Distribution Solutions Group - 10-Q quarterly report FY

 

(Exact name of registrant as specified in its charter)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ      No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o      Accelerated Filer þ      Non-accelerated filer o

     Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).
Yes o      No þ

     The number of shares outstanding of the registrant’s common stock, $1 par value, as of October 31, 2007 was 8,522,001.

     “Safe Harbor” Statement under the Securities Litigation Reform Act of 1995: This Quarterly Report on Form 10-Q 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 or that might otherwise impact the business include the impact of governmental investigations, such as the investigation by the U.S. Attorney’s Office for the Northern District of Illinois; excess and obsolete inventory; disruptions of the Company’s information systems; risks of rescheduled or cancelled orders; increases in commodity prices; the influence of controlling stockholders; competition and competitive pricing pressures; the effect of general economic conditions and market conditions in the markets and industries the Company serves; the risks of war, terrorism, and similar hostilities; and, all of the factors discussed in the Company’s “Risk Factors” set forth in its Annual Report on Form 10-K for the year ended December 31, 2006.

     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.

See notes to condensed consolidated financial statements.

See notes to condensed consolidated financial statements.

See notes to condensed consolidated financial statements.

     As contemplated by the Securities and Exchange Commission, the accompanying consolidated financial statements and footnotes have been condensed and, therefore, do not contain all disclosures required by generally accepted accounting principles. Reference should be made to Lawson Products, Inc.’s (the “Company”) Annual Report on Form 10-K for the year ended December 31, 2006. The Condensed Consolidated Balance Sheets as of September 30, 2007 and December 31, 2006, the Condensed Consolidated Statements of Income for the three month and nine month periods ended September 30, 2007 and 2006 and the Condensed Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2007 and 2006 are unaudited. In the opinion of the Company, all adjustments (consisting only of normal recurring accruals) have been made, which are necessary to present fairly the results of operations for the interim periods. Operating results for the three and nine month periods ended September 30, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007.

     FIN 48 — We account for uncertain tax positions in accordance with FASB Interpretation No. 48 Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109 (“FIN 48”). The application of income tax law is inherently complex. Laws and regulations in this area are voluminous and are often ambiguous. As such, we are required to make many subjective assumptions and judgments regarding our income tax exposures. Interpretations of and guidance surrounding income tax laws and regulations change over time. As such, changes in our subjective assumptions and judgments can materially affect amounts recognized in the condensed consolidated balance sheets and statements of income. See Note J — Income Taxes to the condensed consolidated financial statements for additional detail on our uncertain tax positions.

     There have been no significant changes in our significant accounting policies during the nine months ended September 30, 2007, except as noted above related to FIN 48, as compared to the significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006.

     Certain prior year amounts have been reclassified to conform to current year presentation.

     Comprehensive income was $2,865 and $3,104 for the third quarters of 2007 and 2006, respectively. Comprehensive income includes foreign currency translation adjustments, net of related income tax of $466 and $29 for the three month periods ended September 30, 2007 and 2006, respectively.

     For the nine month periods ended September 30, 2007 and 2006, comprehensive income was $7,542 and $11,350, respectively. Comprehensive income includes foreign currency translation adjustments, net of related income tax of $922 and $82 for the nine months ended September 30, 2007 and 2006, respectively.

     Accumulated comprehensive loss consists only of foreign currency translation adjustments, net of related income tax.

     The calculation of dilutive weighted average shares outstanding for the three and nine months ended September 30, 2007 and 2006 are as follows:

     The revolving line of credit has a maximum borrowing capacity of $75 million and a maturity date of March 27, 2009. The revolving line of credit carries a floating interest rate of prime minus 150 basis points or LIBOR plus 75 basis points, at the Company’s option. At September 30, 2007, the Company’s effective borrowing rate on the revolving line of credit was 6.3 percent. Interest is payable quarterly on prime rate borrowings and at contract expirations for LIBOR borrowings. The line of credit contains certain financial covenants regarding interest coverage, minimum stockholders’ equity and working capital, all of which the Company was in compliance with at September 30, 2007. The Company had $13 million of borrowings under the line outstanding at September 30, 2007.

     The table below presents the changes in the Company’s reserves for severance and related payments, included in accrued expenses and other liabilities, for the first nine months ended September 30, 2007 and 2006:

     The $9,593 severance charge to earnings in 2007 includes $9,129 related to contractual payments for several executives who have retired, have announced their retirement or have been terminated due to a sales management realignment during the first nine months of 2007. The 2007 severance charge also includes $464 related to operational efficiency improvement initiatives implemented in 2007 that resulted in non-executive employee severance (classified in selling, general and administrative expenses on the Condensed Consolidated Statements of Income). For the nine months ended September 30, 2007 severance and other charges of $10,571 on the Condensed Consolidated Statement of Income includes $9,129 of severance charges for executives and $1,442 of compensation expense related to the retirement of Mr. Jeffrey Belford, the Company’s former President and Chief Operating Officer.

     Intangible assets subject to amortization, included within other assets, were as follows:

     Trademarks and tradenames are being amortized over 15 years. The non-compete covenant associated with the 2005 acquisition of Rutland is being amortized over 5 years. Amortization expense for intangible assets is expected to be $250 per year for each of the next four years and $50 per year thereafter until the trademarks and tradenames are fully amortized.

     The Amended Stock Performance Plan (“Plan”) provides for the issuance of incentive compensation to non-employee directors, officers and key employees in the form of stock performance rights (“SPRs”).

     SPRs vest at 20% to 33% per year and entitle the recipient to receive a cash payment equal to the excess of the market value of the Company’s common stock over the SPR exercise price when the SPRs are surrendered. The Company estimates the fair value of SPRs using the Black-Scholes valuation model each quarter. This model requires the input of subjective assumptions that will usually have a significant impact on the fair value estimate. The weighted-average estimated value of SPRs outstanding at September 30, 2007 was $8.33 per SPR with the following assumptions:

     In the third quarter 2007, the Company recorded a reduction to expense of $0.9 million for outstanding SPRs.

     The following is a summary of the activity in the Company’s stock performance rights during the three and nine month periods ended September 30, 2007:

     The aggregate intrinsic value of SPRs outstanding as of September 30, 2007 is $0.9 million.

     As of September 30, 2007, there was $0.3 million of unrecognized compensation cost related to non-vested SPRs, which will be recognized over a weighted average period of 1.6 years.

     As stock-based compensation expense recognized in the Condensed Consolidated Statements of Income for the three and nine month periods ended September 30, 2007 and 2006 is based on awards granted and ultimately expected to vest, the amounts calculated include a reduction for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on historical experience.

     The following is a summary of the activity in the Company’s stock options during the three and nine month periods ended September 30, 2007:

     The aggregate intrinsic value for options outstanding and exercisable at September 30, 2007 is $0.1 million.

     As of September 30, 2007, the Company had the following outstanding options:

     As of December 31, 2006, all outstanding stock options were fully vested and therefore, there is no remaining unrecognized compensation expense as of September 30, 2007.

     In the second quarter of 2006, the Company incurred a loss of $0.8 million ($0.5 million, net of tax) on the sale of equipment related to the Company’s decision to outsource the manufacturing of a product line in the Company’s OEM business. Net book value for the disposed equipment was $1.0 million.

     The Company has two reportable segments: Maintenance, Repair and Replacement distribution in North America (MRO), and Original Equipment Manufacturer distribution and manufacturing in North America (OEM).

     The Company’s MRO distribution segment distributes a wide range of MRO parts to repair and maintenance organizations primarily through the Company’s force of independent field sales agents, as well as inside sales personnel.

     The Company’s OEM segment manufactures and distributes component parts to OEM manufacturers through a network of independent manufacturers’ representatives as well as internal sales personnel.

     The Company’s reportable segments are distinguished by the nature of products, types of customers, and manner of servicing customers. The Company evaluates performance and allocates resources to reportable segments primarily based on operating income.

     Financial information for the Company’s reportable segments consisted of the following:

     The reconciliation of segment profit to consolidated income from continuing operations before income taxes and cumulative effect of accounting change consisted of the following:

     The reconciliation of segment profit to consolidated income from continuing operations before income taxes and cumulative effect of accounting change consisted of the following:

     Asset information for continuing operations related to the Company’s reportable segments consisted of the following:

     At September 30, 2007 and December 31, 2006, the carrying value of goodwill within each reportable segment was as follows:

     The Company adopted the provisions of FASB Interpretation 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), on January 1, 2007. Previously, the Company had accounted for tax contingencies in accordance with Statement of Financial Accounting Standards (“Statement”) No. 5,Accounting for Contingencies. As required by FIN 48, which clarifies Statement No. 109, Accounting for Income Taxes, the Company currently recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more-likely-than-not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. At the adoption date, the Company applied FIN 48 to all tax positions for which the statute of limitations remained open.

     As a result of the implementation of FIN 48, the Company recognized an increase of approximately $1.2 million in the liability for unrecognized tax benefits, which was accounted for as a reduction to the January 1, 2007, balance of retained earnings. At January 1, 2007, the Company had approximately $4.1 million of unrecognized tax benefits, that if recognized would be recorded as a component of the provision for income taxes. At January 1, 2007, the Company recorded interest payable of approximately $675. The interest payable and related interest expense is classified as a component of income taxes on the Condensed Consolidated Balance Sheets and provision for income taxes on the Condensed Consolidated Statements of Income.

     There have been no material changes in the amounts of unrecognized tax benefits or interest and penalties related to uncertain tax positions since the Company adopted FIN 48.

     The Company’s federal returns for the tax years 2004 through 2006 remain open to examination. In addition, the years 2000 through 2002 remain open for federal purposes to the extent of a refund claim currently under review. Generally, the tax years 2002 through 2006 remain open to examination by major state taxing jurisdictions. Finally, the major foreign jurisdictions in which the Company files income tax returns are Canada and Mexico. Generally, the tax years 2001 through 2006 remain open for Mexico and 2002 through 2006 for Canada. Based on these open tax positions, it is possible that the amount of the liability for unrecognized tax benefits could change during the next twelve month period. An estimate of the range of the possible change cannot be made unless and until issues are further developed or examinations close.

     Discounted operations for the three and nine month periods ended September 30, 2007 include the Company’s Mexico operation, which was closed in the second quarter of 2007, and its former UK subsidiary, which was closed in 2005.

     The results of Lawson de Mexico discontinued operations for the three and nine months ended September 30, 2007 and 2006 are summarized as follows:

     At September 30, 2007 and December 31, 2006, the major components of assets and liabilities of the Lawson de Mexico discontinued operations were as follows:

     Operating cash flows generated from the discontinued operations were immaterial to the Company and, therefore, are not disclosed separately.

     As previously disclosed, the Company discontinued its former UK subsidiary in 2005. The remaining assets and liabilities continue to be reported as discontinued operations on the Condensed Consolidated Balance Sheets at September 30, 2007 and December 31, 2006 and include $0.5 million and $0.6 million of assets, respectively, and $0.2 million and $0.9 million of liabilities, respectively.

     In December 2005, the FBI executed a search warrant for records at the Company’s offices and informed the Company that it was conducting an investigation as to whether any of the Company’s representatives improperly provided gifts or awards to purchasing agents (including government purchasing agents) through the Company’s customer loyalty programs. The U.S. Attorney’s Office for the Northern District of Illinois subsequently issued a subpoena for documents in connection with this investigation. In April 2007, thirteen people, including seven former sales agents of the Company, were indicted on federal criminal charges, including mail fraud, in connection with the U.S. Attorney’s investigation. These indictments allege that under the Company’s customer loyalty programs, sales agents would provide cash gift certificates to individuals purchasing Company merchandise on behalf of their employers as a way to increase their commissions and prices paid by customers. All of the cases involve commissioned sales agents of the Company. Although the Company was not charged in connection with these indictments, the U.S. Attorney has announced that its investigation is continuing.

     The Company’s internal investigation regarding these matters has consisted of a review of the Company’s records and interviews with Company employees and independent agents and is not complete. In conjunction with the Company’s internal investigation, several customer loyalty programs were terminated because the Company believes that these programs provided or had the potential of providing promotional considerations, such as gifts and awards, to purchasing agents that the Company has deemed inappropriate. The Company has modified another customer loyalty program to limit the amount and nature of customer gifts distributed under the program. In addition, twenty-three independent agents have been terminated or have resigned and the Company has terminated four employees. The Company is cooperating with the ongoing investigation of the U.S. Attorney; however, the Company cannot predict when the investigation will be completed or what the outcome or the effect of the investigation will be. The outcome of the investigation could result in criminal sanctions or civil remedies against the Company, including material fines, injunctions or the loss of the Company’s ability to conduct business with governmental entities.

Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders
Lawson Products, Inc.

     We have reviewed the condensed consolidated balance sheet of Lawson Products, Inc. and subsidiaries as of September 30, 2007 and the related condensed consolidated statements of income for the three and nine-month periods ended September 30, 2007 and 2006 and the condensed consolidated statements of cash flows for the nine-month periods ended September 30, 2007 and 2006. These financial statements are the responsibility of the Company’s management.

     We conducted our review in accordance with standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

     Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated interim financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

     We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Lawson Products, Inc. and subsidiaries as of December 31, 2006, and the related consolidated statements of income, changes in stockholders’ equity and cash flows for the year then ended, not presented herein, and in our report dated March 9, 2007, we expressed an unqualified opinion on those consolidated financial statements. As discussed in Note K to the condensed consolidated financial statements, Lawson Products, Inc. and subsidiaries began reporting Lawson de Mexico, a subsidiary, as a discontinued operation resulting in a revision to the December 31, 2006 consolidated balance sheet. We have not audited the revised balance sheet reflecting the reporting of discontinued operations.

/s/ ERNST & YOUNG LLP

Chicago, Illinois
November 1, 2007

     The following table presents a summary of the Company’s financial performance for the third quarter of 2007 and 2006:

     Consolidated net sales for the three month period ended September 30, 2007 increased slightly compared to the same period of 2006.

     The following table presents the Company’s net sales results for its MRO and OEM businesses for the third quarter of 2007 and 2006:

     Maintenance, Repair and Operations distribution (MRO) net sales increased $2.2 million in the third quarter of 2007, to $108.2 million from $106.0 million in the prior year period, primarily due to increased penetration of existing customers. Sales increased in the U.S. and Canada by approximately $1.8 million and $0.4 million for the quarter, respectively.

     Original Equipment Manufacturer (OEM) net sales decreased $1.6 million in the third quarter of 2007 to $19.7 million from $21.3 million in 2006. Sales in the U.S. were lower due to the cancellation of some customer contracts.

     Consolidated gross profit margins for the quarter ended September 30, 2007 decreased to 59.8% from 60.1% in the comparable prior year period. This decrease was primarily due to lower gross profit margins in the OEM segment in 2007 caused by product cost increases.

     SG&A expenses were $67.4 million and 52.7 percent of net sales for the third quarter of 2007, which represents a decline from the respective prior period amounts of $70.7 million and 55.6% of net sales. Included in SG&A costs are legal costs associated with the ongoing investigation by the U.S. Attorney’s Office for the Northern District of

Illinois. The Company incurred expenses of $1.2 million related to the investigation in the quarter ended September 30, 2007, which represents a $0.6 million increase compared to $0.6 million in the prior year period. This investigation is ongoing and the Company expects to incur legal and other costs throughout the remainder of 2007 related to this matter. See Note L – Legal Proceedings for more information.

     The primary driver of lower SG&A in the third quarter 2007 was lower compensation costs, including a $3.1 million reduction in costs associated with the Company’s long-term incentive plans and lower variable selling expenses of $0.6 million.

     The Company recorded $3.7 million of severance expense in the third quarter of 2007 related to contractual payments for several executives who have retired, have announced their retirement or have been terminated due to a sales management realignment.

     Operating income for the three month period ended September 30, 2007 decreased to $5.4 million, from $5.8 million in the comparable period of 2006. This $0.4 million decrease in operating income is principally attributable to higher operating expenses, principally the severance and other charges as discussed above.

     The following table presents investment and other income for the quarters ended September 30, 2007 and 2006:

     The effective tax rate for the three months ended September 30, 2007 was 53.9%, which was higher than the 45.6% rate for the three months ended September 30, 2006. The higher rate for the third quarter 2007 was related to increases to estimated tax liabilities related to the Company’s decision to exclude tax deductions for expenses associated with the Company’s customer loyalty programs.

     The Company’s state tax rate estimate fluctuates based on the income tax rates in the various jurisdictions in which the Company operates, and based on the level of profits in those jurisdictions.

     Income from continuing operations before cumulative effect of accounting change for the third quarter of 2007 decreased to $2.4 million ($0.28 per diluted share), compared to $3.3 million ($0.37 per diluted share) in the comparable period of 2006. The $0.9 million decrease is the result of lower operating income in the third quarter 2007 as discussed above, principally due to the severance charges.

     Discontinued operations reflect the results of operations of Lawson de Mexico, net of income taxes. See Note — K in the “Notes to Condensed Consolidated Financial Statements” for information on the Company’s discontinued operations.

     The following table presents a summary of the Company’s financial performance for the first nine months of 2007 and 2006:

     Net sales for the nine month period ended September 30, 2007 were $386.8 million and comparable to $386.7 million in the same period of 2006.

     The following table presents the Company’s net sales results for its MRO and OEM businesses for the first nine months of 2007 and 2006:

     Maintenance, Repair and Operations distribution (MRO) net sales increased $1.1 million for the first nine months of 2007, to $323.4 million from $322.3 million in the prior year period due to slight improvements in account penetration. Sales increased in the U.S. and Canada by approximately $0.5 million and $0.5 million for the quarter, respectively.

     Original Equipment Manufacturer (OEM) net sales decreased $1.0 million in the first nine months of 2007 to $63.4 million from $64.4 million in the prior year period, primarily due to the cancellation of several customer contracts that occurred throughout 2007.

     Consolidated gross profit margins for the first nine months ended September 30, 2007 and 2006 decreased slightly to 59.2% from 59.4%, respectively. This decrease was primarily due to lower gross profit margins in the MRO segment associated with higher product costs.

     SG&A expenses were $205.1 million and 53.0 percent of net sales for the first nine months of 2007, which represents a decline from the respective prior period amounts of $209.6 million and 54.2 percent of net sales. Included in SG&A costs are legal costs associated with the ongoing investigation by the U.S. Attorney’s Office for the Northern District of Illinois. The Company incurred expenses of $4.9 million related to the investigation in the first nine months ended September 30, 2007, which represents a $2.3 million increase compared to $2.6 million in the prior year period. This investigation is ongoing and the Company expects to incur legal and other costs throughout the remainder of 2007 related to this matter. See Note L – Legal Proceedings for more information.

     The primary driver of lower SG&A in the first nine months of 2007 was lower compensation costs, including a $5.9 million reduction in costs associated with the Company’s long-term incentive plans and lower variable selling expenses of $1.7 million.

     The Company recorded $9.1 million of severance expense in the first nine months of 2007 related to contractual payments for several executives who have retired, have announced their retirement or have been terminated due to a sales force realignment and $1.4 million of compensation expense related to the retirement of Mr. Jeffrey Belford, the Company’s former President and Chief Operating Officer.

     In the second quarter of 2006, the Company incurred a loss of $0.8 million ($0.5 million, net of tax) on the sale of equipment related to the Company’s decision to outsource the manufacturing of a product line in the Company’s OEM business.

     Operating income for the nine month period ended September 30, 2007 was $13.3 million, compared to $19.3 million in the prior year-to-date period. The $6.0 million decrease in operating income over these periods is principally attributable to higher operating expenses as result of severance charges. The factors affecting these items were discussed above.

     The following table presents investment and other income for the nine months ended September 30, 2007 and 2006:

     The realized foreign exchange gains for the nine months ended September 30, 2007 and 2006 were related to payments of intercompany balances by the Company’s Canadian subsidiary.

     The effective tax rate for the nine months ended September 30, 2007 was 46.0%, which was higher than the 41.8% rate for the nine months ended September 30, 2006. The higher rate for 2007 was related to increases to estimated tax liabilities related to the Company’s decision to exclude tax deductions for expenses associated with the Company’s customer loyalty programs.

     The Company’s state tax rate estimate fluctuates based on the income tax rates in the various jurisdictions in which the Company operates, and based on the level of profits in those jurisdictions.

     Income from continuing operations before cumulative effect of accounting change for the first nine months of 2007 decreased 40.4%, to $7.1 million ($0.83 per diluted share), compared to $11.9 million ($1.33 per diluted share) in the comparable period of 2006. The $4.8 million decrease is the result of lower operating income in the first nine months of 2007, as discussed above.

     Discontinued operations primarily represent the results of operations of Lawson de Mexico, net of income taxes. See Note — K in the “Notes to Condensed Consolidated Financial Statements” for information on the Company’s discontinued operations.

     The $0.4 million cumulative accounting change in 2006 represents the effect of adopting Financial Accounting Standards Board (FASB) Statement No. 123(R), “Share-Based Payment,” which is a revision of FASB Statement No. 123, “Accounting for Stock-Based Compensation.”

     Net cash provided by operating activities was $4.1 million in the first nine months of 2007, a decrease from $11.9 million for the first nine months of 2006 caused by lower earnings and an increase in cash used for working capital, primarily prepaid expenses and taxes payable.

     Net cash used for investing activities increased $10.6 million for the nine month period ended September 30, 2007 compared to the prior year period as a result of higher capital expenditures including $10.0 million for the Reno, Nevada facility expansion. The Company anticipates the Reno facility expansion will be completed by the end of 2007 and will require no significant additional capital expenditures in the remainder of 2007 for this project. For 2006, capital expenditures of $3.6 million were related to improvement of existing facilities and the purchase of related equipment.

     Net cash provided by financing activities in the first nine months of 2007 was $7.9 million compared to $4.7 million net cash used for financing activities in the first nine months of 2006 primarily related to borrowings and payments on the revolving line of credit.

     Working capital at September 30, 2007 was $92.0 million as compared to $101.8 million at December 31, 2006. At September 30, 2007 and December 31, 2006, the current ratio was 2.2 to 1 and 2.6 to 1, respectively.

     In the third quarter of 2007 and 2006, the Company announced a cash dividend of $0.20 per share on common shares. The third quarter 2007 cash dividend was paid October 16, 2007.

     Net cash provided by operating activities, current cash and cash equivalents and the $75 million unsecured revolving line of credit are expected to be sufficient to finance the Company’s operations, cash dividends and capital expenditures for the next 12 months.

     There have been no material changes in market risk at September 30, 2007 from that reported in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.

     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, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding financial disclosures. There was no change in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2007 that has materially affected or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

     Pursuant to the requirements 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.