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, 1995 OR [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [No Fee Required] Commission file number: 0-10546 LAWSON PRODUCTS, INC. (Exact Name of Registrant as Specified in Charter) Delaware 36-2229304 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1666 East Touhy Avenue, Des Plaines, Illinois 60018 (Address of principal executive offices) Registrant's telephone number, including area code: (847) 827-9666 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of Each Class on which registered None None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $1.00 Par Value (Title of class) Indicate by check mark whether the Registrant (l) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No As of March 1, 1996, 11,600,614 shares of Common Stock were outstanding. The aggregate market value of the Registrant's Common Stock held by nonaffiliates on March 1, 1996 was approximately $189,118,000. The following documents are incorporated into this Form 10-K by reference: Proxy Statement for Annual Meeting of Stockholders to be held on May 7, 1996 Part III Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 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. [X] PART I Item 1. Business. Lawson Products, Inc. was incorporated in Illinois in 1952 and reincorporated in Delaware in 1982. Products The Company is a distributor of approximately 33,000 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 1995, 1994 and 1993 respectively: Percentage of Consolidated Net Sales 1995 1994 1993 Fasteners, Fittings and Related Parts . . . 41% 41% 42% Industrial Supplies . . . . . . . . . . . . 54% 53% 52% Automotive and Equipment Maintenance Parts 5% 6% 6% 100% 100% 100% All of the Company's 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 merchandise which the Company distributes is 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 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 8% of the Company's purchases in 1995. Marketing The Company's principal markets are as follows: Heavy Duty Equipment Maintenance. Customers in this market include operators of trucks, buses, agricultural implements, construction and road building equipment, mining, logging and drilling equipment and other off-the-road equipment. The Company estimates that approximately 45% of 1995 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 1995 sales were made to customers in this market. Passenger Car Maintenance. Customers in this market include automobile service center chains, independent garages, automobile dealers, car rental agencies and other fleet operators. The Company estimates that approximately 11% of 1995 sales were made to customers in this market. The Company has approximately 200,000 customers, the largest of which accounted for less than one percent of net sales during 1995. Sales are made through a force of approximately 1,675 independent sales representatives. Included in this group are 207 district and zone managers, each of whom, in addition to his own sales activities, acts in an advisory capacity to other sales representatives in a designated area of the country. The Company employs 35 regional managers to 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 has 801 employees. The Company's products are sold in all 50 states, Mexico, Puerto Rico, the District of Columbia, Canada and England. 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% of all items were shipped to the customer within 24 hours after an order was received by the Company. This rapid delivery is facilitated by computer controlled order entry and inventory control systems in each general distribution center. In addition, the receipt of customer orders at Lawson distribution facilities has been accelerated by portable facsimile transmission equipment and personal computer systems used by sales representatives operating in certain areas of the country. Customer orders are delivered by common carriers. The Company is required to carry significant amounts of inventory in order to meet its high standards of rapid processing of customer orders. The Company funds its working capital requirements internally. Distribution Facilities Substantially all of the Company's products are stocked in and distributed from each of its nine general distribution centers in; Addison, Illinois; Reno, Nevada; Farmers Branch, Texas; Norcross, Georgia; Fairfield, New Jersey; Mississauga, Ontario, Canada and Bradley Stoke (Bristol) England. Chemical products are distributed from a facility in Vernon Hills, Illinois and welding products are distributed from a facility in Charlotte, North Carolina. Each warehouse and distribution facility orders and maintains its own inventory. In the opinion of the Company, all existing facilities are in good condition, are well maintained and are being used substantially to capacity on a single shift basis. All of the Company's facilities are relatively new. Further expansion of warehousing capacity may require new warehouses, some of which may be located in new geographical areas. Canadian Operations Canadian operations are conducted at the Company's 40,000 square foot general distribution center in Mississauga, Ontario, a suburb of Toronto. These operations constituted less than 3% of the Company's net sales during 1995. United Kingdom Operations Operations in the United Kingdom are conducted under the name of Lawson Products Ltd. from a 19,000 square foot general distribution center in Bradley Stoke (Bristol) England. These operations constituted less than 1% of the Company's net sales during 1995. Mexican Operations Operations in Mexico are conducted under the name of Lawson Products de Mexico S.A. de C.V. from a 5,000 square foot facility in Guadalajara, Mexico. These operations constituted less than 1% of the Company's net sales during 1995. Competition The Company encounters intense competition from several national distributors 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 and its service. 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 other distribution facilities to a lesser degree. Additional administrative, warehouse and distribution facilities owned by the Company are located in Addison, Illinois (65,000 square feet); Fairfield, New Jersey (61,000 square feet); Reno, Nevada (97,000 square feet); Norcross, Georgia (61,300 square feet); Farmers Branch, Texas (54,500 square feet); and Mississauga, Ontario, Canada (40,000 square feet). Chemical products are distributed from a 56,300 square foot owned facility in Vernon Hills, Illinois and welding products are distributed from a 40,000 square foot owned facility located in Charlotte, North Carolina. Administrative, warehouse and distribution facilities in Bradley Stoke (Bristol) England (19,000 square feet) are leased by the Company. Administrative and distribution facilities in Guadalajara, Mexico (5,000 square feet) are leased by the Company. From time to time, the Company leases additional warehouse space near its present facilities. See Item 1, "Business - Distribution Facilities" for further information regarding the Company's properties. Item 3. Legal Proceedings. There is no material pending litigation to which the Company, or any of its subsidiaries, is a party or to which any of their property is subject. Item 4. Submission of Matters to a Vote of Security Holders. No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this Report. 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, 1995 was 1,267. The following table sets forth the high and low closing sale prices as reported on the NASDAQ National Market System during the last two years. The table also indicates the cash dividends paid by the Company during such periods. <TABLE> <CAPTION> 1995 1994 Cash Cash High Low Dividends High Low Dividends <S> <C> <C> <C> <C> <C> <C> First Quarter . . . . . . . $27 3/16 $25 $.12 $31 $25 1/4 $.12 Second Quarter . . . . . . 27 1/2 26 .12 24 1/2 21 3/4 .12 Third Quarter . . . . . . . 28 1/2 26 1/2 .13 25 3/4 22 1/2 .12 Fourth Quarter . . . . . . 27 1/8 23 1/8 .13 27 1/4 24 3/4 .12 </TABLE> 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 Report. The income statement data and balance sheet data for and as of the end of each of the fiscal years in the five-year period ended December 31, 1995, are derived from the audited Financial Statements of the Company. <TABLE> <CAPTION> 1995 1994 1993 1992 1991 <S> <C> <C> <C> <C> <C> Net Sales $223,537,182 $213,097,143 $195,735,202 $186,709,454 $181,729,132 Income Before Income Taxes 34,815,029 34,031,074 27,767,480 25,379,448 26,406,527 Net Income 21,120,029 20,524,074 18,117,480 15,343,448 16,646,527 Total Assets 160,613,798 168,130,848 171,428,606 158,029,952 150,348,539 Noncurrent Liabilities 19,292,794 17,084,617 15,160,121 13,319,626 11,550,482 Stockholders' Equity 122,810,577 131,230,469 140,649,876 128,755,648 120,425,296 Return on Equity (percent) 16.9% 14.7% 13.4% 12.3% 14.4% Per Share of common Stock: Net Income $1.75 $1.55 $1.34 $1.13 $1.23 Stockholders' Equity 10.17 9.91 10.37 9.49 8.87 Cash Dividends Declared .51 .48 .44 .40 .40 Weighted Average Shares Outstanding 12,072,668 13,237,181 13,556,714 13,564,114 13,569,716 </TABLE> Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Results of Operations Net sales for 1995 and 1994 increased 4.9% and 8.9%, respectively, over the immediately preceding years. The sales advance for 1995 occurred primarily as a result of increases in unit sales and the average order size, while the gain in sales for 1994 resulted principally from the number of orders shipped and a larger customer base. Net income in 1995 advanced 2.9% over 1994 to $21,120,029, while net income per share in 1995 increased 12.9% to $1.75 from $1.55 in 1994. Sales gains and cost containment efforts, partially offset by a decrease in gross margins, were primarily responsible for the increase in net income for 1995. Per share net income for 1995 and 1994 was positively impacted by the Company s share repurchases discussed below. The gain in net income for 1994 over 1993 resulted principally from sales advances, improved gross margins, and cost containment efforts. Excluding the effect of the nonrecurring items during 1993, noted below, net income for 1994 rose approximately 20.6 percent. Results for 1993 include an after tax gain of approximately $740,000 realized from the sale of the Compton, California facility and a $352,000 cumulative adjustment to reflect the adoption of FASB Statement No. 109, "Accounting for Income Taxes." Liquidity and Capital Resources Cash flows provided by operations for 1995, 1994, and 1993 were $21,309,287, $23,041,066 and $16,989,688, respectively. The decrease in 1995 resulted principally from increases in operating assets and decreases in operating liabilities from 1994 levels, which more than offset the gain in net income noted above. The 1994 improvement over 1993 was due primarily to the increase in net income and smaller increases in net operating assets and liabilities than in 1993. In addition to satisfying operating requirements, current investments and cash flows from operations are expected to finance the Company s future growth, cash dividends and capital expenditures. Additions to property, plant and equipment for 1995, 1994, and 1993, respectively, were $3,020,330, $6,888,262 and $1,431,004. Consistent with prior years, capital expenditures were incurred primarily for new facilities, improvement of existing facilities, and for the purchase of related equipment. The construction of Lawson s outbound facility in Addison, Illinois was substantially completed by the end of 1994, at a cost of approximately $5,600,000, and opened during the first quarter of 1995. In addition, during the first quarter of 1994, the Company established a new Lawson subsidiary in Guadalajara, Mexico, which operates out of a leased facility. In 1994, the Board of Directors authorized the purchase of up to 1,500,000 shares of the Company s Common Stock. During 1995, 917,500 shares were purchased for approximately $24,085,000, relative to the share authorization noted above. Also, during 1994, 961,500 shares were purchased for approximately $23,105,000, consisting of 496,500 shares relative to the 1,500,000 shares authorized for purchase in 1994 and 465,500 shares relating the share purchases previously authorized during 1990. Funds to purchase these shares were provided by investments and cash flows from operations. Impact of Inflation and Changing Prices The Company has continued to pass most increases in product costs on to its customers and, accordingly, gross margins have not been materially impacted. The effects from inflation have 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 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, 1995 and 1994. Consolidated Statements of Income for the Years ended December 31, 1995, 1994 and 1993. Consolidated Statements of Changes in Stockholders' Equity for the Years ended December 31, 1995, 1994 and 1993. Consolidated Statements of Cash Flows for the Years ended December 31, 1995, 1994 and 1993. 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, 1995 and 1994, 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, 1995. Our audits also included the financial statement schedule listed in the Index at item 14(a). These financial statements and related schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and related schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Lawson Products, Inc. and subsidiaries at December 31, 1995 and 1994, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Ernst & Young LLP Chicago, Illinois February 26, 1996 LAWSON PRODUCTS, INC. CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> December 31, 1995 1994 <S> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 10,432,139 $ 9,852,855 Marketable securities 16,068,113 21,797,808 Accounts receivable, less allowance for doubtful accounts (1995- $1,111,337; 1994-$1,127,017) 28,295,687 27,319,094 Inventories 27,082,903 26,839,274 Miscellaneous receivables 2,977,144 3,184,610 Prepaid expenses 2,657,933 2,440,629 Deferred income taxes 464,000 815,000 Total Current Assets 87,977,919 92,249,270 Property, plant and equipment, at cost, less allowances for depreciation and amortization (1995-$22,894,444; 1994-$20,105,709) 35,501,105 35,858,457 Other assets: Marketable securities 20,847,081 26,101,660 Investments in real estate 3,152,164 3,084,164 Cash value of life insurance 8,790,756 7,245,823 Deferred income taxes 3,201,000 2,461,000 Other 1,143,773 1,129,974 37,134,774 40,022,621 $160,613,798 $168,130,348 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 3,218,887 $ 3,274,004 Accrued expenses and other liabilities 14,329,710 14,524,248 Income taxes 961,830 2,017,010 Total Current Liabilities 18,510,427 19,815,262 Noncurrent liabilities and deferred credits: Accrued liability under security bonus plans 11,421,646 10,163,098 Deferred compensation and other liabilities 7,871,148 6,921,519 19,292,794 17,084,617 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-1995-11,686,614 shares; 1994-17,097,490 shares 11,686,614 17,097,490 Capital in excess of par value 493,783 716,111 Retained earnings 111,320,907 195,609,232 Cost of common stock in treasury: 1994-4,493,676 - (80,884,205) 123,501,304 132,538,628 Foreign currency translation adjustment (823,727) (1,087,159) Unrealized gain (loss) on marketable securities 133,000 (221,000) 122,810,577 131,230,469 $160,613,798 $168,130,348 See notes to consolidated financial statements </TABLE> LAWSON PRODUCTS, INC. CONSOLIDATED STATEMENTS OF INCOME <TABLE> <CAPTION> Year ended December 31, 1995 1994 1993 <S> <C> <C> <C> Net sales $223,537,182 $213,097,143 $195,735,202 Interest and dividend income 1,671,383 1,725,871 2,162,002 Other income - net 977,451 18,170 1,067,137 226,186,016 214,841,184 198,964,341 Cost of goods sold 63,535,746 58,559,096 54,783,721 Selling, general and administrative expenses 126,839,711 121,357,853 115,504,641 Interest expense 10,271 44,831 19,300 Provision for doubtful accounts 985,259 848,330 889,199 191,370,987 180,810,110 171,196,861 Income Before Income Taxes 34,815,029 34,031,074 27,767,480 Federal and state income taxes (credit): Current 14,472,000 14,100,000 10,989,000 Deferred (777,000) (593,000) (987,000) 13,695,000 13,507,000 10,002,000 Income before cumulative effect of change in accounting principle 21,120,029 20,524,074 17,765,480 Cumulative effect-change in accounting for income taxes - - 352,000 Net Income $ 21,120,029 $ 20,524,074 $ 18,117,480 Per share of Common Stock: Income before cumulative effect of change in accounting principle $1.75 $1.55 $1.32 Cumulative effect-change in accounting for income taxes - - .02 Net Income $1.75 $1.55 $1.34 See notes to consolidated financial statements </TABLE> Lawson Products, Inc. Consolidated Statements of Changes in Stockholders' Equity <TABLE> <CAPTION> Unrealized Common Capital Cost of Foreign Gain (Loss) Stock, in excess of Common Currency on $1 par par Retained Stock in Translation Marketable value value Earnings Treasury Adjustment Securities <S> <C> <C> <C> <C> <C> <C> Balance at January 1, 1993 $ 17,081,561 $ 553,195 $ 169,228,919 $ (57,779,689) $ (328,338) $ - Net income 18,117,480 Cash dividends declared (5,965,834) Stock issued under employee stock plans 12,354 134,101 Translation adjustment (403,873) Balance at December 31, 1993 17,093,915 687,296 181,380,565 (57,779,689) (732,211) - Net income 20,524,074 Cash dividends declared (6,295,407) Stock issued under employee stock plans 3,575 28,815 Purchase of common stock (23,104,516) Translation adjustment (354,948) Unrealized loss on marketable securities (221,000) Balance at December 31, 1994 17,097,490 716,111 195,609,232 (80,884,205) (1,087,159) (221,000) Net income 21,120,029 Cash dividends declared (6,076,922) Stock issued under employee stock plans 300 4,551 Purchase of common stock (24,085,282) Retirement of treasury stock (5,411,176) (226,879) (99,331,432) 104,969,487 Translation adjustment 263,432 Unrealized gain on marketable securities 354,000 Balance at December 31, 1995 $ 11,686,614 $ 493,783 $ 111,320,907 $ - $ (823,727) $ 133,000 </TABLE> See notes to consolidated financial statements LAWSON PRODUCTS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> Year ended December 31, 1995 1994 1993 <S> <C> <C> <C> Operating activities: Net income $21,120,029 $20,524,074 $18,117,480 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,349,186 3,085,476 3,195,714 Provision for allowance for doubtful accounts 985,259 848,330 889,199 Deferred income taxes (777,000) (593,000) (1,339,000) Deferred compensation and security bonus plans 3,739,807 2,767,055 2,604,346 Payments under deferred compensation and security bonus plans (1,509,086) (847,666) (769,274) (Gains)/losses from sale of property, plant and equipment 18,884 36,058 (1,216,919) (Income)/losses from investments in real estate (148,000) 208,500 392,000 Changes in operating assets and liabilities: Increase in accounts receivable (1,961,852) (3,095,661) (602,393) Increase in inventories (243,629) (3,183,058) (1,772,046) Increase in prepaid expenses and other assets (2,248,330) (1,383,412) (1,452,659) Increase/(decrease) in accounts payable and accrued expenses (256,456) 2,116,976 901,343 Increase/(decrease) in income taxes payable (1,055,180) 2,079,249 (1,509,882) Other 295,655 478,145 (448,221) Net Cash Provided by Operating Activities 21,309,287 23,041,066 16,989,688 Investing activities: Additions to property, plant and equipment (3,020,330) (6,888,262) (1,431,004) Purchases of marketable securities (293,575,770) (246,580,492) (120,239,385) Proceeds from sale of marketable securities 305,232,277 251,437,202 111,600,275 Proceeds from sale of property, plant and equipment 36,000 5,200 2,135,475 Proceeds from life insurance policies 668,372 173,297 15,000 Other 80,000 80,000 60,000 Net Cash Provided by (Used in) Investing Activities 9,420,549 (1,773,055) (7,859,639) Financing Activities: Purchases of common stock (24,085,282) (23,104,516) - Proceeds from exercise of stock options 4,851 32,390 146,455 Dividends paid (6,070,121) (6,294,979) (5,693,364) Net Cash Used in Financing Activities (30,150,552) (29,367,105) (5,546,909) Increase/(Decrease) in Cash and Cash Equivalents 579,284 (8,099,094) 3,583,140 Cash and Cash Equivalents at Beginning of Year 9,852,855 17,951,949 14,368,809 Cash and Cash Equivalents at End of Year $ 10,432,139 $ 9,852,855 $ 17,951,949 See notes to consolidated financial statements </TABLE> Lawson Products, Inc. and subsidiaries are distributors of expendable parts and supplies for maintenance, repair and operations of equipment. The Company's operations are principally conducted in North America. NOTE A-SUMMARY OF MAJOR ACCOUNTING POLICIES Principles of Consolidation: The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries, each of which is wholly owned. All intercompany items and transactions have been eliminated in consolidation. Revenue Recognition: Sales and associated cost of goods sold are recognized when products are shipped to customers. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. Investments in Real Estate: The Company's investments in real estate representing limited partnership interests are carried on the basis of the equity method. Marketable Securities: Marketable equity securities 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 shareholders' 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 (comprising finished goods) are stated at the lower of cost (first-in, first-out method) or market. Property, Plant and Equipment: Provisions for depreciation and amortization are computed by the straight-line method for buildings using useful lives of 20 to 30 years and by the double declining balance method for machinery and equipment, furniture and fixtures and vehicles using useful lives of 4 to 10 years. Investment Tax Credits: Investment tax credits on assets leased to others (see Investments in Real Estate) are deferred and amortized over the useful life of the related asset. Cash Equivalents: The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Stock Options: Stock options are accounted for under Accounting Principles Board Opinion No. 25, Accounting For Stock Issued to Employees. Under APB 25, no compensation expense is recognized because the exercise price of the stock options granted equals the market price of the underlying stock at the date of grant. 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, 1995, 1994 and 1993. Reclassifications: Certain amounts have been reclassified in the 1993 and 1994 financial statements to conform with the 1995 presentation. NOTE B- MARKETABLE SECURITIES The following is a summary of the Company's investments at December 31 which are all classified as available-for-sale: <TABLE> <CAPTION> (In Thousands) Gross Gross Unrealized Unrealized Estimated 1995 Cost Gains Losses Fair Value <S> <C> <C> <C> <C> Obligations of states and $34,472 $287 $2 $34,757 political subdivisions Foreign government securities 1,516 - - 1,516 Other debt securities 204 - - 204 Total debt securities 36,192 287 2 36,477 Equity securities - 438 - 438 $36,192 $725 $2 $36,915 1994 Obligations of states and $44,896 $82 $425 $44,553 political subdivisions Foreign government securities 1,226 - - 1,226 Other debt securities 2,118 8 6 2,120 $48,240 $90 $431 $47,899 </TABLE> The gross realized gains on sales totaled: $116,062, $11,867, and $141,861 in 1995, 1994, and 1993, respectively, and the gross realized losses totaled $46,186, $55,050, and $83,530, respectively. The net adjustment to unrealized holding gains (losses) included as a separate component of shareholders' equity, net of taxes, totaled $354,000 and ($221,000) in 1995 and 1994, respectively. In 1995 the Company received equity shares on the conversion of certain mutual insurance companies from, which the Company held policies, to stock companies. These shares carry no cost. The amortized cost and estimated fair value of marketable securities at December 31, 1995, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because the issuers of certain securities have the right to prepay obligations without prepayment penalties. <TABLE> <CAPTION> Estimated (In Thousands) Cost Fair Value <S> <C> <C> Due in one year or less $16,024 $16,068 Due after one year through five years 10,397 10,505 Due after five years through ten years 1,611 1,642 Due after ten years 8,160 8,262 Total debt securities 36,192 36,477 Equity securities - 438 $36,192 $36,915 </TABLE> NOTE C-PROPERTY, PLANT AND EQUIPMENT The cost of property, plant and equipment consists of: <TABLE> <CAPTION> 1995 1994 <S> <C> <C> Land $ 5,976,341 $ 5,209,858 Buildings and improvements 32,360,549 29,221,123 Machinery and equipment 14,475,356 11,204,980 Furniture and fixtures 4,618,726 4,383,001 Vehicles 303,317 287,550 Construction in Progress 661,260 5,657,654 $58,395,549 $55,964,166 </TABLE> NOTE D-INVESTMENTS IN REAL ESTATE The Company is a limited partner in three real estate limited partnerships. An affiliate of the Company has a 1.5% interest and 5% interest, respectively, as a general partner in two of the partnerships, which interests are subordinated to the Company's interests in distributable cash. NOTE E-ACCRUED EXPENSES AND OTHER LIABILITIES Accrued expenses and other liabilities consist of the following: <TABLE> <CAPTION> 1995 1994 <S> <C> <C> Salaries, commissions and other compensation $ 5,416,903 $ 5,643,685 Accrued and withheld taxes, other than income taxes 1,408,108 1,154,584 Accrued profit sharing contributions 1,994,328 1,810,562 Accrued self-insured health benefits 1,300,000 1,300,000 Cash dividends payable 1,519,260 1,627,838 Other 2,691,111 2,987,579 $14,329,710 $14,524,248 </TABLE> NOTE F-STOCK PLAN The Company's Incentive Stock Plan (Plan), as amended, provides for the issuance of up to 750,000 shares of Common Stock to officers and key employees pursuant to stock options, stock appreciation rights, stock purchase agreements and stock awards. The Plan permits the grant of incentive stock options, subject to certain annual limitations, with substantially the same terms as non-qualified stock options, except that incentive stock options are not exercisable within six months from date of grant and may not be exercisable while an optionee holds a prior incentive stock option. Incentive stock options may be granted at prices not less than the fair market value of the shares at the dates of grant. Benefits may be granted under the Plan through December 16, 1996 and the allowable duration of the stock options is twelve years. Additional information with respect to the Plan is summarized as follows: <TABLE> <CAPTION> Shares 1995 1994 1993 <S> <C> <C> <C> As of December 31: Options outstanding (per share: $12.83 to $29.75) 126,131 126,431 130,756 Available for grant 536,591 536,591 535,841 Options exercisable 126,131 126,431 103,550 For the year ended December 31: Options exercised (per share: 1995, 1994, and 1993-$8.78 to $27.50) 300 3,575 12,354 Benefits cancelled - 750 5,886 </TABLE> As of December 31, 1995, 93 persons held outstanding options for an aggregate of 126,131 shares of Common Stock with an average per share option price of $27.06. Such options expire on various dates through May 24, 2000. At December 31, 1995, 662,722 shares of Common Stock were reserved for issuance under the Plan. NOTE G-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 Company and its subsidiaries also have in effect security bonus plans for the benefit of their regional managers and independent sales representatives, under the terms of which participants are credited with a percentage of their yearly earnings (as defined). Of the aggregate amounts credited to participants' accounts, 25% vests after five years and an additional 5% vests each year thereafter. For financial reporting purposes, amounts are charged to operations over the vesting period. Provisions for profit sharing and security bonus plans aggregated $3,890,250, $3,517,052 and $3,067,199 for the years ended December 31, 1995, 1994 and 1993, respectively. In 1994 the Company established a 401(k) defined contribution savings plan. The plan, which is available to all employees, was provided to give employees a pre-tax investment vehicle to save for retirement. All contributions to the plan are made by plan participants. NOTE H-INCOME TAXES Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes." SFAS 109 requires recognition of deferred tax liabilities and receivables for future taxes to be calculated using a balance sheet approach. The cumulative effect of adopting SFAS 109 was to increase 1993 net income by $352,000 ($.02 per share). Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. In addition, deferred income taxes include net operating loss carryforwards of a foreign subsidiary which do not expire. The valuation allowance has been provided since there is no assurance that the benefit of the net operating loss carryforwards will be realized. Significant components of the Company's deferred tax assets and liabilities as of December 31 are as follows: <TABLE> <CAPTION> Deferred Tax Assets: 1995 1994 <S> <C> <C> Compensation and benefits $ 7,630,000 $ 6,822,000 Inventory 509,000 514,000 Net operating loss carryforward of subsidiary 2,047,000 1,572,000 Accounts receivable 373,000 376,000 Marketable securities - 120,000 Total Deferred Tax Assets 10,559,000 9,404,000 Valuation allowance for deferred tax assets (2,047,000) (1,572,000) Net Deferred Tax Assets 8,512,000 7,832,000 Deferred Tax Liabilities: Property, plant & equipment 1,200,000 1,166,000 Investments in real estate 3,167,000 3,195,000 Marketable securities 253,000 - Other 227,000 195,000 Total Deferred Tax Liabilities 4,847,000 4,556,000 Total Net Deferred Tax Assets $ 3,665,000 $ 3,276,000 </TABLE> The provisions for income taxes for the years ended December 31, consist of the following: <TABLE> <CAPTION> 1995 1994 1993 <S> <C> <C> <C> Current: Federal $11,657,000 $11,955,000 $ 9,194,000 State 2,815,000 2,145,000 1,795,000 14,472,000 14,100,000 10,989,000 Deferred benefit (777,000) (593,000) (987,000) $13,695,000 $13,507,000 $10,002,000 </TABLE> The reconciliation between the effective income tax rate and the statutory federal rate is as follows: <TABLE> <CAPTION> 1995 1994 1993 <S> <C> <C> <C> Statutory federal rate 35.0% 35.0% 35.0% Increase (decrease) resulting from: State income taxes, net of federal income tax benefit 5.3 4.1 3.9 Non-taxable dividend and interest income (1.4) (1.5) (2.6) Foreign loss 1.7 1.7 1.2 Other items (1.3) .4 (1.5) Provision for income taxes 39.3% 39.7% 36.0% </TABLE> Income taxes paid for the years ended December 31, 1995, 1994 and 1993 amounted to $15,327,000, $12,098,000 and $12,554,000, respectively. NOTE I-COMMITMENTS The Company's minimum rental commitments, principally for equipment, under noncancelable leases in effect at December 31, 1995 amounted to approximately $1,802,000. Such rentals are payable as follows: 1996-$854,000; 1997-$583,000; 1998-$362,000 and 1999-$3,000. Total rental expense for the years ended December 31, 1995, 1994 and 1993 amounted to $1,087,271, $1,188,740 and $1,297,159. NOTE J-PER SHARE DATA Per share data are based on the weighted average number of shares of Common Stock outstanding during each year: 1995-12,072,668; 1994-13,237,181 and 1993- 13,556,714. Exercise of outstanding stock options would not have a material dilutive effect on such per share data. NOTE K SUMMARY OF UNAUDITED QUARTERLY RESULTS OF OPERATIONS Unaudited quarterly results of operations for the years ended December 31, 1995 and 1994 are summarized as follows: <TABLE> <CAPTION> Selected Quarterly Financial Information Quarter ended 1995 Mar. 31 Jun. 30 Sept. 30 Dec. 31* (In thousands, except per share data) <S> <C> <C> <C> <C> Net sales $54,845 $56,095 $56,177 $56,420 Cost of goods sold 15,421 15,822 15,832 16,461 Income before income taxes 8,238 8,482 8,439 9,655 Provision for income taxes 3,214 3,205 3,348 3,928 Net income 5,024 5,277 5,091 5,727 Net income per share of common stock $.40 $.43 $.43 $.49 Weighted average shares outstanding 12,454 12,217 11,826 11,742 Quarter ended 1994 Mar. 31 Jun. 30 Sept. 30 Dec. 31* (In thousands, except per share data) Net sales $49,772 $53,749 $55,539 $54,038 Cost of goods sold 14,252 15,302 15,847 13,157 Income before income taxes 6,550 8,227 8,690 10,565 Provision for income taxes 2,482 3,068 3,443 4,514 Net income 4,068 5,159 5,247 6,051 Net income per share of common stock $.30 $.38 $.40 $.47 Weighted average shares outstanding 13,562 13,480 13,107 12,837 *Inventories and cost of goods sold during interim periods are determined through the use of estimated gross profit rates. The difference between actual and estimated gross profit rates used for the interim periods is adjusted in the fourth quarter. In 1995, this adjustment decreased net income by approximately $354,000, while in 1994, this adjustment increased net income by approximately $1,445,000. Also, the fourth quarter of 1995 reflects adjustments to certain accrued expenses which increased net income by approximately $908,000. </TABLE> SCHEDULE II LAWSON PRODUCTS, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS <TABLE> <CAPTION> Column A Column B Column C Column D Column E Additions Balance at Charged to Beginning of Costs and Deductions- Balance at End Description Period Expenses Describe(A) of Period <S> <C> <C> <C> <C> Allowance deducted from assets to which it applies: Allowance for doubtful accounts: Year ended December 31, 1995 $ 1,127,017 $ 985,259 $ 1,000,939 $ 1,111,337 Year ended December 31, 1994 1,067,754 848,330 789,067 1,127,017 Year ended December 31, 1993 1,059,087 889,199 880,532 1,067,075 Note A - Uncollected receivables written off, net of recoveries. </TABLE> Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. PART III Item 10. Directors and Executive Officers of the Registrant. a. Executive Officers The executive officers of the Company, all of whose terms of office expire on May 7, 1996, are as follows: Year First Other Offices Held Name and Present Elected to During the Past Position with Company Age Present Office Five Years Sidney L. Port, 85 1977 * Chairman of the Executive Committee and Director Bernard Kalish, 58 1989 * Chief Executive Officer, Chairman of the Board and Director Peter G. Smith, 57 1989 * President, Chief Operating Officer and Director Jeffrey B. Belford 49 1989 * Executive Vice President--Operations Hugh Allen, 60 1991 Prior to 1991, Executive Vice Mr. Allen was Vice President--Sales and President-Sales/ Marketing Marketing. James Smith, 55 1996 Mr. Smith was Vice Vice President-- President, Personnel Human Resources from 1995 to 1996. Prior to 1995, Mr. Smith was Manager, Human Resources since he joined the Company in 1993. Jerome Shaffer, 68 1987 * Vice President, Treasurer and Director Joseph L. Pawlick, 53 1987 * Vice President and Controller and Assistant Secretary _______________ These persons have held the indicated positions for at least five years. b. 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 7, 1996, under the caption "Election of Directors," which information is incorporated herein by reference. 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 7, 1996, 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 7, 1996 under the caption "Securities Beneficially Owned by Principal Stockholders and Management," which information is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions. None. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a) (1) Financial Statements The following information is presented in this report: Consolidated Balance Sheets as of December 31, 1995 and 1994. Consolidated Statements of Income for the Years ended December 31, 1995, 1994 and 1993. Consolidated Statements of Changes in Stockholders' Equity for the Years ended December 31, 1995, 1994 and 1993. Consolidated Statements of Cash Flows for the Years ended December 31, 1995, 1994 and 1993. Notes to Consolidated Financial Statements. (2) Financial Statement Schedule The following consolidated financial statement schedule of Lawson Products, Inc. and subsidiaries is included in Item 14(d): Schedule II - Valuation and Qualifying Accounts is submitted with this report. All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not submitted because they are not applicable or are not required under Regulation S-X or because the required information is included in the financial statements or notes thereto. (a) (3) Exhibits. 3(a) Certificate of Incorporation of the Company, as amended, incorporated herein by reference to Exhibit 3(a) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1988. 3(b) By-laws of the Company, dated May 7, 1991, incorporated herein by reference to Exhibit 6(a) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1991. *10(c)(1) Lawson Products, Inc. Incentive Stock Plan, incorporated herein by reference from Exhibit 4 to the Company's Registration Statement on Form S-8 (File No. 33-17912). *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. Peter G. Smith dated July 17, 1972 incorporated herein by reference from Exhibit 10(c)(6) to the Company's Annual Report on Form 10-K for the year ended December 31, 1981. *10(c)(4) Employment Agreement between the Company and Mr. Bernard Kalish, incorporated herein by reference from Exhibit 10(c)(6) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1985; and First Amendment to Employment Agreement dated as of May 27, 1988 incorporated herein by reference from Exhibit 10(c)(6) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1988. *10(c)(5) Employment Agreement between the Company and Mr. Hugh Allen, 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, 1985. *10(c)(6) 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)(7) Amended and Restated Executive Deferral Plan. 11 Statement regarding computation of per share earnings. 21 Subsidiaries of the Company. 23 Consent of Ernst & Young LLP. 27 Financial Data Schedule. * Indicates management employment contracts or compensatory plans or arrangements. (b) Reports on Form 8-K No reports on Form 8-K were filed during the fourth quarter of the fiscal year covered by this Report. (c) Exhibits See item 14(a)(3) above for a list of exhibits to this report. (d) Schedules See item 14(a)(2) above for a list of schedules filed with this report. 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 27, 1996 By /s/ Bernard Kalish Bernard Kalish, Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date Chairman, Chief Executive Officer and Director /s/ Bernard Kalish (principal executive officer) Bernard Kalish Vice President, Treasurer and Director /s/ Jerome Shaffer (principal financial officer) Jerome Shaffer Vice President and Controller /s/ Joseph L. Pawlick (principal accounting officer) Joseph L. Pawlick /s/ James T. Brophy Director March 27, 1996 James T. Brophy /s/ Hugh Allen Director Hugh Allen /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/ Peter G. Smith Director Peter G. Smith EXHIBIT INDEX Sequentially Exhibit Numbered Number Description of Exhibit Page 3(a) Certificate of Incorporation of the Company, as amended, incorporated herein by reference to Exhibit 3(a) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1988. 3(b) By-laws of the Company, dated May 7, 1991, incorporated herein by reference to Exhibit 6(a) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1991. 10(c)(1) Lawson Products, Inc. Incentive Stock Plan, incorporated herein by reference from Exhibit 4 to the Company's Registration Statement on Form S-8 (File No. 33-17912). 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. Peter G. Smith, dated January 17, 1972 incorporated herein by reference from Exhibit 10(c)(6) to the Company's Annual Report on Form 10-K for the year ended December 31, 1981. 10(c)(4) Employment Agreement between the Company and Mr. Bernard Kalish, incorporated herein by reference from Exhibit 10(c)(6) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1985; and First Amendment to Employment Agreement dated as of May 27, 1988 incorporated herein by reference from Exhibit 10(c)(6) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1988. 10(c)(5) Employment Agreement between the Company and Mr. Hugh Allen, 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, 1985. 10(c)(6) 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)(7) Amended and Restated Executive Deferral Plan. 11 Statement regarding computation of per share earnings. 21 Subsidiaries of the Company. 23 Consent of Ernst & Young LLP. 27 Financial Data Schedule.