Item 1. - BUSINESS
The Lamson & Sessions Co. ("Company"), founded in 1866, is a diversified manufacturer and supplier of a broad line of thermoplastic electrical and fluid drainage products for major domestic markets and a producer of fasteners for the aerospace industry. The markets for thermoplastic electrical conduit, related fittings and accessories, wiring devices and sewer pipe include the construction, utility and telecommunications industries; municipalities and other government agencies; and contractors and do-it-yourself home remodelers. Fasteners manufactured serve airframe and jet engine manufacturers in the aerospace industry.
In May 1994, the Company completed the sale of its Midland Steel Division which was engaged in the manufacture and sale of frame assemblies and components. Proceeds from sale were utilized to reduce debt (see Note C, page 21 of this report).
PRINCIPAL PRODUCTS AND MARKETS
The Company is a leading domestic producer of a broad line of thermoplastic electrical conduit, wiring devices, and related fittings and accessories for the construction, consumer (DIY), utility and telecommunications industries, and manufactures and sells thermoplastic sewer pipe. The broad and comprehensive lines of complimentary and compatible thermoplastic products are carried by electrical and building supply wholesalers and retailers.
All of the Company's thermoplastic electrical products compete with and serve as substitutes for similar metallic products, and its engineered sewer pipe products compete with and serve as substitutes for clay, concrete, ductile iron, cement asbestos and polyethylene products. The Company's thermoplastic products offer several advantages over these other products. Specifically, nonmetallic electrical conduit and related fittings and accessories are generally less expensive, lighter and easier to install than metallic products. Furthermore, thermoplastic conduit does not rust, corrode or conduct electricity. Thermoplastic sewer pipe weighs less than substitute products, is easier and more economical to install, does not degenerate due to sewer gases as do some competing products, and eliminates avoidable problems which can be caused by infiltration and exfiltration.
Four core markets are served, each of which has unique product and marketing requirements. These markets are: (i) Industrial, Residential, Commercial and Utility Construction (served by Carlon Electrical Products ("Electrical")) -- contractors engaged in the installation of electrical systems in industrial, residential, commercial construction and electric power utility projects; original equipment manufacturers who use components as subassemblies for their own products and industrial companies who maintain or repair their own facilities; (ii) Consumer (served by Lamson Home Products ("Home")) -- retail consumers of electrical products who perform "do-it-yourself" home repairs and small electrical contractors; (iii) Telecommunications (served by Carlon Telecom Systems ("Telecom")) -- cable TV, telephone and telecommunications companies and (iv) Engineered Sewer Products (served by Lamson Vylon Pipe ("Vylon")) -- various government and private builders of sewer and drainage system. Additionally, the aircraft market serves airframe and jet engine manufacturers.
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The following summarizes the principal products used in each of the four core markets:
INDUSTRIAL, RESIDENTIAL, COMMERCIAL AND UTILITY CONSTRUCTION. The principal products sold to this market include rigid conduit, flexible (electrical nonmetallic tubing), fittings and accessories, outlet boxes, and other products. Other products in this market also include thermoplastic spirally extruded liquidtight conduit, which is used by industrial companies and original equipment manufacturers requiring a watertight housing for electrical cable, and a broad line of industrial nonmetallic enclosures comprised of molded, non-corrosive boxes designed to enclose and protect devices such as electrical controls, switches and industrial control panels.
CONSUMER. The products included in this market are products such as light dimmers, fan speed controls, touch controls, door chimes and home security systems. In addition, the Company supplies this market with products such as outlet boxes, electrical conduit, liquidtight conduit and electrical fittings.
TELECOMMUNICATIONS. In this market products include (i) traditional smooth wall communication duct and spacers used by telecommunication and CATV industries to house electrical cable, (ii) duct systems designed to protect underground fiber optic cables and improve the efficiency and space utilization of existing duct systems.
ENGINEERED SEWER PRODUCTS. Principal products utilized by this market include closed profile engineered sewer pipe used for direct burial and sliplining as well as traditional solid wall sewer and drain pipe used in residential construction of sanitary drainage systems, sewer main and highway underdrain available in diameters ranging from 4 to 48 inches.
AIRCRAFT PARTS. The principal market served is the aircraft market, for which special design high performance fasteners and spherical pivot bearings are manufactured and sold primarily to domestic and foreign markets for use by original equipment manufacturers.
- 3 - L1773 (02/23/95) COMPETITION
Each of the four core markets in which the Company is presently operating are highly competitive based on service, price and quality. Most of the competitors are either national or smaller regional manufacturers who compete with limited product offerings. Unlike a majority of its competitors, the Company manufactures a broad line of thermoplastic products, complementary fittings and accessories, thus enabling it to offer its customers complete and integrated systems.
Markets for the Company's aircraft parts are highly fragmented and include several major competitors. The Company believes that it competes effectively on the basis of price, product quality and delivery.
Certain of the Company's competitors have greater financial resources than the Company.
DISTRIBUTION
The Company distributes its core products through a nationwide network of more than 170 manufacturers' representatives. Currently, 3 of these manufacturers' representatives inventory the Company's products. The Company has reduced the number of inventory locations and has developed its own distribution centers. In the aerospace unit, a combination of direct sales, manufacturer's representatives and distributors are used.
RAW MATERIALS
The Company is a large purchaser of pipe grade polyvinyl chloride resin and has historically been able to obtain adequate quantities. Raw materials for the aerospace market consist mainly of carbon, alloy and stainless steels, aluminum, zinc and other special metals that are purchased principally from major domestic companies and are adequately available.
PATENTS AND TRADEMARKS
The Company owns various patents, patent applications, licenses, trademarks and trademark applications relating to its products and processes. While the Company considers that, in the aggregate, its patents, licenses and trademarks are of importance in the operation of its business, it does not consider that any individual patent, license or trademark, or any technically related group, is of such importance that termination would materially affect its business.
SEASONAL FACTORS
The Company's four core business units experience seasonality caused principally by a decrease in construction activity during the winter months. They are subjected to the economic cycles affecting the construction industry. The aerospace fastener unit is dependent on the economic cycles of the aircraft market, although such impact should be reduced in the future, as the Company expands into a broader range of market niches.
- 4 - L1773 (02/23/95) MAJOR CUSTOMERS
Sales to Affiliated Distributors, a buying group not otherwise affiliated with the Company, totalled approximately 12% of the Company's sales. No customer exceeded 10% of net sales in 1993 or 1992.
The Company does not believe that information concerning backlog is reflective of the status of its business at any one point in time. Due to the nature of the business within the Electrical, Telecom, Home and Vylon markets, the Company typically ships its products within a short period after receipt of the order. In the aerospace market, major customers generally issue blanket purchase orders and then issue short-term releases against these purchase orders. Therefore, at any point in time, backlog only includes the releases that have been received for shipment of products against the blanket orders and not the entire quantity represented by the blanket order. Approximately 6% of the backlog at December 31, 1994, primarily in the aerospace unit, is not expected to be delivered during 1995. The reduction in backlog from each preceding year is attributable to the lower backlogs in the aerospace unit reflecting the general weakness in that market.
RESEARCH AND DEVELOPMENT
The Company is engaged in an aggressive new product development program in an effort to introduce new and innovative applications for thermoplastic products for its existing core business units. The Company maintains a separate research and development center in Cleveland, Ohio to facilitate the introduction of new value-added products and improved manufacturing processes. This activity during each of the last three years of Company sponsored research and development activities totalled $3.4 million, $3.2 million and $3.3 million in 1994, 1993 and 1992, respectively.
ENVIRONMENTAL REGULATIONS
The Company believes that its current operations and its use of property, plant and equipment conform in all material respects to applicable environmental laws and regulations presently in effect (See Notes C and G -- Notes to Consolidated Financial Statements on pages 21 and 25 of this report). The Company has facilities at numerous geographic locations, which are subject to a range of federal, state and local environmental laws and regulations. Compliance with these laws has, and will, require expenditures on a continuing basis.
- 5 - L1773 (02/23/95) EMPLOYEES
At fiscal years ended, the Company had the following employees:
1994 1993 1992 ------- ------- ------- 1,325 1,425 1,510
FOREIGN OPERATIONS
The net sales, operating earnings, and assets employed outside the United States are not significant. Export sales are approximately 1% of consolidated net sales in each of the past three fiscal years and are made principally to countries in North America.
- 6 - L1773 (02/23/95) Item 2.
Item 2. - PROPERTIES
The Company owns manufacturing and distribution facilities which are suitable and adequate for the production and marketing of its products. The Company owns executive and administrative offices which are located in Cleveland, Ohio and occupy 68,000 square feet in a suburban office complex. In addition, the Company also has research and development offices, located in Cleveland, Ohio which occupy leased space of 27,000 square feet. Principal facilities are located in the following cities:
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All of the Company's facilities listed in the above table are owned, except for the Clinton, IA and Woodland, CA Distribution Centers and Montreal, Canada.
The Company presently utilizes substantially all of its facilities and operated in 1994 at approximately 80% of productive capacity.
Item 3.
Item 3. - LEGAL PROCEEDINGS
On January 14, 1992 an action was filed against the Company by Ameritrust Co. N.A. ("Plaintiff") in the U.S. District Court, Northern District of Ohio, seeking to recover $7.3 million under the Comprehensive Environmental Response, Compensation & Liability Act of 1980, as amended ("CERCLA") as well as under state law theories of public nuisance, negligence and strict liability. The plaintiff claims damages consisting of response costs incurred by the plaintiff in remediating environmental contamination allegedly caused by the Company at a manufacturing plant site which the Company sold in 1978 and which was acquired by the plaintiff in 1985. The plaintiff also seeks prejudgment interest and attorneys' fees. On May 21, 1992, the Court dismissed with prejudice the state law claims for public nuisance, negligence and strict liability and ruled that the plaintiff does not have the right to a contribution claim under CERCLA. On June 9, 1992, the Company filed a Second Motion to Dismiss or in the Alternative for Partial Summary Judgment alleging among other things, failure to comply with certain mandatory federal notice requirements and that the remediation was inconsistent with the national contingency plan as required by CERCLA. On October 15, 1993, the Court denied the Company's Second Motion to Dismiss and at the same time denied all pending motions filed by the Plaintiff. On April 29, 1994, the Company filed a Third-Party Complaint against Baker Material Handling Company seeking contribution. On May 27, 1994, the Company filed its Answer to the Second Amended Complaint, and the Court has set a discovery cut-off of February 28, 1995. On November 24, 1994, the Company filed a declaratory judgment action in the Cuyahoga County Common Pleas Court against its liability insurer seeking defense and indemnity costs associated with the action brought by Ameritrust. The outcome of this litigation is not expected to have a material effect on the Company's financial position.
Item 4.
Item 4. - SUBMISSION OF MATTERS TO SECURITY HOLDERS.
None.
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Item 5.
Item 5. - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
The Company's Common Stock is traded on the New York Stock Exchange and Pacific Stock Exchange. High and low sales prices for the common stock are included in Note L -- Notes to Consolidated Financial Statements on page 29 of this report. No dividends were paid in 1994, 1993 or 1992. The approximate number of shareholders of record of the Company's Common Stock at February 1, 1995 was 2,360. Information concerning restrictions on the Company's ability to pay dividends is contained in Note B -- Notes to Consolidated Financial Statements on pages 20 and 21 of this report.
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- 11 - L1773 (02/23/95) Item 7.
Item 7. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
1994 Compared with 1993
Sales were higher in all of the Company's core business units for the second consecutive year increasing overall sales 11% over 1993 levels. Product mix improvements, which gave rise to higher average selling prices, were coupled with strong demand through the fourth quarter contributing to the sales gains. Carlon Electrical Products ("Electrical") and Carlon Telecom Systems ("Telecom") emphasis on priority products improved their product mix and achieved higher sales on lower volume in 1994. Lamson Home Products ("Home Products") aggressive expansion of its product line and market share contributed to sales growth of 21% compared with the prior period. Lamson Vylon Pipe ("Vylon") experienced strong demand for its products, and better product mix resulted in a 15% increase in revenue compared with 1993.
Gross margins improved by 22% in 1994 to 18%. Increased manufacturing efficiencies and reduced rigid pipe sales improved margins despite escalating prices throughout the year on the Company's primary raw material.
Selling, general and administrative expenses increased nominally as a percentage of sales over the 1993 period. Increased commission rates on the higher margin product, promotional expenses, salary expenses and employee health care costs contributed to this change. The effect of rising interest rates on the Company's secured credit facility were softened by the lower average borrowings resulting from the proceeds from the sale of Midland Steel Products.
Since there is no income against which net operating losses can be carried back, the Company did not record any current tax benefit for 1994. The Company does have net operating loss carryforwards which should reduce future income tax expense.
1993 Compared with 1992
Sales increased in 1993 for the first time since 1988 due to a significant improvement in the fourth quarter versus the prior year. Product mix improved by virtue of strong growth in sales of engineered specialty products. This shift in product mix resulted in higher average selling prices which helped offset competitive pricing conditions and adverse weather conditions particularly in the third quarter of 1993. Increased sales in all four core business units with Electrical and Telecom shifting their emphasis from commodity product, particularly rigid pipe, resulted in higher average selling prices and mitigated lower overall unit shipments. Home Products and Vylon experienced stronger demand for their expanded product lines which contributed to higher sales in both units.
Gross margins improved in 1993 by 9% to 14.7%. Cost reduction programs in our manufacturing facilities, coupled with a reduction in total commodity rigid pipe sales, improved the margin by 10.6% offsetting margin erosion due to the erratic pricing of the Company's primary raw material.
- 12 - L1773 (02/23/95) Selling, general and administrative expenses decreased nominally in relation to sales from the prior year. The overall increase is due to salary expenses, employee health care costs, commissions and promotional expenses. While the Company had higher average borrowings during 1993, interest income on refundable income taxes reduced overall interest expense in 1993.
Since there is no income against which net operating losses can be carried back, the Company did not record any current tax benefit for 1993. The Company does have net operating loss carryforwards which should reduce future income tax expense. The Company adopted Financial Accounting Standard Board Statement No. 109, "Accounting for Income Taxes," in the first quarter of 1993 and this adoption had no impact on the Company's financial position.
CASH FLOW, LIQUIDITY AND CAPITAL RESOURCES
Cash flow from continuing operations increased nearly 50% over 1993 and the Midland Steel Products' sale proceeds reduced overall borrowing levels. These sources provided adequate funding of capital expenditures and working capital requirements and strengthened the Company's liquidity. The Company has announced its intent to refinance its credit facility in recognition of its improved financial condition. While the outcome of this effort is not known, the Company expects a favorable resolution to this effort. In 1993, the Company did not increase its total borrowing and generated cash flow from operations for the first time since 1990. Cash flow from operations provided the funding for capital expenditures while borrowings under the secured credit agreement were virtually offset by principal reductions. Internally generated cash flows and existing capacity under the secured credit agreement will be adequate to fund the cash needs for capital expenditures and general operating requirements.
OUTLOOK
The Company's progress to transform itself into a strategically focused electrical-products manufacturer and marketer has improved the operating results in recent years. Consistent with this strategy, the Company has previously announced its intent to pursue the possible sale of its aerospace fastener unit, Valley-Todeco. The Company will continue to emphasize product development for industrial original equipment manufacturers and maintenance repair operations markets in addition to an expanded line of convenience items for the consumer which should provide protection against cyclical trends in residential construction markets. Despite concerns about rising interest rates and weak growth in the general economy, the Company foresees opportunities for significant improvement in 1995.
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- 18 - L1773 (02/23/95) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
Three fiscal years ended December 31, 1994
NOTE A--ACCOUNTING POLICIES
FISCAL YEAR - The Company's fiscal year end is the Saturday closest to December 31.
PRINCIPLES OF CONSOLIDATION AND PRESENTATION: The consolidated financial statements include the accounts of the Company and all domestic and foreign subsidiaries after elimination of significant intercompany items and transactions. Certain 1993 and 1992 items have been reclassified to conform with 1994 reporting classifications.
INVENTORIES: Inventories are valued at the lower of first-in, first-out (FIFO) cost or market.
PROPERTY AND DEPRECIATION: Property, plant and equipment are recorded at cost. For financial reporting purposes, depreciation and amortization are computed principally by the straight-line method over the estimated useful lives of the assets. Accelerated methods of depreciation are used for federal income tax purposes.
INCOME TAXES: Beginning in fiscal year 1993, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." There was no cumulative effect nor any impact on the Company's financial position as a result of this adoption. Investment tax credits are recorded using the flow-through method. In previous years, the Company followed the provisions of SFAS No. 96.
EARNINGS (LOSS) PER COMMON SHARE: Earnings (loss) per common share are based on the weighted average number of common shares and common share equivalents outstanding during the year.
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THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTE B--LONG-TERM DEBT
The Company has a long-term $65,000,000 secured credit agreement supported by the Company's accounts receivable, inventory and property, plant and equipment. The term portion of this facility carries interest at 11.55% and requires quarterly principal payments of $750,000 with interest. The remaining revolving credit portion permits borrowings up to $45,000,000 at any time through December 31, 1999, with interest at 2.5% over the prime rate (8.5% at December 31, 1994). The agreement provides for the payment of a commitment fee of .375% per annum on the average daily unused commitment. In addition to amounts borrowed, letters of credit related to Industrial Revenue Bond financings total approximately $10,000,000 under the agreement.
The 14% Senior Subordinated Notes are due in 1997 with interest payable semi-annually on each June 1 and December 1. The Notes are redeemable at the option of the Company, in whole or in part, at the principal amount plus a specified declining premium together with accrued interest.
The Company's Industrial Revenue Bond financings include several issues due in annual installments from 1994 through 2023 with interest at rates varying from 4% to 8%. In addition, the Company has available letter of credit arrangements with an additional lender to provide approximately $3,000,000 for trade and general corporate purposes. Substantially all of these letters of credit are secured by certain assets. The Company's headquarter facility is subject to a mortgage payable in equal monthly installments through 2003 with interest at 8.625%.
The Company's credit agreements contain various restrictive covenants pertaining to maintenance of working capital, debt service, tangible net worth, certain financial ratios and prohibit the payment of dividends and early redemption of subordinated notes.
- 20 - L1773 (02/23/95) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTE B--LONG-TERM DEBT--Continued
The aggregate minimum combined maturities of long-term debt for the years 1996 through 1999 are approximately $4,531,000, $15,678,000, $1,581,000 and $20,561,000, respectively, with $4,607,000 due thereafter.
Interest expense includes $850,000, $767,000 and $713,000 for amortization of deferred financing cost in 1994, 1993 and 1992, respectively. Interest paid was $6,847,000, $8,229,000 and $7,320,000 in 1994, 1993 and 1992, respectively.
Rental expense related to operating leases was $3,015,000, $2,647,000 and $2,531,000 in 1994, 1993 and 1992, respectively. Aggregate future minimum payments related to operating leases with initial or remaining terms of one year or more for the years 1995 through 1998 and thereafter are $1,880,000, $1,265,000, $851,000, $694,000 and $854,000, respectively.
NOTE C--DISCONTINUED OPERATIONS
During the first quarter of 1994, the Company entered into a definitive agreement to sell substantially all of the assets and certain liabilities (including prospective pension and postretirement benefit obligations) of its Midland Steel Products Division for $16,430,000 resulting in a loss of $8,900,000 ($.67 per share) after related costs and expenses. Included in the loss on disposal is a curtailment loss of $1,140,000 related to net pension costs and a settlement gain of $650,000 related to postretirement benefits other than pensions. The Company believes adequate provision has been made for all contractual obligations, environmental costs, and other obligations retained in the sale of the division. Included in each years' loss from operations is interest of $1,836,000 allocated on the basis of the Company's incremental borrowing rate applied on the net proceeds from the sale. The assets held for sale at the end of 1994 are comprised of land and building pending final resolution of certain contractual conditions.
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THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTE D--PENSION PLANS
The Company sponsors pension plans covering substantially all employees. Plans covering salaried employees provide benefits that are based on an employee's years of service and compensation during the five-year period prior to retirement. Plans covering hourly employees provide benefits of stated amounts for each year of service. The Company annually contributes amounts to the plans which are actuarially determined to provide sufficient assets to meet future benefit payment requirements.
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THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTE D--PENSION PLANS--Continued
Accrued expenses and other liabilities include the current portion of pension liabilities of $4,487,000 and $4,665,000 in 1994 and 1993, respectively. The discount rates used in determining pension expense were 7.25%, 8.5% and 9% in 1994, 1993 and 1992, respectively. The discount rates used for funded status information were 8.0% in 1994 and 7.25% in 1993. The change in the discount rate had the effect of decreasing the accumulated benefit obligation approximately $4,800,000. This change will not have a material effect on future pension expense. The long-term rates of return on assets used in determining the funded status information were 9.5% in 1994 and 1993. Plan assets consist primarily of fixed income and equity securities including Company securities totalling $3,212,000. The salary progression assumptions used in determining the funded status information were 5% in each year.
NOTE E--POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
In addition to providing pension benefits, the Company provides health care and life insurance benefits for certain of its retired employees.
In 1992, the Company adopted SFAS No. 106, "Employers Accounting for Postretirement Benefits Other Than Pensions." Under SFAS No. 106, the Company is required to accrue the estimated cost of retiree benefit payments, other than pensions, during employees' active service period. The Company previously expensed the cost of these benefits, which are primarily health care, as claims were paid.
The Company elected to recognize this change in accounting on the immediate recognition basis. The cumulative effect of adopting SFAS No. 106 was an increase in accrued postretirement benefits other than pensions and decrease in 1992 net earnings of $26,860,000.
The Company continues to fund these benefit costs on a pay-as-you-go basis, with the retiree, in most instances, paying a portion of the costs.
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THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTE E--POSTRETIREMENT BENEFITS OTHER THAN PENSIONS--Continued
The decrease in APBO is principally due to the sale of the Midland Steel Products Division (see Note C). In addition, the Company remains contingently liable for postretirement benefits of certain businesses previously sold.
The discount rate used in determining the APBO was 7.5% in 1994 and 1993. The assumed health care cost trend rate used in measuring the APBO was an average of 14% in 1994 and 1993, declining to an ultimate rate of 5.5% in 2007 and thereafter.
If the health care cost trend rate assumptions were increased by 1%, the APBO as of December 31, 1994 would increase by 9.2%. The effect of this change on periodic postretirement benefit cost for 1994 would be an increase of 11.2%, or approximately $280,000.
- 24 - L1773 (02/23/95) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTE F--NON-RECURRING CHARGES
In 1992, the Company recorded non-recurring charges of $4,602,000 ($.35 per share after tax effect). The majority of these costs are included in other long-term liabilities and represent provisions for the relocation of production lines, consolidation of plant capacity, and various other costs resulting from the Company's efforts to improve cost effectiveness and future profitability.
NOTE G--LITIGATION
In 1992, the present owner of property sold by the Company in 1978 filed a complaint against the Company seeking reimbursement for certain costs related to environmental remediation of the site. All but one of the claims have been dismissed. Management believes that the final resolution of this matter will not have a material adverse effect on the Company's consolidated financial position.
The Company is a party to various claims and matters of litigation incidental to the normal course of its business. Management believes that the final resolution of these matters will not have a material adverse effect on the Company's financial position.
NOTE H--PREFERRED AND PREFERENCE STOCK
The Company has authorized 1,200,000 and 3,000,000 shares of Serial Preferred and Preference Stock, respectively, none of which is issued or outstanding at December 31, 1994.
The Company has reserved for issuance 200,000 shares of Cumulative Redeemable Serial Preference Stock, Series II, without par value, which is part of purchase rights related to each outstanding common share. None of these shares were issued in 1994 or 1993. The right associated with each common share entitles its holder to purchase from the Company or acquiring company, one one-hundredth of a share of preference stock at a price of $47 which is subject to adjustment. The rights become exercisable only if a person or group acquires beneficial ownership of 15% or more of the Company's common shares or takes certain other actions. In any such event, a 15% or more owner is prohibited from exercising the rights. When exercisable, the rights entitle each holder to purchase, according to the agreement, either the Company's common shares or stock in the acquiring entity worth twice the value of the then applicable purchase price. Under certain circumstances, the Company has the authority to exchange each right for one common share without payment required. Unless otherwise extended, the Company may redeem the rights in their entirety, at a price of one cent per right, at any time until the tenth calendar day following any public announcement that beneficial ownership of 15% or more has occurred in the Company's common shares, or upon certain other events, including Board of Directors approval of a merger. The rights expire on September 7, 1998.
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THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTE I--STOCK OPTIONS
Under the 1994 Nonemployee Directors Stock Option Plan, the Company is authorized to issue 60,000 non-qualified stock options. The options become exercisable one year after date of grant and expire at the end of ten years. Under the 1988 Incentive Equity Performance Plan, the Company is authorized to issue 1,150,000 incentive stock options (ISO's), non-qualified stock options, stock appreciation rights (SAR's), and restricted or deferred stock. Options generally become exercisable in part one year after date of grant and expire at the end of ten years. Options outstanding under the 1978 Non-Qualified Incentive Stock Option Plan have been granted for the purchase of common shares at prices ranging from $4.750 to $5.75 per share. No options are available for future grant under the 1978 Plan.
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THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTE J -- INCOME TAXES
There was no income tax expense or benefit recorded in 1994 or 1993. The Company provided an income tax benefit of $800,000 in 1992.
The Company has available net operating loss carryforwards totalling approximately $39 million which expire in the years 1999 to 2009. The Company also has available general business tax credit carryforwards of $2 million which expire through 2009, and alternative minimum tax credit carryforwards of approximately $1 million which may be carried forward indefinitely.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities are presented below:
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THE LAMSON & SESSIONS CO. AND SUBSIDIARIES
NOTE J -- INCOME TAXES -- Continued
The provision for income taxes is different than the amount computed using the applicable statutory federal income tax rate with the differences summarized below:
In 1994, 1993 and 1992, the Company received income tax refunds of $201,000, $1,626,000 and $1,618,000, respectively.
NOTE K--INDUSTRY SEGMENTS
With the completion of the sale of the Midland Steel Products Division (see Note C), the Company presently operates in one dominant industry segment. The Company is principally engaged in the manufacture and sale of thermoplastic conduit, enclosures, wiring devices and accessories for the construction, consumer, power, communications and waste water markets as well as fasteners for the aerospace engine and airframe markets.
In 1994, sales to a single customer totalled approximately 12%. No customer exceeded 10% of net sales in 1993 or 1992.
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- 30 - L1773 (02/23/95) REPORT OF INDEPENDENT AUDITORS - - - - ------------------------------
Board of Directors and Shareholders The Lamson & Sessions Co.
We have audited the accompanying consolidated statements of financial position of The Lamson & Sessions Co. and Subsidiaries as of December 31, 1994 and January 1, 1994, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three fiscal years in the period ended December 31, 1994. Our audits also included the financial statement schedule listed in the Index at Item 14 (a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Lamson & Sessions Co. and Subsidiaries at December 31, 1994 and January 1, 1994, and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended December 31, 1994, 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, present fairly in all material respects the information set forth therein.
As discussed in Note E to the consolidated financial statements, effective January 1, 1992, the Company changed its method of accounting for postretirement benefits other than pensions.
Ernst & Young LLP
Cleveland, Ohio
January 20, 1995
- 31 - L1773 (02/23/95) STATEMENT OF MANAGEMENT'S RESPONSIBILITY ----------------------------------------
We have prepared the financial statements and other financial information contained in this Annual Report.
The management of Lamson & Sessions is primarily responsible for the integrity of this financial information. The financial statements were prepared in accordance with generally accepted accounting principles and necessarily include certain amounts based on management's reasonable best estimates and judgments, giving due consideration to materiality. Financial information contained elsewhere in this annual report is consistent with that contained in the financial statements.
Management is responsible for establishing and maintaining a system of internal control designed to provide reasonable assurance as to the integrity and reliability of financial reporting. The concept of reasonable assurance is based on the recognition that there are inherent limitations in all systems of internal control, and that the cost of such systems should not exceed the benefits to be derived therefrom.
To meet management's responsibility for financial reporting, we have established internal control systems which we believe are adequate to provide reasonable assurance that our assets are protected from loss. These systems produce data used for the preparation of published financial information and provide for appropriate reporting relationships and division of responsibility. All significant systems and controls are reviewed periodically by our internal auditors in order to ensure compliance, and by our independent auditors to support their audit work. It is management's policy to implement a high proportion of recommendations resulting from these reviews.
The Audit Committee of the Board of Directors, composed solely of outside directors, meets regularly with management, internal auditors, and our independent auditors to review accounting, auditing and financial matters. Both the independent auditors and the internal auditors have free access to the Audit Committee, with or without management, to discuss the scope and results of their audits and the adequacy of the system of internal controls.
/s/ John B. Schulze - - - - -------------------------------- John B. Schulze Chairman of the Board, President and Chief Executive Officer
/s/ James J. Abel - - - - -------------------------------- James J. Abel Executive Vice President, Secretary, Treasurer and Chief Financial Officer
- 32 - L1773 (02/23/95) PART II
Item 9. - DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
Item 10. - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Directors
The information set forth under the caption "Election of Directors" in the Company's definitive proxy statement for its annual meeting of shareholders to be held April 28, 1995 is hereby incorporated by reference.
(b) Executive Officers - See Part I
(c) Compliance with Section 16 (a) of the Exchange Act.
The information set forth in the last paragraph under caption "Election of Directors" in the Company's definitive proxy statement for its annual meeting of shareholders to be held April 28, 1995 is hereby incorporated by reference.
Item 11. - EXECUTIVE COMPENSATION
The information set forth under the caption "Executive Compensation" in the Company's definitive proxy statement for its annual meeting of shareholders to be held April 28, 1995 is hereby incorporated by reference.
Item 12. - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the captions "Ownership of the Company's Common Shares," "Election of Directors" and "Security Ownership of Management" in the Company's definitive proxy statement for its annual meeting of shareholders to be held April 28, 1995 is hereby incorporated by reference.
Item 13. - CERTAIN RELATIONSHIPS AND RELATED TRANSACTION
None.
PART IV
Item 14. - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- 33 - L1773 (02/23/95) (a) The following documents are filed as part of this report:
Consolidated financial statements of The Lamson & Sessions Co. and Subsidiaries are included in Item 8