done by the stockholders.
Section 3.2. Number of Directors, Classes, Terms and Election;
Vacancies. The number of directors shall not be less than five nor more than
nine, the exact number of directors to be determined from time to time by
resolution adopted by a majority of the whole Board, and such exact number shall
be nine until otherwise determined by resolution adopted by a majority of the
whole Board. As used in this Article, a whole Board means the total number of
directors which at the time are to constitute the Board of Directors, either as
designated in this Section or as determined by the Board of Directors in
accordance herewith, as the case may be. No decrease in the number of directors
constituting the Board shall shorten the term of any incumbent director.
The Board of Directors shall be divided into three classes as nearly
equal in number as possible, with the term of office of Class I expiring at the
annual meeting of stockholders in 1983, of Class II expiring at the annual
meeting of stockholders in 1984, and of Class III expiring at the annual meeting
of stockholders in 1985. At each annual meeting of stockholders, directors
chosen to succeed those whose terms then expire shall be elected for a term of
office expiring at the third succeeding annual meeting of stockholders after
their election.
If the office of any director or directors becomes vacant by reason of
death, resignation, retirement, disqualification, removal from office, or
otherwise, or a new directorship is created, a majority of the remaining
directors, though less than a quorum, shall choose a successor or successors, or
a director to fill the newly created directorship. Directors elected to fill a
vacancy shall hold office for a term expiring at the annual meeting at which the
term of the class to which they shall have been elected expires.
Section 3.3. Removal of Directors. Subject to the rights of the holders
of any series of Preferred Stock then outstanding, (a) any director, or the
entire Board of Directors may be removed at any time, but only for cause; and
(b) the affirmative vote of the holders of not less than 75% of the total voting
power of all outstanding shares of capital stock of the Corporation entitled to
vote generally in the election of directors (considered for this purpose as one
class) outstanding at the time a determination is made shall be required to
remove a director from office.
Section 3.4. Place of Meetings. The Board of Directors may hold its
meetings outside of the State of Delaware, at the office of the Corporation or
at such other places as they may from time to time determine, or as shall be
fixed in the respective notices or waivers of notice of such meetings.
Section 3.5. Committees of Directors. The Board of Directors may, by
resolution or resolutions passed by a majority of the whole Board, designate one
or more committees, each committee to consist of one or more of the directors of
the Corporation. The Board may designate one or more directors as alternate
Members of any committee, who may replace any absent or disqualified member at
any meeting of the committee. Any such committee, to the extent provided in the
resolution of the Board of Directors, shall have and may exercise all the powers
and authority of the Board of Directors in the management of the business and
affairs of the Corporation, and may authorize the seal of the Corporation to be
affixed to all papers which may require it; but no such committee shall have the
power or authority in reference to amending the Certificate of Incorporation,
adopting an agreement of merger or consolidation, recommending to the
stockholders the sale, lease or exchange of all or substantially all of the
Corporation's property and assets, recommending to the stockholders a
dissolution of the Corporation or a revocation of a dissolution, or amendment to
the By-Laws of the Corporation; and, unless the resolution, By-Laws, or
Certificate of Incorporation expressly so provide, no such committee shall have
the power or authority to declare a dividend or to authorize the issuance of
stock. Such committee or committees shall have such name or names as may be
determined from time to time by resolution adopted by the Board of Directors.
The committees shall keep regular minutes of their proceedings and report the
same to the Board of Directors when required.
Section 3.6. Compensation of Directors. Directors, as such, may receive
such stated salary for their services and/or such fixed sums and expenses of
attendance for attendance at each regular or special meeting of the Board of
Directors as may be established by resolution of the Board; provided that
nothing herein contained shall be construed to preclude any director from
serving the Corporation in any other capacity and receiving compensation
therefor. Members of special or standing committees may be allowed like
compensation for attending committee meetings.
Section 3.7. Annual Meeting. The annual meeting of the Board of
Directors shall be held within ten days after the annual meeting of the
stockholders in each year. Notice of such meeting, unless waived, shall be given
by mail or telegram to each director elected at such annual meeting, at his
address as the same may appear on the records of the Corporation, or in the
absence of such address, at his residence or usual place of business, at least
three days before the day on which such meeting is to be held. Said meeting may
be held at such place as the Board may fix from time to time or as may be
specified or fixed in such notice or waiver thereof.
Section 3.8. Special Meetings. Special meetings of the Board of
Directors may be held at any time on the call of the Chairman of the Executive
Committee (if any), the Chairman of the Board or President or at the request in
writing made to either of said Chairman or the President of any three directors.
Notice of any such meeting, unless waived, shall be given by mail or telegram to
each director at his address as the same appears on the records of the
Corporation not less than one day prior to the day on which such meeting is to
be held if such notice is by telegram, and not less than three days prior to the
day on which the meeting is to be held if such notice is by mail. If the
Secretary shall fail or refuse to give such notice, then the notice may be given
by the officer to whom the request is made or by any one of the directors making
the call. Any such meeting may be held at such place as the Board may fix from
time to time or as may be specified or fixed in such notice or waiver thereof.
Any meeting of the Board of Directors shall be a legal meeting without any
notice thereof having been given, if all the directors shall be present thereat,
and no notice of a meeting shall be required to be given to any director who
shall attend such meeting.
Section 3.9. Action Without Meeting; Participation at Meeting by
Telephone. Any action required or permitted to be taken at any meeting of the
Board of Directors or any committee thereof may be taken without a meeting, if a
written consent to such action is signed by all members of the Board or of such
committee, as the case may be, and such written consent is filed with the
minutes of proceedings of the Board of Directors.
Section 3.10. Members of the Board of Directors, or any committee
designated by the Board, may participate in a meeting of the Board or committee
by means of conference telephone or similar communications equipment by means of
which all persons participating in the meeting can hear each other, and
participation in a meeting pursuant to this section shall constitute presence in
person at such meeting.
Section 3.11. Quorum and Manner of Acting. Except as otherwise provided
in these By-Laws, a majority of the total number of directors as at the time
specified by the By-Laws shall constitute a quorum at any regular or special
meeting of the Board of Directors. Except as otherwise provided by statute, by
the Certificate of Incorporation, or by these By-Laws, the vote of a majority of
the directors present at any meeting at which a quorum is present shall be the
act of the Board of Directors. In case of an equality of votes on any question
before the Board of Directors of the Corporation, the Director who holds the
office of Chairman of the Executive Committee, if any, Chairman of the Board, or
the President (if a director), in that order if present, shall have a second and
deciding vote. In the absence of a quorum, a majority of the directors present
may adjourn the meeting from time to time until a quorum shall be present.
Notice of any adjourned meeting need not be given, except that notice shall be
given to all directors if the adjournment is for more than thirty days.
ARTICLE IV
OFFICERS
Section 4.1. Executive Officers. The executive officers of the
Corporation shall be a Chairman of the Board, President or Office of the
President established in the manner prescribed by Section 4.17 of these by-laws,
one or more Executive Vice Presidents, one or more Senior Vice Presidents, such
number of Vice Presidents, if any, as the Board of Directors may determine, a
Secretary and a Treasurer. One person may hold any number of said offices.
Section 4.2. Election, Term of Office and Eligibility. The executive
officers of the Corporation shall be elected annually by the Board of Directors
at its annual meeting or at a special meeting held in lieu thereof. Each
officer, except such officers as may be appointed in accordance with the
provisions of Section 4.3, shall hold office until his successor shall have been
duly elected or appointed and qualified or until his death, resignation or
removal. The Chairman of the Board and the Vice Chairman of the Board shall be
and remain members of the Board of Directors. None of the other officers need be
members of the Board.
Section 4.3. Subordinate Officers. The Board of Directors may appoint
such Assistant Secretaries, Assistant Treasurers, Controller and other officers,
and such agents as the Board may determine, to hold office for such period and
with such authority and to perform such duties as the Board may from time to
time determine. The Board may, by specific resolution, empower the chief
executive officer of the Corporation or the Executive Committee (if such a
committee is established in the manner prescribed by Section 3.5 of these
By-Laws) to appoint any such subordinate officers or agents.
Section 4.4. Removal. The Chairman of the Board, the Vice Chairman of
the Board, the President, any Vice President, the Secretary and/or the Treasurer
may be removed at any time, either with or without cause, but only by the
affirmative vote of the majority of the total number of directors as at the time
specified by the By-Laws. Any subordinate officer appointed pursuant to Section
4.3 may be removed at any time, either with or without cause, by the majority
vote of the directors present at any meeting of the Board or by any committee or
officer empowered to appoint such subordinate officers.
Section 4.5. The Chairman of the Board. The Chairman of the Board shall
be the chief executive officer of the Corporation. Subject to the control vested
in the Board of Directors by statute, by the Certificate of Incorporation, or by
these By-Laws, he shall administer and be responsible for the overall management
of the business and affairs of the Corporation. He shall preside at all meetings
of the stockholders and the Board of Directors; and in general, shall perform
all duties incident to the office of the Chairman of the Board and such other
duties as from time to time may be assigned to him by the Board of Directors.
Section 4.6. The Vice Chairman of the Board. In the absence of the
Chairman of the Board, or in the event of his inability or refusal to act, the
Vice Chairman of the Board or his designee shall preside at all meetings of the
stockholders and the Board of Directors.
Section 4.7. The President. The President shall have authority to see
that all resolutions of the Board of Directors and of the Executive Committee
are carried into effect, shall perform such duties as are incident to the office
of President or as may from time to time be assigned by the Chairman of the
Board, the Vice Chairman of the Board or the Board of Directors, and, if the
President is a director, in the absence or disability of the Chairman of the
Board, shall perform the duties of the Chairman of the Board.
Section 4.8. The Executive Vice Presidents. In the absence of the
Chairman of the Executive Committee, the Chairman of the Board and the
President, or in the event of their inability or refusal to act, the Executive
Vice President (or in the event there be more than one Executive Vice President,
Executive Vice Presidents in the order designated, or in the absence of any
designation, in the order elected) shall perform the duties of the Chairman of
the Executive Committee, the Chairman of the Board and the President. Each
Executive Vice President shall perform such other duties as from time to time
may be assigned to him by the Chairman of the Executive Committee, the Chairman
of the Board, the Vice Chairman of the Board, the President or by the Board of
Directors.
Section 4.9. The Vice Presidents. In the event of the absence or
disability of the Chairman of the Executive Committee, the Chairman of the
Board, the President and/or all Executive Vice Presidents, each senior Vice
President, in the order of his seniority, which shall be in the order of his
election, and then each Vice President, in the order of his seniority, shall
perform the duties of such officers. The Vice Presidents shall also perform such
other duties as from time to time may be assigned to them by the Chairman of the
Executive Committee, the Chairman of the Board, the Vice Chairman of the Board,
the President, Executive Vice Presidents or by the Board of Directors of the
Corporation.
Section 4.10. The Secretary. The Secretary shall:
(a) Keep the minutes of the meetings of the stockholders and
of the Board of Directors;
(b) See that all notices are duly given in accordance with the
provisions of these By-Laws or as required by law;
(c) Be custodian of the records and of the seal of the
Corporation and see that the seal or a facsimile or equivalent thereof
is affixed to or reproduced on all documents, the execution of which on
behalf of the Corporation under its seal is duly authorized;
(d) Have charge of the stock record books of the Corporation,
unless the same shall be entrusted by the Board of Directors to a
registrar or transfer agent, in which case the registrar or transfer
agent shall have charge of same;
(e) In general, perform all duties incident to the office of
Secretary, and such other duties as are provided by these By-Laws and
as from time to time are assigned to him by the Chairman of the
Executive Committee, the Chairman of the Board, the Vice Chairman of
the Boar, the President or the Board of Directors of the Corporation.
Section 4.11. The Assistant Secretaries. If one or more Assistant
Secretaries shall be appointed pursuant to the provisions of Section 4.3
respecting subordinate officers, then, at the request of the Secretary, or in
his absence or disability, the Assistant Secretary designated by the Secretary
(or in the absence of such designations, then any one of such Assistant
Secretaries) shall perform the duties of the Secretary and when so acting shall
have all the powers of and be subject to all the restrictions upon the
Secretary.
Section 4.12. The Treasurer. The Treasurer shall:
(a) Receive and be responsible for all funds of and securities
owned or held by the Corporation and, in connection therewith, among
other things: keep or cause to be kept full and accurate records and
accounts for the Corporation; deposit or cause to be deposited to the
credit of the Corporation all moneys, funds and securities so received
in such bank or other depository as the Board of Directors or an
officer designated by the Board may from time to time establish; and
disburse or supervise the disbursement of the funds of the Corporation
as may be properly authorized;
(b) Render to the Board of Directors at any meeting thereof,
or from time to time whenever the Board of Directors or the chief
executive officer of the Corporation may require, financial and other
appropriate reports on the condition of the Corporation;
(c) In general, perform all the duties incident to the office
of Treasurer and such other duties as from time to time may be assigned
to him by the Chairman of the Executive Committee, the Chairman of the
Board, the Vice Chairman of the Board, the President or the Board of
Directors of the Corporation.
Section 4.13. The Assistant Treasurers. If one or more Assistant
Treasurers shall be appointed pursuant to the provisions of Section 4.3
respecting subordinate officers, then, at the request of the Treasurer, or in
his absence or disability, the Assistant Treasurer designated by the Treasurer
(or in the absence of such designation, then any one of such Assistant
Treasurers) shall perform all the duties of the Treasurer and when so acting
shall have all the powers of and be subject to all the restrictions upon the
Treasurer.
Section 4.14. Salaries. The salaries of the officers shall be fixed
from time to time by the Board of Directors, and no officer shall be prevented
from receiving such salary by reason of the fact that he is also a director of
the Corporation.
Section 4.15. Bonds. If the Board of Directors or the chief executive
officer shall so require, any officer or agent of the Corporation shall give
bond to the Corporation in such amount and with such surety as the Board of
Directors or the chief executive officer, as the case may be, may deem
sufficient, conditioned upon the faithful performance of their respective duties
and offices.
Section 4.16. Delegation of Duties. In case of the absence of any
officer of the Corporation or for any other reason which may seem sufficient to
the Board of Directors, the Board of Directors may, for the time being, delegate
his powers and duties, or any of them, to any other officer or to any director.
Section 4.17. Office of the President. Notwithstanding anything herein
to the contrary, the Board of Directors of the Corporation may at any time, and
from time to time, (i) designate, in lieu of a President, an Office of the
President or (ii) disband such Office of the President in favor of a President.
The Office of the President shall consist of at least two, but not more than
three employees of the Corporation, elected by the Board of Directors. Each
member of the Office of the President shall perform such duties as may be
prescribed by the Chairman of the Board or the Board of Directors and shall have
the same duties and powers as a President of the Corporation hereunder;
provided, however, that (i) the Board of Directors of the Corporation may, by
resolution, designate only certain members of the Office of the President who
may exercise certain authority of a President hereunder, and (ii) the approval
of at least two members of the Office of the President shall be required for all
actions of the Office of the President including, but not limited to, the
following:
(a) Calling for a special meeting of stockholders pursuant to
Section 2.6 hereof;
(b) Calling for a special meeting of the Board of Directors of
the Corporation pursuant to Section 3.8 hereof;
(c) Casting the deciding vote on any question before the Board
of Directors of the Corporation pursuant to Section 3.10 if and only if
all such members of the Office of the President are also directors of
the Corporation. If only one member of the Office of the President is a
director, such member shall have authority to cast the deciding vote
pursuant to Section 3.10 hereof; and
(d) Assign duties to any Executive Vice President, any Vice
President, the Secretary or the Treasurer.
ARTICLE V
SHARES OF STOCK
Section 5.1. Regulation. Subject to the terms of any contract of the
Corporation, the Board of Directors may make such rules and regulations as it
may deem expedient concerning the issue, transfer and registration of
certificates for shares of the stock of the Corporation, including the issue of
new certificates for lost, stolen or destroyed certificates, and including the
appointment of transfer agents and registrars.
Section 5.2. Stock Certificates. Certificates for shares of the stock
of the Corporation shall be respectively numbered serially for each class of
stock, or series thereof, as they are issued, shall be impressed with the
corporate seal or a facsimile thereof, and shall be signed by the Chairman of
the Board, the President or an Executive Vice President, and by the Secretary or
Treasurer, or an Assistant Secretary or an Assistant Treasurer, provided that
such signatures may be facsimiles on any certificate countersigned by a transfer
agent other than the Corporation or its employee. Each certificate shall exhibit
the name of the Corporation, the class (or series of any class) and number of
shares represented thereby, the name of the holder, the par value of the shares
represented thereby, or that such shares are without par value. The powers,
designations, preferences, and relative, participating, optional or other
special rights of each class of stock and series of any class and the
qualifications, limitations or restrictions of such preferences and/or rights
shall be set forth in full or summarized on the face or back of the certificates
which the Corporation shall issue, or such certificate shall contain a statement
that the Corporation will furnish without charge to each stockholder who so
requests the powers, designations, preferences and relative, participating,
optional or other special rights of each class of stock or series thereof and
the qualifications, limitations or restrictions of such preferences and/or
rights. Each certificate shall be otherwise in such form as may be prescribed by
the Board of Directors.
Section 5.3. Transfer of Shares. Shares of the capital stock of the
Corporation shall be transferable on the books of the Corporation by the holder
thereof in person or by his duly authorized attorney, upon the surrender or
cancellation of a certificate or certificates for a like number of shares. Upon
presentation and surrender of a certificate properly endorsed and payment of all
taxes therefor, the transferee shall be entitled to a new certificate or
certificates in lieu thereof. As against the Corporation, a transfer of shares
can be made only on the books of the Corporation and in the manner hereinabove
provided, and the Corporation shall be entitled to treat the registered holder
of any share as the owner thereof and shall not be bound to recognize any
equitable or other claim to or interest in such share on the part of any other
person, whether or not it shall have express or other notice thereof, save as
expressly provided by the statutes of the State of Delaware.
Section 5.4. Fixing Date for Determination Stockholders of Record. In
order that the Corporation may determine the stockholders entitled to notice of
or to vote at any meeting of stockholders or any adjournment thereof, or
entitled to receive payment of any dividend or other distribution or allotment
of any rights, or entitled to exercise any rights in respect of any change,
conversion or exchange of stock or for the purpose of any other lawful action,
the Board of Directors may fix, in advance, a record date, which shall not be
more than sixty nor less than ten days before the date of such meeting, nor more
than sixty days prior to any other action.
A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
Section 5.5. Lost Certificate. Any stockholder claiming that a
certificate representing shares of stock has been lost, stolen or destroyed may
make an affidavit or affirmation of the fact and, if the Board of Directors so
requires, advertise the same in a manner designated by the Board, and give the
Corporation a bond of indemnity in form and with security for an amount
satisfactory to the Board (or an officer or officers designated by the Board),
whereupon a new certificate may be issued of the same tenor and representing the
same number, class and/or series of shares as were represented by the
certificate alleged to have been lost, stolen or destroyed.
ARTICLE VI
BOOKS AND RECORDS
Section 6.1. Location. The books, accounts and records of the
Corporation may be kept at such place or places within or without the State of
Delaware as the Board of Directors may from time to time determine.
Section 6.2. Inspection. The books, accounts and records of the
Corporation shall be open to inspection by any member of the Board of Directors
at all times; and open to inspection by the stockholders at such times, and
subject to such regulations as the Board of Directors may prescribe, except as
otherwise provided by statute.
Section 6.3. Corporate Seal. The corporate seal shall contain two
concentric circles between which shall be the name of the Corporation and the
word Delaware and in the center shall be inscribed the words Corporate Seal.
ARTICLE VII
DIVIDENDS AND RESERVES
Section 7.1. Dividends. Dividends upon the outstanding shares of
capital stock of the Corporation (other than liquidating dividends) shall be
declared only from the earned surplus or net profits of the Corporation. Subject
to the provisions of the Certificate of Incorporation, and to any other lawful
commitments of the Corporation, and subject to applicable law, dividends may be
declared and made payable at such times and in such amounts as the Board of
Directors may from time to time determine. Dividends may be declared at any
regular or special meeting of the Board and may be paid in cash or other
property or in the form of a stock dividend.
Section 7.2. Reserves. The Board of Directors of the Corporation may
set apart, out of any of the funds of the Corporation available for dividends, a
reserve or reserves for any proper purpose and may increase, reduce or abolish
any such reserve.
ARTICLE VIII
MISCELLANEOUS PROVISIONS
Section 8.1. Fiscal Year. The fiscal year of the Corporation shall end
an the 31st day of December of each year.
Section 8.2. Depositories. The Board of Directors or an officer
designated by the Board shall appoint banks, trust companies, or other
depositories in which shall be deposited from time to time the money or
securities of the Corporation.
Section 8.3. Checks, Drafts and Notes. All checks, drafts, or other
orders for the payment of money and all notes or other evidences of indebtedness
issued in the name of the Corporation shall be signed by such officer or
officers or agent or agents as shall from time to time be designated by
resolution of the Board of Directors or by an officer appointed by the Board.
Section 8.4. Contracts and Other Instruments. The Board of Directors
may authorize any officer, agent or agents to enter into any contract or execute
and deliver any instrument in the name and on behalf of the Corporation and such
authority may be general or confined to specific instances.
Section 8.5. Notices. Whenever under the provisions of the statutes or
of the Certificate of Incorporation or of these By-Laws notice is required to be
given to any director or stockholder, it shall not be construed to mean personal
notice, but such notice may be given in writing, by mail, by depositing the same
in a post office or letter box, in a postpaid sealed wrapper or by delivery to a
telegraph company, addressed to such director or stockholder at such address as
appears on the records of the Corporation, and such notice shall be deemed to be
given at the time when the same shall be thus mailed or delivered to a telegraph
company.
Section 8.6. Waivers of Notice. Whenever any notice is required to be
given under the provisions of the statutes or of the Certificate of
Incorporation or of these By-Laws, a waiver thereof in writing signed by the
person or persons entitled to said notice, whether before or after the time
stated therein, shall be deemed equivalent to notice. Attendance of a person at
a meeting shall constitute a waiver of notice of such meeting, except when the
person attends a meeting for the express purpose of objecting, at the beginning
of the meeting, to the transaction of any business because the meeting is not
lawfully called or convened. Neither the business to be transacted at, nor the
purpose of, any regular or special meeting of the stockholders, directors or
members of a committee of directors need be specified in any written waiver of
notice.
Section 8.7. Stock in Other Corporations. Any shares of stock in any
other Corporation which may from time to time be held by this Corporation may be
represented and voted at any meeting of shareholders of such Corporation by the
Chairman of the Executive Committee, if any, the Chairman of the Board, or the
President or an Executive Vice President, or by any other person or persons
thereunto authorized by the Board of Directors, or by any proxy designated by
written instrument of appointment executed in the name of this Corporation by
its Chairman of the Executive Committee, if any, the Chairman of the Board, the
President or an Executive Vice President. Shares of stock belonging to the
Corporation need not stand in the name of the Corporation, but may be held for
the benefit of the Corporation in the individual name of the Treasurer or of any
other nominee designated for the purpose by the Board of Directors. Certificates
for shares so held for the benefit of the Corporation shall be endorsed in blank
or have proper stock powers attached so that said certificates are at all times
in due form for transfer, and shall be held for safekeeping in such manner as
shall be determined from time to time by the Board of Directors.
Section 8.8. Indemnification.
(a) The Corporation shall indemnify each person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation) by
reason of the fact that the person is or was a director or officer of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by the person in connection with such action, suit or proceeding to the fullest
extent authorized by the laws of Delaware as the same now or may hereafter exist
(but, in the case of any change, only to the extent that such change authorizes
the Corporation to provide broader indemnification rights than said law
permitted the Corporation to provide prior to such change) if the person acted
in good faith and in a manner the person reasonably believed to be in or not
opposed to the best interests of the Corporation, and with respect to any
criminal actions or proceeding had no reasonable cause to believe that the
person's conduct was unlawful. The termination of any action, suit or proceeding
by judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent shall not, of itself, create a presumption that the person did
not act in good faith and in a manner which the person reasonably believed to be
in or not opposed to the best interest of the Corporation, and, with respect to
any criminal action or proceeding, had reasonable cause to believe that the
person's conduct was unlawful.
(b) The Corporation shall indemnify each person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the Corporation to procure a judgment in
its favor by reason of the fact that the person is or was a director or officer
of the Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees)
to the fullest extent authorized by the laws of Delaware as the same now or may
hereafter exist (but, in the case of any change, only to the extent that such
change authorizes the Corporation to provide broader indemnification rights than
said law permitted the Corporation to provide prior to such change) actually and
reasonably incurred by the person in defense or settlement of such action or
suit if the person acted in good faith and in a manner the person reasonably
believed to be in or not opposed to the best interests of the Corporation and
except that that no indemnification shall be made in respect of any claim, issue
or matter as to which such person shall have been adjudged to be liable to the
Corporation unless and only to the extent the Court of Chancery of Delaware or
the court in which such action or suite was brought shall determine upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery of Delaware or such
other court shall deem proper.
(c) To the extent that a present or former director or officer of the
Corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in subsections (a) and (b) of this
Section 8.8, or in defense of any claim, issue or matter therein, such person
shall be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection therewith.
(d) Any indemnification under subsections (a) and (b) of this Section
8.8 (unless ordered by a court) shall be made by the Corporation only as
authorized in the specific case upon a determination that indemnification of the
present or former director or officer is proper in the circumstances because the
person has met the applicable standard of conduct set forth in subsections (a)
and (b) of this Section 8.8. Such determination shall be made, with respect to a
person who is a director or officer at the time of such determination, (1) by a
majority vote of the directors who are not parties to such action, suit or
proceeding, even though less than a quorum, or (2) by a committee of such
directors designated by majority vote of such directors, even though less than a
quorum, or (3) if there are no such directors, of if such directors so direct,
by independent legal counsel in a written opinion, or (4) by the stockholders.
(e) Expenses (including attorneys' fees) incurred by an officer or
director in defending any civil, criminal, administrative or investigative
action, suit or proceeding shall be paid by the Corporation in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that such person is not entitled to be
indemnified by the Corporation as authorized in this Section 8.8. Such expenses
(including attorneys' fees) incurred by former directors and officers or other
employees and agents shall be so paid upon such terms and conditions as the
Corporation deems appropriate.
(f) The indemnification and advancement of expenses provided by, or
granted pursuant to, the other subsections of this Section 8.8 shall not be
deemed exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in such
person's official capacity and as to action in another capacity while holding
such office.
(g) The Corporation shall have power to purchase and maintain insurance
on behalf of any person who is or was a director, officer, employee or agent of
the Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against such
person and incurred by such person in any such capacity, or arising out of such
person's status as such, whether or not the Corporation would have the power to
indemnify such person against such liability under this Section 8.8.
(h) With respect to any person made or threatened to be made a party to
any threatened, pending, or completed action, suit, or proceeding, whether
civil, criminal, administrative, or investigative by reason of the fact that
such a person is or was a director or officer of the Corporation, or is or was
serving at the request of the Corporation as a director or officer of another
enterprise, the rights to indemnification and to the advancement of expenses
conferred in Section 8.8 shall be contract rights.
(i) For purposes of this Section 8.8, references to "the Corporation"
shall include, in addition to the resulting corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors, officers, and employees
or agents, so that any person who is or was a director, officer, employee or
agent of such constituent corporation, or is or was serving at the request of
such constituent corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
shall stand in the same position under this Section 8.8 with respect to the
resulting or surviving corporation as such person would have with respect to
such constituent corporation if its separate existence had continued.
(j) For purposes of this Section 8.8, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on a person with respect to any employee benefit plan; and
references to "serving at the request of the corporation" shall include any
service as a director, officer, employee or agent of the corporation which
imposes duties on, or involves services by, such director, officer, employee, or
agent with respect to an employee benefit plan, its participants or
beneficiaries; and a person who acted in good faith and in a manner such person
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the corporation" as referred to in this Section
8.8.
(k) The indemnification and advancement of expenses provided by, or
granted pursuant to, this Section 8.8 shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a director
or officer of the Corporation and shall inure to the benefit of the heirs,
executors and administrators of such a person.
(l) Any amendment, repeal or modification of any provision of this
Section 8.8 by the stockholders or the directors of the Corporation shall not
adversely affect any right or protection of a director or officer of the
Corporation existing at the time of such amendment, repeal or modification.
Section 8.9. Amendment of By-Laws. The stockholders, by the affirmative
vote of holders of not less than 75% of the total voting power of all
outstanding shares of capital stock of the Corporation may, at any annual or
special meeting if notice of such alteration or amendment of the By-Laws is
contained in the notice of such meeting, alter, amend, or repeal these By-Laws,
and alterations or amendments of By-Laws made by the stockholders shall not be
altered or amended by the Board of Directors.
The Board of Directors, by the affirmative vote of a majority of the
whole Board, may make, alter, amend, or repeal these By-Laws at any meeting,
except as provided in the above paragraph. By-Laws made, altered, amended or
repealed by the Board of Directors may be altered or repealed by the
stockholders.
EXHIBIT 14
LAWSON PRODUCTS, INC.
CODE OF ETHICS
CODE OF ETHICS
INTRODUCTION
Fellow Employees:
This Code of Ethics was adopted by the Board of Directors of Lawson
Products, Inc. and is applicable to all directors and employees of Lawson. It
addresses the legal and ethical principles that must guide all of us in our
work. It is critical to the success of Lawson and in the best interests of its
stockholders that its employees and directors conduct themselves honestly and
ethically. This Code of Ethics is intended as one element in our effort to
ensure lawful and ethical conduct on the part of Lawson Products, Inc. and its
subsidiaries ("Lawson or the "Company") and all of its employees, officers and
directors, which we will refer to, collectively, as employees, and should be
read in conjunction with the Lawson Employee Handbook. To be useful, this Code
of Ethics and the Employee Handbook should be kept handy and reviewed
frequently. You should become familiar with their contents and use them as a
guide when you are unsure of what actions to take.
No single document can cover every situation, however. While business
practices may change over time, our commitment to the highest standards of
integrity remains constant. You may face dilemmas in which you must consider
options and decide what to do. We expect your conduct to be guided by this Code
of Ethics, by your personal sense of right and wrong, and by the answers to the
following questions:
o Is this conduct legal?
o Is my conduct ethical?
o Does my conduct comply with Lawson's policy?
You should be able to answer "yes" to all these questions before
undertaking the conduct.
Most importantly, when questions arise or when you need an
interpretation of policies or procedures, ask for help. Talk with your manager,
to the Human Resources Manager, to the General Counsel or to any corporate
officer.
If you believe that the actions of anyone affiliated with Lawson are
unethical or expose the rest of us to legal or contractual problems, it is your
duty to speak up. Lawson policy prohibits retribution or retaliation of any kind
for doing so.
Ethical principles are often easy to state but sometimes difficult to
apply. Nontheless, living up to this Code of Ethics must be our way of life at
work. It also means showing respect for those whose lives we affect and treating
them as we would want them to treat us, whether that person is a supervisor,
colleague, or subordinate. Integrity is not an occasional requirement. It erodes
when it is not reinforced by practice and weakens if it is not continually
applied to new issues and situations. Whatever you do, remember; when you act on
Lawson's behalf, Lawson's reputation for maintaining the highest ethical
standards is in your hands.
[signed]
Robert J. Washlow
Chairman of the Board and Chief Executive Officer
BUSINESS CONDUCT POLICY
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I. GENERAL STATEMENT OF POLICY
The policy of Lawson is to comply with all applicable federal, state,
foreign and local laws, rules and regulations and to adhere to the highest
ethical standards in the conduct of our business. It is each employee's
responsibility to adhere to this Code of Ethics. Management is responsible for
making sure that proper attention is given to, and that controls are in place
for, promoting compliance with our Code of Ethics and the specific Lawson
policies addressing each area. Employees who fail to abide by these Lawson
policies will face corrective action, up to and including termination from
Lawson. As to executive officers and directors, the requirement that you adhere
to these policies may only be waived by the board of directors of Lawson, and we
will disclose any waiver of these policies made by the board of directors on
behalf of any executive officer or director as required by applicable law.
This Code of Ethics briefly summarizes the conduct required by key
policies and guidelines in effect in the U.S. and in many overseas locations and
is intended to remind us of the need to act ethically in all we do. Because the
business and legal environment in which Lawson operates is extremely complex, it
would be impossible to formulate a single policy that would govern all possible
situations. Lawson's non-U.S. operations may, in addition, have policies in
effect that complement and support Lawson's ethical approach. Non-U.S. employees
are governed by the applicable non-U.S. policies in their operations as well as
the business with integrity principles described in this Code of Ethics.
It is each employee's responsibility to acquire and maintain a working
knowledge of the business laws and ethics policies as applicable to your
responsibilities with Lawson. If employees have any questions concerning the
application of this Code of Ethics to a particular situation, or need additional
information concerning an issue not covered by the Code of Ethics, they should
contact the General Counsel or Human Resources department of Lawson. If you ever
are unsure about a situation or pending decision, about the proper application
of this Code of Ethics or about what is required by the law in any given
situation, they must consult with the General Counsel or Human Resources
department. In this way, you can obtain more information about the relevant
policy of Lawson.
If you have reason to believe that the actions of anyone at Lawson
violate this Code of Ethics, are otherwise unethical or expose the Company to
legal or contractual problems, you should notify promptly the General Counsel or
Chairman of the Board of Director's Audit Committee. You may choose to remain
anonymous in reporting any possible violation of this Code. In addition, you may
report concerns regarding questionable accounting or auditing matters
confidentially and anonymously by utilizing our web-based and telephone hotline
program. (See the Lawson website for further information.) Lawson policy
prohibits retribution or retaliation for any information or reports that you
provide that are based on a reasonable belief or concern that a violation of
this Code of Ethics might have occurred or is planned.
II. BUSINESS PRACTICES AND LEGAL COMPLIANCE
A. CONFLICTS OF INTEREST
As an employee of Lawson, each individual owes a duty of loyalty to
Lawson. Therefore, employees must use Lawson's property, its business
opportunities and their positions with Lawson exclusively for the benefit of
Lawson. This means that employees must act in the best interests of Lawson, not
their own, and that they must always seek to advance the goals of Lawson as
established by management and the Board of Directors.
Each employee will act at all times honestly and ethically, including
the ethical handling of actual or apparent conflicts of interest between
personal and professional relationships. For purposes of this Code of Ethics,
the phrase "actual or apparent conflict of interest" shall be broadly construed
and include, for example, direct conflicts, indirect conflicts, potential
conflicts, apparent conflicts and any other personal, business or professional
relationship or dealing that has a reasonable possibility of creating even the
mere appearance of impropriety.
It is essential that all employees, both professionally and personally,
take reasonable steps to avoid situations that may create a conflict of
interest, or the potential for conflict of interest or the appearance of a
conflict of interest.
Some examples of (but not limited to) potential conflicts of interest
are:
1. Investing in any company that sells products or services similar
to Lawson's, or any company doing or seeking to do business with
Lawson, other than relatively small investments in securities
widely held by the general public;
2. Working for, or on behalf of, any such company;
3. Placing Company business with relatives or friends, or working on
a Company project that will have a direct impact on the financial
interests of relatives or friends;
4. Encouraging companies dealing with Lawson to buy supplies or
services from relatives or friends;
5. Borrowing money from companies doing or seeking to do business
with Lawson other than on generally available terms;
6. Participating in the regulatory or other activities of a
community or governmental body that have a direct impact on the
business of Lawson;
7. Hiring or supervising a relative or close friend;
8. A personal relationship with another employee or vendor that
affects one's ability to do one's job or disrupts the workplace;
9. Working for another company which conflicts with one's duties
and responsibilities at Lawson by affecting one's ability to
do his/her job, work his/her regularly scheduled shift, or
work his/her stated available hours.
Each employee is responsible for recognizing situations in which a
conflict of interest is present or might arise and reporting the situation to
the appropriate level of management. Where an employee believes it is not
possible or not beneficial to Lawson to avoid any of these situations, or to
avoid any other conflict of interest, the employee must inform his or her
supervisor and make full written disclosure (in advance whenever possible) to
the General Counsel of Lawson.
B. GIFTS AND SAMPLES
In addition to avoiding actual conflicts of interest, employees must
not permit their judgment as an employee of Lawson to be influenced by personal
considerations, or create any appearance that they are seeking to obtain
business or contracts for Lawson based on improper considerations.
For this reason, employees may not accept any gifts or entertainment
that is of more than immaterial value given for the purpose of furthering a
business relationship between Lawson and any customer, supplier or other person
seeking to do business with Lawson. For this purpose a "gift" includes any
gratuitous service, loan, discount, entertainment, money, commissions, bonuses,
trips or article of value. Any additional exceptions to the foregoing of similar
nature must be approved by the General Counsel of Lawson or his designee.
No employee should make payments or transfer assets to officials or
employees of any governmental body in order to influence that body's decision.
The Company complies with the U.S. Foreign Corrupt Practices Act and the laws of
other countries which prohibit the payment of money or anything of value to any
person who is a government official, member of a political party or candidate
for political office, solely for the purpose of obtaining, retaining or
directing business.
C. CONFIDENTIAL INFORMATION
All information about Lawson's business and its plans that has not been
disclosed to the public is a valuable asset that belongs to Lawson. Employees
must never (i) use any confidential information relating to Lawson for any
purpose other than the performance of their duties to Lawson, or (ii) disclose
any confidential information/trade secrets relating to Lawson to anyone,
including relatives, friends, or other persons or companies, without written
advance authorization by the General Counsel of Lawson.
D. INTELLECTUAL PROPERTY
In the performance of assigned duties, employees may develop ideas,
inventions, software, or create original works of authorship relating to the
business of Lawson (herein known as "Intellectual Property"). In consideration
of the compensation paid to each employee by Lawson, it is the understanding
between Lawson and each employee that Lawson shall have certain rights in the
Intellectual Property. Where the subject matter of such Intellectual Property
(i) results from or is suggested by any activity which the employee may do for
or on behalf of Lawson, (ii) is created, invented or developed on Lawson time or
using Lawson's facilities, or (iii) is related to Lawson's business, the
employee shall assign all rights in such Intellectual Property to Lawson.
At the request of Lawson, either during employment or after termination
thereof, each employee shall execute or join in executing all papers or
documents required for filing of a patent or copyright applications in the
United States and such foreign countries as Lawson may elect for the
Intellectual Property. Each employee shall assign such patent and copyright
applications to Lawson or its nominee and shall provide Lawson and its agents or
attorneys with all reasonable assistance in the preparation and prosecution of
such applications, including drawings, specifications and the like, all at the
expense of Lawson. Each employee shall do all things that may be necessary to
establish, protect, and maintain the rights of Lawson or its nominee in the
Intellectual Property in accordance with the intent of this Code of Ethics.
E. FINANCIAL STATEMENTS AND OTHER DISCLOSURES
The integrity of Lawson's financial reporting is of the utmost
importance. Accounting and financial reporting practices must be fair and
proper, in accordance with generally accepted accounting principles (GAAP), and
using management's best judgments where necessary. No employee shall, directly
or indirectly, take any action to fraudulently influence, coerce, manipulate or
mislead Lawson's independent public auditors for the purposes of rendering the
financial statements of Lawson misleading.
Lawson does not condone practices that might lead to fraudulent
financial reporting. While difficult to give an all-inclusive definition of
fraudulent financial reporting, it is in general any intentional or reckless
conduct, whether by act or omission, that results in materially misleading
financial statements. Clear, open and frequent communication among all
management levels and personnel on all significant financial and operating
matters will substantially reduce the risk of problems in the accounting and
financial reporting areas as well as help achieve operating goals. All
management employees are expected to be aware of these risks and to communicate
accordingly.
Each employee must ensure that all reasonable and necessary steps
within his or her areas of responsibility are taken to provide full, fair,
accurate, timely and understandable disclosure in reports and documents that
Lawson files with or submits to the Securities and Exchange Commission or state
regulators, and in all other regulatory filings. In addition, employees must
provide full, fair, accurate, and understandable information whenever
communicating with Lawson's stockholders or the general public.
F. SECURITIES LAWS AND INSIDER TRADING
It is both illegal and against this Code of Ethics for any individual
to profit from undisclosed information relating to Lawson or any company with
which we do business. Please refer to Lawson's Insider Trading Policy for
additional information.
G. ANTITRUST LAWS
The U.S. antitrust laws prohibit agreements, either expressed or
inferred, or actions that unreasonably restrain trade, defined as restrictive
practices that may reduce or hinder competition. These laws require that
decisions be made and activities undertaken independently, without any agreement
or coordination with competitors. Among those agreements and activities
constituting clear violations are agreements and understandings to fix or
control prices and other terms of sale; to allocate products, territories or
markets (including store locations); or to limit the production or sale of
products. Accordingly, employees must take great care to avoid any
communications with Lawson's competitors with respect to these or other business
matters.
The antitrust laws also prohibit monopolization and attempted
monopolization. Monopolization consists of a firm having monopoly power, which
is generally defined as a high market share of approximately 70% or more in a
market with high barriers to entry, and engaging in anticompetitive or
exclusionary conduct that enhances or maintains that monopoly power. Attempted
monopolization is very similar, except that a firm must have a dangerous
probability of successfully monopolizing the market, which generally is defined
as possessing a market share of approximately 50% or more in a market with high
barriers to entry. Because intent is an important element to both monopolization
and attempted monopolization claims, Lawson personnel should make every effort
to ensure that nothing in their conduct or written or oral communications
creates the impression of an improper intent to eliminate or injure competitors
or to restrict competition.
The antitrust laws regulate conduct with suppliers and others. For
example, resale price agreements, as opposed to suggested resale prices, are
prohibited by the antitrust laws. In addition, the Robinson-Patman Act prohibits
price discrimination by suppliers and knowingly inducing or receiving
discriminatory pricing by buyers. Individuals involved in pricing discussions
with suppliers must be knowledgeable with respect to resale price agreements and
price discrimination and must consult with the General Counsel as issues arise.
Because of the complexity of the antitrust laws, it is imperative that
advice be sought from the General Counsel regarding this subject.
H. PERSONNEL AND OTHER BUSINESS RECORDS
Employees may not collect or maintain in Lawson's files information
about other employees that is not directly related to their employment. If an
employee receives an inquiry from a third party seeking to verify the fact of
employment or to obtain information that must be disclosed by law, the employee
must not disclose any information to the third party and, instead, refer the
inquiry to the appropriate Human Resources representative.
Inappropriate access or modifications to, or unauthorized copying or
destruction of, accounting or other business records is prohibited. These
prohibitions apply to all business records and data, regardless of whether such
data and records are in written form or electronically stored.
I. DISCRIMINATION AND SEXUAL HARASSMENT
Lawson is committed to a work environment free of any form of
discrimination or sexual harassment. Consistent with its anti-harassment policy
as set forth in the Employee Handbook. Lawson will not tolerate any conduct in
the workplace that constitutes sexual harassment, whether engaged in by
supervisory or non-supervisory personnel. For a complete description of Lawson's
policy against sexual harassment, employees should refer to the Employee
Handbook.
In addition, consistent with Lawson's policy against discrimination in
the workplace, one may not in his or her capacity as a Lawson employee
discriminate against any individual or group on the basis of age, race, color,
sex, religion, national origin, disability or any other characteristic protected
by law. For a complete description of Lawson's policy against discrimination,
employees should refer to the Employee Handbook.
J. ENVIRONMENT
Lawson is committed to doing all that it can to assist in minimizing
the degradation of our natural environment. Accordingly, employees should always
take care in disposing of any waste materials or releasing any discharges into
the air or water and comply with all applicable regulations and procedures
required by law and by Company policy. If an employee is unclear about what is
required, the employee must not dispose of any material or release any
discharges until it is determined what procedures apply.
K. ADVERTISING
All Lawson advertising must be truthful, not deceptive, and comply with
the applicable laws, regulations, and Company advertising policies. Any claims
about the performance or qualities of our products in advertising,
sales-training material, and point-of-purchase displays or literature must be
substantiated before being made. We will hold ourselves and our competitors to
the same high standard when making comparative claims about competing products.
L. POLITICAL ACTIVITIES
Unless authorized, employees who participate in partisan political
activities should not suggest or state that they speak or act for Lawson.
M. PRODUCT SAFETY
Lawson's objective is to manufacture and market products that are safe
for their anticipated use. Employees should immediately report any suspected
product-safety problem to their supervisor.
N. NO CONTRACTUAL RIGHTS
All statements contained in this Code of Ethics are intended to reflect
general policies, principles, and procedures, do not represent contractual
commitments on the part of Lawson and may be changed at any time without notice.
Without limiting the generality of the foregoing, nothing in this Code of Ethics
should be construed to grant to any employee any right to benefits under any
employee benefit plan, program or arrangement.
III. DISSEMINATION AND ENFORCEMENT OF THE CODE OF ETHICS
A. DISSEMINATION
A copy of this Code of Ethics is to be provided to all employees of
Lawson. The Human Resources department will restate and/or republish the policy
periodically as needed.
B. COMPLIANCE CERTIFICATION
All employees of Lawson at the director level and above will be asked
to certify this Code of Ethics upon receipt. By certifying, the employee
acknowledges that he or she has read and understands the conditions of the Code
of Ethics. Employee certifies this Code of Ethics by signing and submitting the
attached acknowledgment.
C. PENALTIES FOR VIOLATIONS OF THE CODE OF ETHICS
It is each employee's responsibility to resolve with the General
Counsel of Lawson any actual or potential conflicts with this Code of Ethics.
Violations of this Code of Ethics, even in the first instance, may result in
disciplinary action up to and including dismissal of employment from Lawson. In
addition, violations of laws applicable to Lawson could result in substantial
fines to Lawson and individual violators and, in certain instances,
imprisonment. Anyone who violates the provisions of this Code of Ethics by
engaging in unethical conduct, failing to report conduct potentially violative
of this Code of Ethics or refusing to participate in any investigation of such
conduct, will be subject to disciplinary actions, up to and including
termination of service with Lawson. Violations of this Code may also constitute
violations of law and may result in civil or criminal penalties for an employee
or Lawson. No improper or illegal behavior will be justified by a claim that it
was ordered by someone in higher authority. No one, regardless of his or her
position, is authorized to direct an employee to commit a wrongful act.
D. REPORTING VIOLATIONS OF THE CODE OF ETHICS
Lawson is committed to supporting its people in meeting these ethical
standards of conduct. If you have reason to believe that the actions of anyone
at Lawson violate this Code of Ethics, are otherwise unethical or expose the
Company to legal or contractual problems, you should notify promptly the General
Counsel or Chairman of the Board of Director's Audit Committee. You may choose
to remain anonymous in reporting any possible violation of this Code. In
addition, you may report concerns regarding questionable accounting or auditing
matters confidentially and anonymously by utilizing our web-based and telephone
hotline program. (See the Lawson website for further information.) Lawson policy
prohibits retribution or retaliation for any information or reports that you
provide that are based on a reasonable belief or concern that a violation of
this Code of Ethics might have occurred or is planned.
Code of Ethics
The undersigned hereby acknowledges that he or she has received a copy
of Lawson's Code of Ethics and that he or she has read and understood this Code
of Ethics in its entirety and agrees to abide by it. The undersigned further
acknowledges that it is his or her responsibility to seek clarification from the
office of Lawson's General Counsel if any application of the Code of Ethics to a
particular circumstance is not clear. The undersigned acknowledges that the
undersigned's continued service with Lawson requires the undersigned to fully
adhere to this Code of Ethics and that failure to do can result in disciplinary
action up to and including termination of the undersigned's employment by
Company.
--------------------------------------------
(Signature)
--------------------------------------------
(Date)
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
NAME JURISDICTION OF INCORPORATION
- ---- -----------------------------
Lawson Products, Inc. New Jersey
Lawson Products, Inc. Texas
Lawson Products, Inc. Georgia
Lawson Products, Inc. Nevada
Lawson Products, Inc. (Ontario) Ontario, Canada
LPI Holdings, Inc. Illinois
Lawson Products de Mexico S. de RL. de C.v. Mexico
Drummond American Corporation Illinois
Cronatron Welding Systems, Inc. North Carolina
Allprocure.com, Inc.(1) Missouri
Assembly Component Systems, Inc. Illinois
Automatic Screw Machine Products Company, Inc.(2) Alabama
Assembly Component Systems Limited2 England
LP Service Co. Illinois
C.B. Lynn Company Illinois
Superior & Sedgwick Associates (a limited partnership)(3) Illinois
(1) owned 65% by the Company
(2) subsidiary of Assembly Component Systems, Inc.
(3) owned 98.5% by the Company
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-17912) of our report dated February 25, 2004, with respect to the
consolidated financial statements and schedule of Lawson Products, Inc. included
in the Annual Report (Form 10-K), for the year ended December 31, 2003.
/s/ Ernst & Young LLP
Chicago, Illinois
March 15, 2004
Exhibit 31.1
CERTIFICATIONS
--------------
I, Robert J. Washlow, certify that:
1. I have reviewed this Annual Report on Form 10-K of Lawson Products, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal control
over financial reporting.
Date: March 12, 2004
/s/ Robert J. Washlow
- -------------------------
Robert J. Washlow
Chief Executive Officer
Exhibit 31.2
CERTIFICATIONS
--------------
I, Thomas Neri, certify that:
1. I have reviewed this Annual Report on Form 10-K of Lawson Products, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal control
over financial reporting.
Date: March 12, 2004
/s/ Thomas Neri
- ------------------------------------------
Thomas Neri
Executive Vice President -Finance and Corporate Planning
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Lawson Products, Inc. (the
"Company") on Form 10-K for the period ending December 31, 2003 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), the
undersigned Chief Executive Officer and Chief Financial Officer of the Company
hereby certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.906 of
the Sarbanes-Oxley Act of 2002 that based on their knowledge: 1) the Report
fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, and 2) the information contained in the Report fairly
presents, in all material respects, the financial condition and results of
operations of the Company as of and for the periods covered in the Report.
/s/ Robert J. Washlow
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Robert J. Washlow, Chief Executive Officer
/s/ Thomas Neri
- ------------------------------------------
Thomas Neri
Executive Vice President -Finance and Corporate Planning
March 12, 2004
A signed original of this written statement required by Section 906, or other
document authenticating, acknowledging, or otherwise adopting the signature that
appears in typed form within the electronic version of this written statement
required by Section 906, has been provided to Lawson Products, Inc. and will be
retained by Lawson Products, Inc. and furnished to the Securities and Exchange
Commission or its staff upon request.
The foregoing certification is being furnished to the Securities and Exchange
Commission as an exhibit to the Form 10-K and shall not be considered filed as
part of the Form 10-K.
