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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
for the fiscal year ended December 31, 1997
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
for the transition period from to .
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Commission file number: 0-23804
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Simpson Manufacturing Co., Inc.
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(Exact name of registrant as specified in its charter)
California 94-3196943
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4637 Chabot Drive, Suite 200, Pleasanton, CA 94588
(Address of principal executive offices)
Registrant's telephone number, including area code: (510)460-9912
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Securities registered pursuant to Section 12(b) of the Act:
Common Stock, without par value New York Stock Exchange, Inc.
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(Title of each class) (Name of each exchange
on which registered)
Securities registered pursuant to Section 12(g) of the Act:
None
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(Title of class)
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 X No
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Indicate by check if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K 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/
As of February 28, 1998, there were outstanding 11,541,828 shares of
the registrant's common stock, without par value, which is the only class
of common or voting stock of the registrant. As of that date, the aggregate
market value of the shares of common stock held by nonaffiliates of the
registrant (based on the closing price for the common stock on the New York
Stock Exchange on February 27, 1998) was approximately $302,416,553.
Documents Incorporated by Reference
The information called for by Part III is incorporated by reference
to the definitive Proxy Statement for the Annual Meeting of Stockholders
of the Company to be held May 20, 1998, which will be filed with the
Securities and Exchange Commission not later than 120 days after December
31, 1997.
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Certain matters discussed below are forward-looking statements that involve
risks and uncertainties, certain of which are discussed in this and in
other reports filed by the Company with the Securities and Exchange
Commission. Actual results might differ materially from results suggested
by any forward-looking statements in this report.
PART I
ITEM 1. BUSINESS.
Background
Simpson Manufacturing Co., Inc. (the "Company"), through its subsidiary,
Simpson Strong-Tie Company Inc. ("Simpson Strong-Tie" or "SST"), designs,
engineers and is a leading manufacturer of wood-to-wood, wood-to-concrete
and wood-to-masonry connectors, and through its subsidiary, Simpson Dura-
Vent Company, Inc. ("Simpson Dura-Vent" or "SDV"), designs, engineers and
manufactures venting systems for gas and wood burning appliances. The
Company markets its products to the residential construction, light
industrial and commercial construction, remodeling and do-it-yourself
("DIY") markets. The Company believes that SST benefits from strong brand
name recognition among architects and engineers who frequently specify in
building plans the use of SST products, and that SDV benefits from strong
brand name recognition among contractors, dealers, distributors and
original equipment manufacturers ("OEMs") to which SDV markets its
products. The Company has continuously manufactured structural connectors
since 1956.
Connectors produced by Simpson Strong-Tie typically are steel devices that
are used to strengthen, support and connect joints in residential and
commercial construction and DIY projects. These products enhance the safety
and durability of the structures in which they are installed and can save
time and labor costs for the contractor. SST's connector products increase
structural integrity and improve structural resistance to seismic, wind and
other forces. Applications range from building framing to deck construction
to DIY projects. SST produces and markets more than 1,300 standard
connector products in addition to products that it manufactures to custom
specifications requested by architects and engineers.
Simpson Dura-Vent's venting systems are used to vent gas furnaces and water
heaters, gas fireplaces and stoves, wood burning stoves and pellet stoves.
SDV's metal vents, chimneys and chimney liner systems exhaust the products
of combustion to the exterior of the building, and some products introduce
outside air into the appliance. SDV designs its products for ease of
assembly and safe operation and to achieve a high level of performance. SDV
produces and markets several hundred different venting products and
systems.
The Company emphasizes continuous new product development and often obtains
patent protection for its new products. The Company's products are marketed
in all 50 states of the United States and in England, France, Germany,
Canada, Mexico, Japan and Australia. Both Simpson Strong-Tie and Simpson
Dura-Vent products are distributed through a contractor and dealer
distributor network, home centers and OEMs.
The Company has developed and uses automated manufacturing processes. Its
innovative manufacturing systems and techniques have allowed it to control
manufacturing costs, even while developing both new products and products
that meet customized requirements and specifications. The Company's
development of specialized manufacturing processes has also permitted
increased operating flexibility and enhanced product design innovation. The
Company has developed a quality management system that employs numerous
quality-control procedures. Since 1996, SST's quality management system has
been registered under ISO 9001. The Company has 11 manufacturing locations
in the United States, Canada, France and the United Kingdom.
The Company is a California corporation and was reorganized in 1994 as a
holding company for Simpson Strong-Tie and Simpson Dura-Vent.
Industry and Market Trends
Based on trade periodicals, participation in trade and professional
associations and communications with governmental and quasi-governmental
organizations and customers and suppliers, the Company believes that a
variety of events and trends have resulted in significant developments in
the markets that the Company serves. Some of these events and trends are
discussed below.
Recent natural disasters throughout the world have focused attention on
safety concerns relating to the structural integrity of homes and other
buildings. The 1995 earthquake in Kobe, Japan, the 1994 earthquake in
Northridge, California, the 1989 Loma Prieta earthquake in Northern
California, Hurricanes Hugo in 1989 and Andrew in 1992 in the Southeast,
and other less cataclysmic natural disasters damaged and destroyed
innumerable homes and other buildings, resulting in heightened
consciousness of the fragility of some of those structures.
In recent years, architects, engineers, model code agencies, contractors,
building inspectors and legislators have continued efforts to improve
structural integrity and safety of homes and other buildings in the face of
disasters of various types, including seismic events, storms and fires.
Based on ongoing participation in trade and professional associations and
communications with governmental and quasi-governmental regulatory
agencies, the Company believes that building codes are being strengthened
and that their enforcement is becoming more rigorous. The Company's
products are designed to respond to increasing demand resulting from these
trends.
The requirements of the Endangered Species Act, the Federal Lands Policy
Management Act and the National Forest Management Act have resulted in
increasingly limited amounts of timber available for harvest from public
lands. This has contributed to an increase in lumber prices and a
concomitant increase in the use of engineered wood products. Engineered
wood products, which substitute for strong, clear-grained lumber
historically obtained from logging older, large-diameter trees, have been
developed to conserve lumber. Engineered wood products frequently require
specialized connectors. Sales of Simpson Strong-Tie's engineered wood
connector products increased significantly in 1996 and 1997.
Concerns about energy conservation and air quality have led to increasing
recognition of the advantages of natural gas as a heating fuel, including
its abundance and clean burning characteristics. Use of natural gas for
home heating has been increasing in the United States. According to the
Census Bureau, the share of new single-family houses in 1996 heated with
natural gas was 69%, a slight increase from 67% in 1994. Sales of gas
fireplaces have increased in recent years relative to those of traditional
wood burning fireplaces. Traditional wood burning fireplaces negatively
affect both indoor and outdoor air quality. In contrast, direct vent gas
fireplaces draw air for combustion from outdoors (through the double wall
venting system) and feature sealed glass doors that reduce indoor air
contamination. In the past, Simpson Dura-Vent products have not been sold
into the traditional masonry and manufactured fireplace market. The recent
trend from wood to gas fireplaces is viewed as a significant opportunity
for SDV's gas venting products.
The Company has developed its distribution through home centers throughout
the United States. The National Retail Hardware Association estimates that
there are 44,500 home centers and lumber and building material outlets in
the United States. The Company's sales to home centers increased
significantly in 1996 and 1997. See "Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Business Strategy
The Company designs, manufactures and sells products that are of high
quality and performance, easy to use and cost-effective for customers. The
Company provides rapid delivery of its products and prompt engineering and
sales support. Based on its communications with customers, engineers,
architects, contractors and other industry participants, the Company
believes that its products have strong brand name recognition, and the
Company seeks to continue to develop the value of its brand names through a
variety of customer-driven strategies. Information provided by customers
has led to the development of many of the Company's products, and the
Company expects that customer needs will continue to shape the Company's
product development, marketing and services.
Specification in architects' and engineers' plans and drawings influences
which products will be used for particular purposes and therefore is key to
the use of the Company's products in construction projects. The Company
encourages architects and engineers to specify the installation of the
Company's products in projects they design and supervise, and encourages
acceptance of the Company's products by construction contractors. The
Company maintains frequent contacts with architects, engineers and
contractors, as well as private organizations that provide information to
building code officials, both to inform them regarding the quality, proper
installation, capabilities and value of the Company's products and to
update them about product modifications and new products that may be useful
or needed. The Company sponsors seminars to inform architects, engineers
and building officials on appropriate use and proper installation of the
Company's products.
The Company seeks to expand its product and distribution coverage through
several channels:
Distributors. The Company regularly evaluates its distribution coverage and
service levels provided by its distributors and from time to time modifies
its distribution strategy and implements changes to address weaknesses and
opportunities. The Company has various programs to evaluate distributor
product mix and conducts promotions to encourage distributors to add
Company products that complement their mix of product offerings in their
markets.
Through its efforts to increase specifications by architects and engineers,
and through increasing the number of products sold to particular
contractors, the Company seeks to increase sales to distributors that serve
building contractors. The Company continuously seeks to expand the number
of contractors served by each distributor through such sales efforts as
demonstrations of product cost-effectiveness and information programs.
Home Centers. The Company intends to continue to increase penetration of
the DIY markets by solicitation of home centers. The Company's Sales
Representatives and Retail Specialists maintain on-going contact with home
centers to provide timely product availability and product knowledge
training. To satisfy specialized requirements of the home center market,
the Company has developed extensive bar coding and merchandising aids and
has concentrated a portion of its research efforts into the development of
DIY products.
OEM Relationships. The Company works closely with manufacturers of
engineered wood products and OEMs in developing and expanding the
application and sales of Simpson Strong-Tie's engineered wood connector
products and Simpson Dura-Vent's gas, wood and pellet stove venting
products. SST has relationships with several of the largest manufacturers
of engineered wood products, and SDV has OEM relationships with several
major gas fireplace and gas stove manufacturers.
The Company is expanding its established facilities outside California to
increase its presence and sales in markets east of the Rocky Mountains.
During the last five years, the Company has expanded or has planned to
expand nearly all of its manufacturing and warehouse facilities. Sales in
the 37 states east of the Rocky Mountains grew approximately 44% from 1995
to 1997 and represented approximately 48% of the Company's 1997 domestic
sales. In the last four years, the Company commenced manufacturing in
England, opened a warehouse facility in Western Canada, purchased
manufacturers in Eastern Canada and in France, made an equity investment in
a product design and distribution company in Germany and entered into a
distribution arrangement in Japan. The European investments are intended to
establish a presence in the European Community through companies with
existing customer bases and through servicing U.S.-based customers
operating there. The Company intends to continue to pursue and expand
operations outside the United States.
The Company's goal is to manufacture and warehouse its products in
geographic proximity to its markets to provide availability and rapid
delivery of products to customers and prompt response to customer requests
for specially designed products and services. With respect to the DIY and
dealer markets, the Company's strategy is to keep the customer's retail
stores continuously stocked with adequate supplies of the full line of the
Company's products that those stores carry. The Company manages its
inventory to assure continuous product availability. Most customer orders
are filled within a few days. High levels of manufacturing automation and
flexibility allow the Company to maintain its quality standards while
continuing to provide prompt delivery. See "Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The Company's product research and development is based largely on needs
that customers communicate to the Company. The Company typically has
developed 10 to 15 new products annually (some of which may be produced in
a range of sizes). The Company's strategy is to develop new products on a
proprietary basis where possible. Of more than 80 patents that the Company
owns, 70 cover products that the Company currently manufactures and
markets. The Company has filed 39 patent applications that are pending.
The Company's long-term strategy is to develop, acquire or invest in
product lines or businesses that (a) complement the Company's existing
product lines, (b) can be marketed through its existing distribution
channels, (c) might benefit from use of the Simpson Strong-Tie and Simpson
Dura-Vent brand names, and (d) are responsive to needs of the Company's
customers.
Simpson Strong-Tie
Overview
Connectors produced by Simpson Strong-Tie typically are steel devices that
are used to strengthen, support and connect joints in residential and
commercial construction and DIY projects. These products enhance the safety
and durability of the structures in which they are installed and can save
time and labor costs for the contractor. SST's connector products increase
structural integrity and improve structural resistance to seismic, wind and
other forces. Applications range from building framing to deck construction
to DIY projects. SST produces and markets more than 1,300 standard
connector products in addition to products that it manufactures to custom
specifications requested by architects and engineers.
In the United States, connector usage developed faster in the West than
elsewhere due to the low cost and abundance of timber and to local
construction practices. Increasingly, the market has been influenced both
by a growing awareness that the devastation caused by seismic, wind and
other disasters can be reduced through improved building codes and
construction practices and by environmental concerns that contribute to the
increasing cost and reduced availability of wood. Most Simpson Strong-Tie
products are listed by recognized building standards agencies as complying
with model building codes and are specified by architects and engineers for
use in projects they are designing or supervising. The engineered wood
products industry is developing in response to concerns about the
availability of wood, and the Company believes that SST is the leading
supplier of connectors for use with engineered wood products.
Products
Simpson Strong-Tie is a recognized brand name in the markets it serves.
Over a quarter of SST's 1997 revenues are derived from products that are
protected by patents. SST manufactures and markets three primary categories
of connector products: wood-to-wood, wood-to-concrete and wood-to-masonry.
SST also markets specialty screws and nails for proper installation of
certain of its connector products. For tying wood members to the
foundation, SST has designed and currently markets a line of anchor bolts
and the associated parts for aligning the anchor bolts, as well as threaded
rod, epoxy and mechanical anchors, which have seismic, retrofit and
remodeling applications for both new construction and DIY markets.
Almost all of Simpson Strong-Tie's products are listed by recognized model
building code agencies. To achieve such listings, SST conducts extensive
product testing, which is witnessed and certified by independent testing
engineers. The tests also provide the basis for publication of load ratings
for SST structural connectors, and this information is used by architects,
engineers, contractors and homeowners. The information is useful across the
range of applications of SST's products, from the deck constructed by a
homeowner to a multi-story structure designed by an architect or engineer
in an earthquake zone.
Simpson Strong-Tie also manufactures connector products specifically
designed for use with engineered wood products, such as wood I-joists. With
increased timber costs and reduced availability of trees suitable for
making traditional solid sawn lumber, construction with engineered wood
products has increased substantially in the last three years. Over the same
period, SST's net sales of engineered wood connectors through dealer and
contractor distributors and engineered wood product manufacturers have also
increased significantly.
New Product Development
Simpson Strong-Tie commits substantial resources to engineering and new
product development. The majority of SST's products have been developed
through SST's internal research and development program. Of the 65 U.S. and
15 foreign patents that SST owns, 67 cover products that SST currently
manufactures and markets. SST typically has developed 10 to 15 new products
each year. SST's research and development expense for the three years ended
December 31, 1997, 1996 and 1995, was $957,000, $1,025,000 and $922,000,
respectively. As part of the new product development process, SST
engineers, in cooperation with sales and marketing staff, meet regularly
with architects, engineers, building inspectors, code officials and
customers. Several new products derived from existing product lines are
developed annually. SST recently developed and introduced a line of powder-
coat painted shelf brackets primarily for the DIY market, high-strength
chemical epoxy anchor systems, and reduced deflection hold-downs and
associated fasteners. The Company believes that existing distribution
channels are receptive to product line extensions, thereby enhancing SST's
ability to enter new markets.
Sales and Marketing
Simpson Strong-Tie's sales and marketing programs are implemented through
SST's branch system. SST currently maintains branches in Northern and
Southern California, Texas, Ohio, England and France. Each branch is served
by its own sales force as well as manufacturing, warehouse and office
facilities. Each branch is responsible for a broad geographic area. Branch
managers have significant autonomy, which includes setting sales and
marketing strategies. Each domestic branch is an independent profit center
with a cash profit sharing bonus program based on its own performance. At
the same time, the domestic branches closely integrate their manufacturing
activities to enhance product availability. Branch sales forces in the U.S.
are supported by marketing managers in the home office in Pleasanton,
California. The sales force maintains close working relationships with
customers, develops new business, calls on architects, engineers and
building officials and participates in a range of educational seminars.
Simpson Strong-Tie sells its products through an extensive distribution
system comprising dealer distributors supplying thousands of retail
locations nationwide, contractor distributors (primarily on the West
Coast), home centers (including more than 1,800 stores across the United
States), manufacturers of engineered wood products, and specialized
contractors such as roof framers. SST's DIY and dealer products are used to
build projects such as decks, patio covers and shelf and bench systems. In
1996, SST completed an agreement with a Japanese trading partner to
distribute its products in Japan. SST has also received C-Mark equivalency
clearance from the Japanese building code authorities, which is expected to
facilitate acceptance of its products into that market. The Company
believes that SST's increasing diversification into new and growing markets
has reduced its vulnerability to construction industry cycles.
Simpson Strong-Tie dedicates substantial resources to customer service.
Every year, SST produces numerous publications and point-of-sale marketing
aids to serve specifiers, distributors, retailers and users. These
publications include SST's general catalog, as well as various specific
catalogs, such as those for its epoxy products and the engineered wood and
plated truss industries. The catalogs and publications describe the
products and provide load and installation information. SST publishes a
newsletter, Connector Update, providing technical, installation and other
information, as well as publications addressing seismic and hurricane
conditions and the DIY market. To serve users in the U.S. and elsewhere who
do not speak English, SST employs bilingual sales people and prints some of
its publications in other languages.
Simpson Strong-Tie's engineers not only design and test products, but also
provide engineering support for customers. This support might range from
the discussion of a load value in a catalog to testing a unique application
for an existing product. SST's sales force communicates with customers in
each of its marketing channels, through its publications, through seminars
and through frequent calls.
Based on its communications with customers, Simpson Strong-Tie believes
that its products are essential to its customers' businesses, and it is
SST's policy to ship products ordered within a few days of receiving the
order. Many of SST's customers are contractors that require rapid delivery
of needed products. Home centers and dealers also require superior service,
because of fluctuating demand. To satisfy these requirements, SST maintains
high inventory levels, has redundant manufacturing capability and some
multiple dies to produce the same parts, and maintains computer sales and
inventory control and forecasting capability throughout its nationwide
network of factories and warehouses. The Company also has special programs
for contractors intended to ensure the prompt and reliable manufacture and
delivery of custom products.
Simpson Strong-Tie believes that dealer and home center sales of SST
products are significantly greater when the bins and racks at large dealer
and home center locations are adequately stocked with appropriate products.
Various retailers carry varying numbers of different SST products and SST's
Retail Specialists are engaged in ongoing efforts to inform retailers about
other SST products that can be used in their specific markets and to
encourage them to add these products to better meet their customers' needs.
Achieving these objectives requires teamwork and significant inventory
commitments between SST and the distributors and retailers. Retail
Specialists are playing a significant role in keeping the racks full and
extending the product lines at the large dealer and home center level. They
help retailers order product, set up merchandising systems, stock shelves,
hold product seminars and provide SST with daily information that is used
to improve service and product mix.
Simpson Dura-Vent
Overview
Simpson Dura-Vent's venting systems are used to vent gas furnaces and water
heaters, gas fireplaces and stoves, wood burning stoves and pellet stoves.
SDV's metal vents, chimneys and chimney liner systems exhaust the products
of combustion to the exterior of the building and have been designed for
ease of assembly and safe operation and to achieve a high level of
performance. SDV produces and markets several hundred different venting
products and systems.
In recent years, the abundant supply and clean burning characteristics of
natural gas have gained public recognition, resulting in increased market
share for gas appliances in the new construction and the appliance
replacement markets. In addition, concern over energy conservation and
environmental air quality has resulted in increased use of gas stoves and
fireplaces rather than the traditional wood burning stoves and fireplaces.
As a result, new venting systems, such as Direct-Vent, have been developed
to address changes in appliance technology.
Simpson Dura-Vent's objective is to expand market share in all of its
distribution channels, by entering expanding markets that address energy
and environmental concerns. SDV's strategy is to capitalize on its
strengths in new product development and its established distribution
network and to continue its commitment to superior quality and service. SDV
operates manufacturing and warehouse facilities in California and
Mississippi.
Products
Simpson Dura-Vent is a leading supplier of double-wall Type B Gas Vent
systems, used for venting gas furnaces, water heaters, boilers and
decorative gas fireplaces. SDV believes that there is significant potential
in the gas fireplace market, because of the large number of fireplaces sold
in the new construction market, the relative ease of installing side-wall
vented gas fireplaces for the remodeling market and the trend from wood to
gas as a result of environmental concerns and ease of operation.
Simpson Dura-Vent's Type B Gas Vent product line features heavy-duty
quality construction and a twist-lock design that provides for fast and
easy job-site assembly compared to conventional snap together designs. The
twist-lock design has broader applications and has been incorporated into
SDV's gas, pellet and direct vent product lines.
Simpson Dura-Vent has introduced a patented flexible vent connector,
Dura/Connect, for use between the gas appliance flue outlet and the
connection to the Type B Gas Vent installed in the ceiling. Dura/Connect
eliminates the difficult and time consuming process of cutting, crimping
and fitting galvanized steel vent connectors. Marketed to home centers and
hardware stores, Dura/Connect offers a simple twist, bend and connect
installation for water heaters and gas furnaces.
The wood stove industry has responded to air quality concerns with
substantial reductions in wood stove particulate emissions. In 1985,
Simpson Dura-Vent introduced Dura-Plus, a patented chimney system for use
with wood burning stoves. The Dura-Plus chimney is used with Environmental
Protection Agency ("EPA") approved wood stoves. The Dura-Plus safety valve
design provides enhanced fire safety in the event of a creosote chimney
fire. Dura-Plus chimney is available in kits, and is sold through retail
fireplace specialty shops and home centers. The growing gas fireplace
market has evolved into two basic types of fireplace: top-vent fireplaces
that are vented with the standard Type B Gas Vent and direct-vent
fireplaces that use a special double-wall venting system. Since 1993, SDV
has provided direct-vent gas fireplace venting systems under OEM contracts
with several major fireplace manufacturers in the United States. SDV's
direct-vent system is designed not only to exhaust the flue products, but
also to draw in outside air for combustion, an important feature in modern
energy-efficient home construction. The direct-vent gas fireplace systems
provide ease of installation, permitting horizontal through-the-wall
venting or standard vertical through-the-roof venting. Sales of Direct-Vent
have been robust. In 1996, SDV expanded its Direct-Vent product line to
include both co-axial and co-linear direct vent systems for venting gas
stoves and gas inserts into existing masonry chimneys or existing factory-
built metal chimneys.
Since early 1995, nearly all wood stove manufacturers have introduced
direct vent gas stoves. Simpson Dura-Vent has entered into OEM and
distribution relationships with several of these manufacturers to supply
Direct Vent venting products. In 1994, SDV introduced Direct Vent G.S., a
decorative direct vent system for venting free standing gas stoves. The
recent trend from wood to gas stoves, while increasing competition for wood
and pellet appliance venting products, is viewed as a significant
opportunity for SDV's gas venting products.
New Product Development
Simpson Dura-Vent has gained industry recognition by offering innovative
new products that meet changing needs of customers. SDV representatives
serve on industry committees concerned with issues such as new appliance
standards and government regulations. SDV's research and development
expense for the three years ended December 31, 1997, 1996 and 1995, was
$323,000, $287,000 and $258,000, respectively. SDV also maintains working
relationships with research and development departments of major appliance
manufacturers, providing prototypes for field testing and conducting tests
in SDV's testing laboratory. SDV believes that such relationships provide
competitive advantages. For example, several years ago, SDV introduced the
first special vent for the newly invented pellet stoves, and more recently,
SDV introduced the first direct vent system for the increasingly popular
direct vent gas appliances.
Sales and Marketing
Simpson Dura-Vent's sales organization consists of a director of sales and
marketing, a marketing communications manager, regional sales managers, and
independent representative agencies. SDV markets venting systems for both
gas and wood burning appliances through wholesale distributors in the
United States, Canada and Australia to the HVAC (heating, ventilating and
air conditioning) and PHC (plumbing, heating and cooling) contractor
markets, and to fireplace specialty shop distributors. These customers sell
to contractor and DIY markets. SDV also markets venting products to home
center and hardware store chains. SDV has entered into OEM relationships
with several major gas fireplace and gas stove manufacturers, which SDV
believes are leaders in the direct-vent gas appliance market.
Simpson Dura-Vent responds to technological changes occurring in the
industry through new product development and has developed a reputation for
quality and service to its customers. To reinforce the image of quality,
SDV produces extensive sales support literature and advertising materials.
Recognizing the difficulty that customers and users may have in
understanding new, complex venting requirements, SDV publishes a venting
handbook to assist contractors, building officials and retail outlets with
the science of proper venting. Advertising and promotional literature has
been designed to be used by distributors and their customers, as well as
home centers and hardware chains.
Manufacturing Process
The Company has concentrated on making its manufacturing processes as
efficient as possible without sacrificing the flexibility necessary to
service the needs of its customers.
The Company has developed and uses automated manufacturing processes. The
Company's innovative manufacturing systems and techniques have allowed it
to control manufacturing costs, even while developing both new products and
products that meet customized requirements and specifications. The
Company's development of specialized manufacturing processes also has
permitted increased operating flexibility and enhanced product design
innovation.
The Company is committed to helping people build safer structures
economically through the design, engineering and manufacturing of
structural connector and related products. To this end, the Company has
developed a quality management system that employs numerous quality-control
procedures, such as computer-generated work orders, constant review of
parts as they are produced and frequent quality testing. Since 1996,
Simpson Strong-Tie's quality management system has been registered under
ISO 9001, an internationally recognized set of quality-assurance standards.
The Company believes that ISO registration is a significant asset in doing
business with European companies and is becoming increasingly important to
U.S. companies.
Simpson Strong-Tie operates manufacturing and warehouse facilities in
California, Texas, Ohio, Florida, Illinois, British Columbia, Ontario,
England and France. Most of SST's products are produced with a high level
of automation, using progressive dies run in automatic presses making parts
from coiled sheet steel often in excess of 100 strokes per minute. SST
produces 500 million product pieces per year. Over half of SST's products
are individually bar coded, particularly the products that are sold to home
centers. SST has significant press capacity and has some multiple dies for
its high volume products because of the need to produce the product close
to the customer and to provide backup capacity. The balance of production
is accomplished through a combination of manual, blanking and numerically
controlled (NC) processes which include robotic welders, lasers and turret
punches. SST believes it is the only manufacturer in the connector industry
using NC turret punches to manufacture a large variety of standard and
special products. This capability allows SST to produce products with
little redesign or set-up time, facilitating rapid turnaround for
customers. New tooling is also highly automated. Dies are designed and
produced using computer aided design (CAD) and computer aided machinery
(CAM) systems. CAD/CAM capability enables SST to create multiple dies
rapidly and design them to high standards. The Company is constantly
reviewing its product line to reduce manufacturing costs and increase
automation.
Simpson Dura-Vent operates manufacturing and warehouse facilities in
California and Mississippi where it produces component parts for venting
systems using NC-controlled punch presses equipped with high-speed
progressive and compound tooling. SDV's vent pipe and elbow assembly lines
are automated, to produce finished products efficiently from large coils of
steel and aluminum. UPC bar coding and computer tracking systems provide
SDV's industrial engineers and production supervisors with real-time
productivity tools to measure and evaluate current production rates,
methods and equipment.
Each of the Company's current and planned manufacturing facilities is
located in a geographic region that has experienced major natural
disasters, such as earthquakes, floods and hurricanes. For example, the
1989 Loma Prieta earthquake in Northern California destroyed a freeway and
caused other major damage within a few miles of the Company's facilities in
San Leandro, California, and the earthquakes in Northridge, California, in
January 1994, destroyed several freeways and numerous buildings in the
region in which the Company's facilities in Brea are located. The Company
does not carry earthquake insurance. Other insurance that it carries is
limited and not likely to be adequate to cover all of the Company's
resulting costs, business interruption and lost profits in the event of a
major natural disaster in the future. If a natural disaster were to render
one or more of the Company's manufacturing facilities totally or partially
unusable, whether or not covered by insurance, the Company's business and
financial condition could be materially and adversely affected.
Regulation
The design, capacity and quality of most of the Company's products and
manufacturing processes are subject to numerous and extensive regulations
and standards promulgated by governmental, quasi-governmental and industry
organizations. Such regulations and standards are highly technical and
complex and are subject to frequent revision. The failure of the Company's
products or manufacturing processes to comply with any of such regulations
and standards could impair the Company's ability to manufacture and market
its products profitably and materially and adversely affect the Company's
business and financial condition.
Simpson Strong-Tie's product lines are subject to Federal, state, county,
municipal and other governmental and quasi-governmental regulations that
affect product design, development, testing, applications, marketing,
sales, installation and use. Most SST products are recognized by building
code and standards agencies. Agencies that recognize Company products
include the International Conference of Building Officials ("ICBO"),
Building Officials and Code Administrators International ("BOCA"), Southern
Building Code Congress International ("SBCCI"), The National Evaluation
Service, the City of Los Angeles, Dade County, Florida, and the California
Division of Architecture. These and other code agencies adopt various
testing and design standards and incorporate them into their related
building codes. For example, ICBO requirements are codified in the Uniform
Building Code. The Uniform Building Code generally applies to construction
in the Western United States. To be recognized by ICBO, SST products must
conform to Uniform Building Code requirements. SST considers this
recognition to be a significant marketing tool and devotes considerable
effort to obtaining appropriate approvals for its products. SST believes
that architects, engineers, contractors and other customers are less likely
to purchase structural products that lack the appropriate code approval or
acceptance, at least if code-accepted competitive products are available.
SST's management actively participates in industry related professional
associations to keep abreast of regulatory changes and to provide
information to regulatory agencies.
Simpson Dura-Vent operates under a complex regulatory environment that
includes appliance and venting performance standards related to safety,
energy efficiency and air quality. Gas venting regulations are contained in
the National Fuel Gas Code ("NFGC"), while safety and performance
regulations for wood burning appliances and chimney systems are contained
in a National Fire Protection Association standard ("NFPA 211"). Standards
for testing gas vents and chimneys are developed by testing laboratories
such as Underwriter's Laboratories ("UL") in compliance with the American
National Standards Institute. Clean air standards for both gas and wood
burning appliances are regulated by the EPA. Energy efficiency standards
are regulated by the Department of Energy ("DOE") under the authority of
the National Appliance Energy Conservation Act. ""Under this act, the DOE
periodically reviews the necessity for increased efficiency standards with
respect to gas furnaces. A substantial percentage of Simpson Dura-Vent's
Type B Gas Vent sales are for gas furnace applications. Minimum appliance
efficiency standards might be adopted that could negatively affect sales of
Type B Gas Vents, which could materially and adversely affect the Company's
operating results and financial condition. The standards and regulations
contained in the NFGC and NFPA 211 are ultimately adopted by national
building code organizations such as ICBO, BOCA and SBCCI. In turn, the
various building codes are adopted by local municipalities, resulting in
enforcement through the building permit process. Safety, air quality and
energy efficiency requirements are enforced by local air quality districts
and municipalities by requiring proper UL, EPA and DOE labels on appliances
and venting systems.
Competition
The Company faces a variety of competition in all of the markets in which
it participates. This competition ranges from subsidiaries of large
national or international corporations to small regional manufacturers.
While price is an important factor, the Company competes primarily on the
basis of quality, breadth of product line, technical support, service,
field support and product innovation. Simpson Strong-Tie competes with
numerous companies and its competitors generally are privately held
businesses. Most of the competitors tend to be more regional than SST, but
one distributes its products nationally.
The venting industry is highly competitive. Many of Simpson Dura-Vent's
competitors have greater financial and other resources than SDV. SDV's
principal competitors include the Selkirk Metalbestos Division of Eljer
Industries Inc. (a subsidiary of Zurn Industries, which recently announced
a merger with U.S. Industries, Inc.), American Metal Products Co. (a
subsidiary of Masco Corp.), Metal-Fab, Inc., Hart & Cooley, Inc. and the
Air Jet Division of General Products Co. The Company believes that Metal-
Fab, Inc., Hart & Cooley, Inc. and Air Jet tend to be more regional than
SDV, and that they have smaller shares of the national market than SDV.
Raw Materials
The principal raw material used by the Company is steel, including
stainless steel, and is generally ordered to specific American Society of
Testing and Materials ("ASTM") standards. Other raw materials include
aluminum, aluminum alloys and ceramic and other insulation materials, which
are used by Simpson Dura-Vent, and cartons, which are used by both SST and
SDV. The Company purchases raw materials from a variety of commercial
sources. The Company's practice is to seek cost savings and enhanced
quality by purchasing from a limited number of suppliers.
The steel industry is highly cyclical and prices for the Company's raw
materials are influenced by numerous factors beyond the Company's control,
including general economic conditions, competition, labor costs, import
duties and other trade restrictions. The Company historically has not
attempted to hedge against changes in prices of steel or other raw
materials. The Company might not be able to increase its product prices in
amounts that correspond to increases in raw materials prices without
materially and adversely affecting its sales and profits. See "Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Patents and Proprietary Rights
The Company's subsidiaries own more than 80 U.S. and foreign patents, of
which 70 cover products that they currently manufacture and market. Its
subsidiaries have filed 14 U.S. and 25 foreign patent applications that are
currently pending. These patents and patent applications cover various
design aspects of the subsidiaries' products as well as processes used in
their manufacture. The Company's subsidiaries are continuing to develop new
potentially patentable products, product enhancements and product designs.
Although the Company's subsidiaries do not intend to apply for additional
foreign patents covering existing products, the Company is developing an
international patent program to protect new products that its subsidiaries
may develop.
The Company's subsidiaries hold 99 trademark registrations in the U.S. and
foreign countries covering 48 trademarks, have 40 trademark registration
applications pending in the U.S. and foreign countries covering seven
trademarks, and use several other trademarks that they have not yet
attempted to register.
The Company's ability to compete effectively with other companies depends
in part on its ability to maintain the proprietary nature of its
technology. There can be no assurance, however, as to the degree of
protection afforded by these patents or the likelihood that patents will
issue pursuant to pending patent applications. Furthermore, there can be no
assurance that others will not independently develop the same or similar
technology, develop around the patented aspects of any of the Company's
products or proposed products, or otherwise obtain access to the Company's
proprietary technology.
In addition to seeking patent protection, the Company also relies on
unpatented proprietary technology to maintain its competitive position.
Nevertheless, there can be no assurance that the Company will be able to
protect its know-how or other proprietary information.
In attempting to protect its proprietary information, the Company expects
that it may sometimes be necessary to prosecute lawsuits against
competitors and others that the Company believes have infringed or are
infringing the Company's rights. In such an event, the defendant may assert
counterclaims to complicate or delay the litigation or for other reasons.
If the Company were to be unable to maintain the proprietary nature of its
significant products, the Company's business and financial condition could
be materially and adversely affected.
Acquisitions and Expansion into New Markets
The Company's future growth, if any, may depend to some extent on its
ability to penetrate new markets, both domestically and internationally.
See "Business Strategy" and "Industry and Market Trends." Therefore, the
Company may in the future pursue acquisitions of product lines or
businesses. Acquisitions involve numerous risks, including difficulties in
the assimilation of the operations and products of the acquired companies,
the diversion of management's attention from other business concerns, risks
of entering markets in which the Company has little or no direct prior
experience, and the potential loss of key employees of the acquired
company. In addition, future acquisitions by the Company may result in
potentially dilutive issuances of equity securities, the incurring of
additional debt, and amortization expenses related to goodwill and
intangible assets, which could adversely affect the Company's
profitability. If an acquisition occurs, no assurance can be given as to
its effect on the Company's business or operating results. See "Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
In addition, construction customs, standards, techniques and methods in
international markets differ from those in the United States. Laws and
regulations applicable in new markets for the Company are likely to be
unfamiliar to the Company and compliance may be substantially more costly
than the Company anticipates. As a result, it may become necessary for the
Company to redesign products or to invent or design new products in order
to compete effectively and profitably outside the United States or in
markets that are new to the Company in the United States. The Company
expects that significant time will be required for it to generate
substantial sales or profits in new markets.
Other significant challenges to conducting business in foreign countries
include, among other factors, local acceptance of the Company's products,
political instability, currency controls, changes in import and export
regulations, changes in tariff and freight rates, and fluctuations in
foreign exchange rates. There can be no assurance that the Company will be
able to penetrate these markets or that any such market penetration can be
achieved on a timely basis or profitably. If the Company is not successful
in penetrating these markets within a reasonable time, it will be unable to
recoup part or all of the significant investments it will have made in
attempting to do so. See "Business Strategy" and "Industry and Market
Trends."
In 1996, the Company purchased for approximately $1.0 million the assets of
the Builders Products Division of MiTek Industries Ltd. ("MiTek") and
entered into an agreement to supply MiTek with connector products in the
UK. In addition, during the first quarter of 1997, the Company purchased
three Canadian companies and a related U.S. company, the Isometric Group,
which manufacture and distribute a line of mechanical anchors and related
products, for approximately $7.6 million plus an earnout based on future
sales increases. Also during the first quarter of 1997, the Company
purchased, for approximately $1.7 million, the remaining 66% equity in
Patrick Bellion, S.A., a French manufacturer of connector products. See
"Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Sources of Capital."
Seasonality and Cyclicality
The Company's sales are seasonal, with operating results varying from
quarter to quarter. The Company's sales and income have historically been
lower in the first and fourth quarters and higher in the second and third
quarters of the year as retailers and contractors purchase construction
materials in the late spring and summer months for the construction season.
In addition, demand for the Company's products and the Company's results of
operations are significantly affected by weather conditions, such as
unseasonably warm, cold or wet weather, which affect, and sometimes delay
or accelerate, installation of certain of the Company's products. Political
and economic events can also affect the Company's revenues. The Company has
little control over the timing of customer purchases, and sales anticipated
in one quarter may occur in another quarter, thereby affecting both
quarters' results. In addition, the Company incurs significant expenses as
it develops, produces and markets its products in anticipation of future
orders. Products typically are shipped as orders are received, and
accordingly the Company operates with little backlog. As a result, net
sales in any quarter generally depend on orders booked and shipped in that
quarter. A significant portion of the Company's operating expenses are
fixed, and planned expenditures are based primarily on sales forecasts. If
sales fall below the Company's expectations, operating results would be
adversely affected for the relevant quarters, as expenses based on those
expectations will already have been incurred. See "Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The Company's principal markets are in the building construction industry.
That industry is subject to significant volatility as a result of
fluctuations in interest rates, the availability of credit to builders and
developers, inflation rates and other economic factors and trends, none of
which is within the Company's control. Declines in commercial and
residential construction may be expected to reduce the demand for the
Company's products. The Company cannot provide any assurance that its
business will not be adversely affected by future negative economic or
construction industry performance or that future declines in construction
activity or the demand for the Company's products will not have material
adverse effects on the Company and its business and financial condition.
See "Item 7 - Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Product Liability
The Company designs and manufactures most of its standard products and
expects that it will continue to do so. The Company employs engineers and
designers to design and test its products under development. In addition,
the Company maintains a quality control system. The Company has on occasion
found manufacturing flaws in its products. In addition, the Company
purchases from third party suppliers raw materials, principally steel, and
finished goods that are produced and processed by other manufacturers. The
Company also has on occasion found flaws in raw materials and finished
goods produced by others, some of which flaws have not been apparent until
after the products were installed by customers. Many of the Company's
products are integral to the structural soundness or fire safety of the
buildings in which they are used. As a result, if any flaws exist in the
Company's products (as a result of design, raw material or manufacturing
flaws) and such flaws are not discovered and corrected before the Company's
products are incorporated into structures, the structures could suffer
severe damage (such as collapse or fire) and personal injury could result.
To the extent that such damage or injury is not covered by the Company's
product liability insurance, and if the Company were to be found to have
been negligent or otherwise culpable, the Company and its business and
financial condition could be materially and adversely affected by the
necessity to correct such damage and to compensate persons who might have
suffered injury.
Furthermore, in the event that a flaw is discovered after installation but
before any damage or injury occurs, it may be necessary for the Company to
recall products, and the Company may be liable for any costs necessary to
retrofit the affected structures. Any such recall or retrofit could entail
substantial costs and adversely affect the Company's reputation, sales and
financial condition. The Company does not carry insurance against recall
costs, and its product liability insurance may not cover retrofit costs.
The severe earthquake in Northridge, California, in January 1994, damaged
or destroyed numerous structures, and Company products were installed in
some of those structures. No assurance can be given that claims will not be
made against the Company with regard to damage or destruction of structures
incorporating Company products resulting from a natural disaster. Any such
claims, if asserted, could materially and adversely affect the Company.
Environmental, Health and Safety Matters
The Company is subject to environmental laws and regulations governing
emissions into the air, discharges into water, and generation, handling,
storage, transportation, treatment and disposal of waste materials. The
Company is also subject to other Federal and state laws and regulations
regarding health and safety matters. The Company's manufacturing operations
involve the use of solvents, chemicals, oils and other materials that are
regarded as hazardous or toxic and the use of complex and heavy machinery
and equipment that can pose severe safety hazards (especially if not
properly and carefully used). Some of the Company's products also
incorporate materials that are hazardous or toxic in some forms (such as
zinc and lead, which are used in some steel galvanizing processes). The
Company believes that it has obtained all material licenses and permits
required by environmental, health and safety laws and regulations in
connection with the Company's operations and that its policies and
procedures comply in all material respects with existing environmental,
health and safety laws and regulations. It is possible that additional
licenses or permits may be required, that the Company's policies and
procedures might not comply in all respects with all such laws and
regulations or, even if they do, that employees might fail or neglect to
follow them in all respects, and that the Company's generation, handling,
use, storage, transportation, treatment or disposal of hazardous or toxic
materials, machinery and equipment might cause injury to persons or to the
environment. In addition, properties occupied by the Company may be
contaminated by hazardous or toxic substances and remedial action may be
required at some time in the future. It is also possible that materials in
certain of the Company's products could cause injury or sickness. Relevant
laws and regulations could also be changed or new ones could be adopted
that require the Company to obtain additional licenses and permits and
cause the Company to incur substantial expense. Any such event or
contamination could have a material adverse effect on the Company and its
liquidity, results of operations and financial condition. See "Regulation."
Employees and Labor Relations
As of February 28, 1998, the Company had 1,312 full-time employees, of whom
926 were hourly employees and 386 were salaried employees. The Company
believes that its overall compensation and benefits for the most part
exceed industry averages and that its relations with its employees are
good.
The Company is dependent on certain key management and technical personnel,
including Barclay Simpson, Thomas J Fitzmyers, Stephen B. Lamson and Donald
M. Townsend. The loss of one or more key employees could have a material
adverse effect on the Company. The Company's success will also depend on
its ability to attract and retain additional highly qualified technical,
marketing and management personnel necessary for the maintenance and
expansion of the Company's activities. The Company faces strong competition
for such personnel and there can be no assurance that the Company will be
able to attract or retain such personnel.
A significant number of the Company's employees at two of the Company's
major manufacturing facilities are represented by labor unions and are
covered by collective bargaining agreements. Three of the Company's
collective bargaining agreements at two of its California facilities were
renegotiated in 1995. These agreements cover sheetmetal workers in Brea,
California, and the Company's tool and die craftsmen in both Brea and San
Leandro, California. These three contracts were extended into 1998 and
1999. A fourth contract, covering sheetmetal workers in San Leandro,
expires in July 2000. A work stoppage or interruption by a significant
number of the Company's employees could have a material and adverse effect
on the Company and its business and financial condition.
ITEM 2. PROPERTIES.
Properties
The Company maintains its home office in Pleasanton, California, and other
offices, manufacturing and warehouse facilities elsewhere in California and
in Texas, Ohio, Florida, Mississippi, Illinois, British Columbia, Ontario,
England and France. As of February 28, 1998, the Company's facilities were
as follows:
Approximate
Square Owned or Lease
Location Footage Leased Lessee Expires Function
- --------------------------- ----------- ---------- -------- ------- --------------------------
Pleasanton, California 19,400 Leased Company 2000 Office
San Leandro, California 47,100 Leased(1) SST 2001 Office, Manufacturing and
Warehouse
San Leandro, California 71,000 Owned Office, Manufacturing and
Warehouse
San Leandro, California 57,000 Leased(2) SST 2001 Manufacturing and
Warehouse
San Leandro, California 48,000 Leased SST 2001(3) Office and Warehouse
San Leandro, California 27,000 Owned Manufacturing and
Warehouse
San Leandro, California 61,800 Leased SST 1999 Warehouse
Brea, California 50,700 Owned Office, Manufacturing and
Warehouse
Brea, California 78,000 Owned Office and Warehouse
Brea, California 30,500 Owned Office, Manufacturing and
Warehouse
Brea, California 42,900 Owned Warehouse
McKinney, Texas 84,300 Owned Office, Manufacturing and
Warehouse
McKinney, Texas 117,100 Owned Office and Warehouse
Columbus, Ohio 153,500 Leased(4) SST 2005 Office, Manufacturing and
Warehouse
Jacksonville, Florida 74,600 Leased SST 2001 Office and Warehouse
Addison, Illinois 52,400 Leased SST 2003 Office, Manufacturing and
Warehouse
Enfield, Connecticut(5) 55,100 Leased(5) SST 2003 Office and Warehouse
Tamworth, England 78,100 Leased SST(6) 2012 Office, Manufacturing and
Warehouse
Cannock, Staffordshire, 26,900 Leased SST(6) 2000 Office, Manufacturing and
England Warehouse
Chelmsford, England 25,000 Leased SST(6) 1998 Office, Manufacturing and
Warehouse
Vacaville, California 125,000 Leased(7) SDV 2007 Office, Manufacturing and
Warehouse
Vacaville, California 120,300 Owned Office, Manufacturing and
Warehouse
Vacaville, California 20,500 Leased SDV 1998 Warehouse
Fontana, California 17,900 Leased SDV 1998 Warehouse
Vicksburg, Mississippi 172,000 Leased(8) SDV 2003 Office, Manufacturing and
Warehouse
Vicksburg, Mississippi 65,100 Leased SDV 1998 Warehouse
Ceres, Mississippi 302,000 Owned(9) Office, Manufacturing and
Warehouse
Vancouver, British Columbia 6,000 Leased SST 1999 Warehouse
Toronto, Ontario 36,300 Leased SST(10) 1999 Office, Manufacturing and
Warehouse
Toronto, Ontario 10,800 Leased SST(10) 2002 Warehouse
St. Hermine, France 11,300 Leased SST(11) 2002 Office, Manufacturing and
Warehouse
St. Hermine, France 20,900 Leased SST(11) 2002 Office, Manufacturing and
Warehouse
St. Hermine, France 15,900 Owned Office, Manufacturing and
Warehouse
- ------------------------
(1) Lessor is Simpson Investment Company, a related party. See Note 9 to
the Consolidated Financial Statements contained elsewhere herein.
(2) Lessor is Doolittle Investors, a related party. See Note 9 to the
Consolidated Financial Statements contained elsewhere herein.
(3) The Company has a commitment to purchase this property for
approximately $1,975,000. The transaction is expected to close in the
third quarter of 1998.
(4) Lessor is Columbus Westbelt Investment Company, a related party. See
Note 9 to the Consolidated Financial Statements contained elsewhere
herein.
(5) Simpson Strong-Tie signed the lease in 1997 and the facility is
expected to be completed and occupied in 1998.
(6) Lessee is Simpson Strong-Tie International, Inc., a wholly-owned
subsidiary of SST.
(7) Lessor is Vacaville Investors, a related party. See Note 9 to the
Consolidated Financial Statements contained elsewhere herein.
(8) Lessor is Vicksburg Investors, a related party. See Note 9 to the
Consolidated Financial Statements contained elsewhere herein.
(9) The Company has commenced construction of a new manufacturing and
distribution facility in Ceres to replace the existing facilities in
Vicksburg. The new facility is expected to be completed and occupied
in 1998.
(10) Lessee is Simpson Strong-Tie Canada, Ltd., a wholly-owned subsidiary
of SST.
(11) Lessee is Simpson Strong-Tie France, Ltd., a wholly-owned subsidiary
of SST.
The Company's manufacturing facilities are equipped with specialized
equipment and use extensive automation. The Company considers its existing
and planned facilities to be suitable and adequate for its operations as
currently conducted and as planned through 1998. The manufacturing
facilities currently are being operated with one full shift and at most
plants with at least a partial second shift. The Company anticipates that
it may require additional facilities in 1999 or thereafter to accommodate
its growth.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, the Company is involved in litigation that it considers
to be in the normal course of its business. No such litigation within the
last five years resulted in any material loss. The Company is not engaged
in any legal proceedings as of the date hereof, which the Company expects
individually or in the aggregate to have a material adverse effect on the
Company's financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were 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 has been listed on the New York Stock Exchange
("NYSE") under the symbol "SSD" since October 13, 1997. Prior to that time,
the Common Stock was traded on the Nasdaq National Market tier of The
Nasdaq Stock Market under the trading symbol "SMCO." The following table
shows the range of high and low closing sale prices per share of the Common
Stock as reported by The Nasdaq Stock Market or the NYSE, as applicable,
for the calendar quarters indicated:
Market Price
Quarter High Low
-------- --------
1997
Fourth............................. $ 40 1/4 $ 32 1/4
Third.............................. 41 7/8 26 3/16
Second............................. 27 1/2 21 3/4
First.............................. 29 1/2 22
1996
Fourth............................. $ 24 $ 20
Third.............................. 21 18 1/2
Second............................. 20 3/4 15 3/4
First.............................. 15 3/4 13
The Company estimates that as of February 28, 1998, approximately 2,400
persons owned shares of the Company's Common Stock either directly or
through nominees.
The Company currently intends to retain its future earnings, if any, to
finance operations and fund internal growth and does not anticipate paying
cash dividends on the Company's Common Stock for the foreseeable future.
Future dividends, if any, will be determined by the Company's Board of
Directors, based on the Company's earnings, cash flow, financial condition
and other factors deemed relevant by the Board of Directors. In addition,
existing loan agreements require the Company to maintain Tangible Net Worth
of $63.0 million plus 50% of net profit after taxes for each fiscal year
ending after December 31, 1997. This requirement may limit the amount that
the Company may pay out as dividends on the common stock. As of December
31, 1997, the Company had a Tangible Net Worth of $126.2 million.
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected consolidated financial information
with respect to the Company for each of the five years ended December 31,
1997, 1996, 1995, 1994 and 1993, derived from the audited Consolidated
Financial Statements of the Company, the most recent three years of which
appear elsewhere herein. The data presented below should be read in
conjunction with the Consolidated Financial Statements and related Notes
thereto and "Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere herein.
Year Ended December 31,
(Dollars in thousands, except --------------------------------------------------------
per share data) 1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
STATEMENT OF OPERATIONS DATA:
Net sales $246,074 $202,409 $167,958 $151,290 $113,923
Cost of sales 149,279 124,394 109,368 96,984 72,387
-------- -------- -------- -------- --------
Gross profit 96,795 78,015 58,590 54,306 41,536
Selling expense 23,113 20,104 17,110 14,714 12,137
General and administrative expense 30,053 25,036 18,512 18,608 14,156
Compensation related to stock plans 305 180 61 6,909 693
-------- -------- -------- -------- --------
Income from operations 43,324 32,695 22,907 14,075 14,550
Interest income (expense), net 429 595 142 (559) (997)
-------- -------- -------- -------- --------
Income before income taxes
and minority interest 43,753 33,290 23,049 13,516 13,553
Provision for income taxes 17,767 13,569 8,927 8,098 5,517
Minority interest - - - (33) 66
-------- -------- -------- -------- --------
Net income $ 25,986 $ 19,721 $ 14,122 $ 5,451 $ 7,970
======== ======== ======== ======== ========
Diluted net income per share
of common stock $ 2.17 $ 1.68 $ 1.23 $ 0.51 $ 0.89
======== ======== ======== ======== ========
Dividends per share of common stock $ - $ - $ - $ - $ .055
======== ======== ======== ======== ========
As of December 31,
--------------------------------------------------------
(Dollars in thousands) 1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
BALANCE SHEET DATA:
Working capital $ 83,297 $ 70,676 $ 51,984 $ 44,127 $ 24,526
Property, plant and equipment, net 42,925 28,688 26,420 20,843 13,551
Total assets 150,765 122,521 96,642 80,311 58,325
Total debt 30 - 20 - 14,998
Total liabilities 21,814 20,224 15,089 13,789 25,487
Total shareholders' equity 128,951 102,297 81,553 66,522 32,535
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
1997 1996
-------------------------------------------- --------------------------------------------
(Dollars in thousands, Fourth Third Second First Fourth Third Second First
except per share data) Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
-------- -------- -------- -------- -------- -------- -------- --------
Net sales $ 59,767 $ 68,825 $ 65,555 $ 51,927 $ 50,063 $ 57,129 $ 51,760 $ 43,457
Cost of sales 37,079 40,364 39,228 32,609 30,088 34,441 31,509 28,356
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit 22,688 28,461 26,327 19,318 19,975 22,688 20,251 15,101
Selling expense 5,645 5,893 6,367 5,208 5,202 4,929 5,463 4,510
General and
administrative expense 7,084 8,665 8,078 6,226 6,648 7,034 6,225 5,128
Compensation related to
stock plans 15 290 - - 180 - - -
-------- -------- -------- -------- -------- -------- -------- --------
Income from operations 9,944 13,613 11,882 7,884 7,945 10,725 8,563 5,463
Interest income (expense), net 181 106 (18) 160 269 175 97 54
-------- -------- -------- -------- -------- -------- -------- --------
Income before income taxes 10,125 13,719 11,864 8,044 8,214 10,900 8,660 5,517
Provision for income taxes 4,106 5,531 4,843 3,287 3,316 4,507 3,492 2,254
-------- -------- -------- -------- -------- -------- -------- --------
Net income $ 6,019 $ 8,188 $ 7,021 $ 4,757 $ 4,898 $ 6,393 $ 5,168 $ 3,263
======== ======== ======== ======== ======== ======== ======== ========
Diluted net income per share
of common stock $ 0.50 $ 0.68 $ 0.59 $ 0.40 $ 0.41 $ 0.54 $ 0.44 $ 0.28
======== ======== ======== ======== ======== ======== ======== ========
The Company's results of operations fluctuate from quarter to quarter. The
fluctuations are caused by various factors, primarily the increase in
construction activity during warmer months of the year. Historically,
demand for the Company's products has tended to be somewhat higher in the
second and third quarters and somewhat lower in the first and fourth
quarters.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain matters discussed below are forward-looking statements that involve
risks and uncertainties, certain of which are discussed in this and in
other reports filed by the Company with the Securities and Exchange
Commission. Actual results might differ materially from results suggested
by any forward-looking statements in this report.
The following is a discussion and analysis of the consolidated financial
condition and results of operations for the Company for the years ended
December 31, 1997, 1996 and 1995, and of certain factors that may affect
the Company's prospective financial condition and results of operations.
The following should be read in conjunction with the Consolidated Financial
Statements and related Notes appearing elsewhere herein.
Overview
From 1995 through 1997, annual net sales of the Company increased 46.5%
from $168.0 million in 1995 to $246.1 million in 1997. The increase in net
sales resulted primarily from increased geographic distribution and a
broadening of the Company's customer base and product lines, both
internally and through acquisitions. Net sales increased from 1995 to 1997
in all regions of the United States, with above average rates of growth in
the Midwestern and Northeastern markets. Expansion into overseas markets
also contributed to the net sales growth over the last three years. During
the year ended December 31, 1997, gross profit margin increased to 39.3%,
from 34.9% in 1995. The increase over the past two years was due primarily
to lower material costs as a percentage of net sales, LIFO gains recorded
in 1996 and 1997 as compared to a LIFO loss in 1995 and lower overhead
costs as a percentage of net sales. Income from operations as a percentage
of net sales, increased to 17.6% in 1997 from 13.6% in 1995, despite a 0.5%
increase in selling, general and administrative costs as a percentage of
net sales.
Results of Operations
The following table sets forth, for the years indicated, the percentage of
net sales of certain items in the Company's consolidated statements of
operations.
Years Ended December 31,
--------------------------------
1997 1996 1995
-------- -------- --------
Net sales 100.0% 100.0% 100.0%
Cost of sales 60.7% 61.5% 65.1%
-------- -------- --------
Gross profit 39.3% 38.5% 34.9%
Selling expense 9.4% 9.9% 10.2%
General and administrative expense 12.2% 12.4% 11.0%
Compensation related to stock plans 0.1% 0.1% *
-------- -------- --------
Income from operations 17.6% 16.1% 13.6%
Interest income, net 0.2% 0.3% 0.1%
-------- -------- --------
Income before income taxes 17.8% 16.4% 13.7%
Provision for income taxes 7.2% 6.7% 5.3%
-------- -------- --------
Net income 10.6% 9.7% 8.4%
======== ======== ========
- -----------
* Less than 0.05%
Comparison of the Years Ended December 31, 1997 and 1996
Net Sales
Net sales increased 21.6% to $246.1 million in 1997 from $202.4 million in
1996. Net sales of Simpson Strong-Tie's products increased 25.3% to $190.6
million in 1997, while net sales of Simpson Dura-Vent's products increased
by 10.3% to $55.5 million in 1997. SDV accounted for approximately 22.6% of
the Company's total net sales, a decrease from 24.9% in 1996. The increases
in net sales at both SST and SDV were primarily due to volume increases,
with relatively small increases in average prices. The increase in net
sales reflected sales growth throughout the United States, particularly in
California and the Northeastern region of the country. International sales
increased at a substantial rate, with a significant portion of this
increase resulting from the businesses acquired earlier in the year.
Contractor distributors and homecenters were the fastest growing connector
sales channels. The growth rate of Simpson Strong-Tie's epoxy, seismic and
engineered wood product sales remained strong, and SST's acquisition of the
Isometric Group's line of mechanical anchor products also contributed
significantly to the increase in net sales. Simpson Dura-Vent's sales of
chimney products and Direct-Vent products experienced above-average growth.
Gross Profit
Gross profit increased 24.1% to $96.8 million in 1997 from $78.0 million in
1996. As a percentage of net sales, gross profit increased to 39.3% in 1997
from 38.5% in 1996. The increase was primarily due to a reduction as a
percentage of net sales in the non-material components of cost of sales,
including depreciation on factory equipment, research and development
costs, labor, factory overhead costs and shipping and freight. These costs
decreased as a percentage of net sales primarily due to the improved
absorption of fixed components of these costs because of the increased
sales volume. Material costs as a percentage of net sales also decreased
slightly relative to 1996. These improvements were offset somewhat by a
smaller LIFO gain recorded in 1997 as compared to 1996.
Selling Expense
Selling expense increased 15.0% to $23.1 million in 1997 from $20.1 million
in 1996, but decreased as a percentage of net sales. The increase was
primarily due to higher personnel costs, including agent commissions,
related to the increase in the size of the sales force, which was expanded
in 1997 to include manufacturers' representatives who distribute the
Company's mechanical anchor product line. This increase was offset slightly
by reduced spending on advertising and promotional materials.
General and Administrative Expense
General and administrative expenses increased 20.0% to $30.1 million in
1997 from $25.0 million in 1996, and increased as a percentage of net
sales. The increase was primarily due to increased cash profit sharing, as
a result of higher operating profit, as well as higher personnel costs,
including those associated with the two acquisitions earlier in the year.
Partially offsetting the increase was a decrease in expenses because of the
1996 write-off of intangible assets related to Simpson Strong-Tie's
operations in the UK.
Acquired European Operations
The Company recorded an after-tax net loss in its combined European
operations of $2.4 million in 1997, including $1.0 million in intercompany
interest charges, compared to after-tax net losses of $2.8 million in 1996.
These losses are primarily associated with the Company's UK operations.
Depreciation on purchased capital equipment and administrative and other
overhead costs incurred related to the growing operations contributed
significantly to the losses. The Company expects the losses in the UK to
continue through at least 1998.
Comparison of the Years Ended December 31, 1996 and 1995
Net Sales
Net sales in 1996 increased 20.5% to $202.4 million from $168.0 million in
1995. Net sales of Simpson Strong-Tie products increased 19.8% to $152.1
million in 1996, while net sales of Simpson Dura-Vent products increased by
22.8% to $50.3 million in 1996. SDV accounted for 24.9% of the Company's
total net sales, up from 24.4% in 1995. The increases in net sales at both
SST and SDV were primarily due to volume increases, with relatively small
increases in average prices. The increase in net sales occurred throughout
the United States, but was particularly strong in the Northeastern region
of the country, primarily as a result of increased home center and dealer
distributor business. Sales in California, however, grew at a rate
substantially below the overall growth rate. The Company also had above-
average growth in export sales, a small but steadily growing part of both
the connector and venting businesses. The sales growth rate of DIY, epoxy
and seismic products led SST sales, and sales of Direct-Vent products, now
sold both to OEMs and through distributors, continued to experience strong
growth.
Gross Profit
Gross profit in 1996 increased 33.2% to $78.0 million from $58.6 million in
1995. Gross profit as a percentage of net sales increased to 38.5% in 1996
from 34.9% in 1995. The increase was primarily due to three factors. The
first factor was a substantial benefit attributable to the LIFO gain for
the year as compared to a LIFO loss in the prior year. Second, the non-
material component of cost of sales, which includes research and
development costs, direct and indirect labor, factory costs and shipping
and freight, decreased slightly as a percentage of net sales primarily due
to the increased absorption of the fixed components of these costs
resulting from increased sales volume. Finally, raw material costs
decreased somewhat relative to 1995. Labor costs as a percentage of net
sales remained relatively flat during 1996.
Selling Expense
In 1996, selling expense increased 17.5% to $20.1 million from $17.1
million in 1995. The increase was primarily due to higher advertising and
sales promotion expenses, a large percentage of which was targeted toward
the retail business. The Company also hired several new Retail Specialists
to support the increased home center and DIY business and added several
sales people. In addition, the increased sales at Simpson Dura-Vent
resulted in proportionately higher commissions and other related costs.
General and Administrative Expense
General and administrative expense increased 35.2% to $25.0 million in 1996
from $18.5 million in 1995. The increase was primarily due to higher cash
profit sharing, as a result of higher operating profit, and the write-off
of intangible assets related to the Company's UK operations (see "Acquired
Operations" below). Also contributing to the increase in general and
administrative expense were increased personnel and overhead costs
resulting from the addition of administrative staff, including those at the
businesses acquired in the second half of 1995.
Interest Income (Expense), net
The Company had interest income of $595,180 in 1996 as compared to $141,535
in 1995. The increase resulted from the higher cash and short-term
investment balances during the year.
Provision for Income Taxes
The Company's effective tax rate increased to 40.8% in 1996 from 38.7% in
1995. The lower 1995 tax rate was principally a result of the full
recognition of California investment tax credits on equipment purchased for
manufacturing and research and development.
Acquired Operations
The Company's United Kingdom operations continued to report losses. While
sales there have increased substantially since 1995, largely because of
acquisitions, current gross margins are substantially lower than those of
the rest of the Company's operations.
In December 1996, the Company completed the purchase of the assets,
including $675,000 in equipment, of the Builders Products Division of MiTek
Industries Ltd. for approximately $1.0 million. As a result of this
acquisition, the Company concluded that additional manufacturing space was
needed and that the consolidation of its UK facilities into a single
location was advisable. In connection with this consolidation, the Company
wrote off approximately $1.1 million of intangible assets associated with
the separate UK operations. The Company recorded after-tax net losses in
its European operations, including intercompany interest charges and the
$1.1 million charge discussed above, of approximately $2.8 million in 1996
compared to after-tax net losses of $1.5 million in 1995. The losses were
primarily due to depreciation on purchased capital equipment and
administrative and other overhead costs incurred as a result of the growing
operations. The Company expects these losses to continue through at least
1998.
Liquidity and Sources of Capital
The Company's liquidity needs arise principally from working capital
requirements, capital expenditures and asset acquisitions. During the three
years ended December 31, 1997, the Company relied primarily on internally
generated funds and its credit facilities to finance these needs. The
Company's working capital requirements are seasonal with the highest
working capital needs typically occurring in the second and third quarters
of the year. Cash and cash equivalents were $19.4 million and $19.8 million
at December 31, 1997 and 1996, respectively. Working capital was $83.3
million and $70.7 million at December 31, 1997 and 1996, respectively. As
of December 31, 1997, the Company had no significant debt and had available
to it unused credit facilities of approximately $22.9 million.
The Company had cash flows from operating activities of $21.1 million,
$24.6 million and $13.4 million for 1997, 1996 and 1995, respectively. In
1997, cash was provided by net income of $26.0 million, noncash expenses
(such as depreciation and amortization) of $6.7 million and increases in
accrued profit sharing and other accrued liabilities totaling $1.6 million.
The Company's primary operating cash flow requirements resulted from
increased levels of inventory and accounts receivable that are required as
the Company's sales increase. In 1997, 1996 and 1995, the Company used cash
of $9.1 million, $7.7 million and $5.6 million, respectively, to fund
accounts receivable and inventory requirements. In addition, trade accounts
payable balances decreased and the deferred tax asset balance increased in
1997, accounting for an aggregate use of an additional $3.4 million in
cash. The balance of the cash used in 1997 resulted from changes in the
other current asset and liability accounts.
Cash used in investing activities was $21.8 million, $12.3 million and
$13.1 million for 1997, 1996 and 1995, respectively. Capital expenditures,
related primarily to expanding capacity, increased in 1997 to $16.5 million
from $7.4 million in 1996. Included in the 1997 investing activities are
the Company's two acquisitions for a total of $9.3 million. The first was
an equity purchase for $7.6 million plus an earnout based on future sales
increases of three Canadian companies and a related U.S. company, the
Isometric Group, that manufactures and distributes a line of mechanical
anchors and related products. The second was the purchase of the remaining
66% equity in Patrick Bellion, S.A., a French manufacturer of connector
products, for $1.7 million. In addition, $7.3 million in cash was used for
real estate and related purchases in 1997. Partially offsetting these
purchases was the sale of a short-term investment providing nearly $4.0
million in cash.
Financing activities provided net cash of $0.3 million, $0.5 million and
$0.9 million in 1997, 1996 and 1995, respectively. The cash was provided
primarily through the exercise of stock options by current and former
employees of the Company.
The Company believes that cash generated by operations, borrowings
available under its existing credit agreements, the majority of which have
been renewed through June 1998, and other available financing will be
sufficient for the Company's working capital needs and planned capital
expenditures through at least 1998.
Inflation
The Company believes that the effect of inflation on the Company has not
been material in recent years, as inflation rates have remained low.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
SIMPSON MANUFACTURING CO., INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Statements
Report of Independent Accountants.................................. 24
Consolidated Balance Sheets at December 31, 1997 and 1996.......... 25
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995................................. 26
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1997, 1996 and 1995........................... 27
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995................................. 28
Notes to the Consolidated Financial Statements..................... 29
Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts.................... 40
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Simpson Manufacturing Co.,
Inc.:
We have audited the financial statements and the financial statement
schedule of Simpson Manufacturing Co., Inc. and subsidiaries listed in the
index on page 23 of this Form 10-K. These financial statements and the
financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and the financial statement 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 misstatements. 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 Simpson
Manufacturing Co., Inc. and subsidiaries as of December 31, 1997 and 1996,
and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles. In addition, in
our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
San Francisco, California
January 29, 1998
SIMPSON MANUFACTURING CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
----------------------------
1997 1996
------------ ------------
ASSETS
Current assets
Cash and cash equivalents $ 19,418,689 $ 19,815,297
Short-term investments - 3,896,428
Trade accounts receivable, net 24,625,568 20,930,490
Inventories 54,982,945 42,247,777
Deferred income taxes 3,536,750 2,919,455
Other current assets 1,723,586 956,565
------------ ------------
Total current assets 104,287,538 90,766,012
Property, plant and equipment, net 42,925,088 28,687,635
Investments 559,200 1,382,578
Other noncurrent assets 2,993,114 1,684,548
------------ ------------
Total assets $150,764,940 $122,520,773
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Notes payable $ 29,605 $ -
Trade accounts payable 8,813,196 10,063,828
Accrued liabilities 5,506,903 4,137,648
Accrued profit sharing trust contributions 2,886,875 2,446,001
Accrued cash profit sharing and commissions 3,094,834 2,292,057
Accrued workers' compensation 659,272 809,272
Income taxes payable - 341,626
------------ ------------
Total current liabilities 20,990,685 20,090,432
Long-term liabilities 823,732 133,333
------------ ------------
Total liabilities 21,814,417 20,223,765
------------ ------------
Commitments and contingencies (Note 9)
Shareholders' equity
Preferred Stock, without par value;
authorized shares, 5,000,000; issued
and outstanding shares, none - -
Common Stock, without par value;
authorized shares, 20,000,000;
issued and outstanding shares,
11,451,018, and 11,517,113 at
December 31, 1996 and 1997 32,377,563 31,233,648
Retained earnings 96,848,685 70,862,906
Cumulative translation adjustment (275,725) 200,454
------------ ------------
Total shareholders' equity 128,950,523 102,297,008
------------ ------------
Total liabilities and
shareholders' equity $150,764,940 $122,520,773
============ ============
The accompanying notes are an integral part of
these consolidated financial statements.
SIMPSON MANUFACTURING CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
Net sales $246,074,446 $202,408,917 $167,957,955
Cost of sales 149,279,718 124,394,086 109,368,027
------------ ------------ ------------
Gross profit 96,794,728 78,014,831 58,589,928
Operating expenses
Selling 23,113,344 20,104,344 17,109,325
General and administrative 30,052,669 25,035,874 18,512,003
Compensation related to
stock plans (Note 13) 305,038 180,155 61,250
------------ ------------ ------------
53,471,051 45,320,373 35,682,578
Income from operations 43,323,677 32,694,458 22,907,350
Interest income, net 429,102 595,180 141,535
------------ ------------ ------------
Income before income taxes 43,752,779 33,289,638 23,048,885
Provision for income taxes 17,767,000 13,569,000 8,927,000
------------ ------------ ------------
Net income $ 25,985,779 $ 19,720,638 $ 14,121,885
============ ============ ============
Net income per common share
Basic $ 2.26 $ 1.73 $ 1.25
Diluted $ 2.17 $ 1.68 $ 1.23
Number of shares outstanding
Basic 11,474,592 11,424,945 11,316,673
Diluted 11,965,950 11,755,184 11,460,567
The accompanying notes are an integral part of
these consolidated financial statements.
SIMPSON MANUFACTURING CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
Common Stock Cumulative
---------------------------- Retained Translation
Shares Amount Earnings Adjustment Total
------------ ------------ ------------ ------------ ------------
Balance, January 1, 1995 11,275,196 $ 29,580,365 $ 37,020,383 $ (78,715) $ 66,522,033
Options exercised 82,231 749,156 - - 749,156
Tax benefit of options exercised - 78,395 - - 78,395
Common stock issued at
$9.75 per share 800 7,800 - - 7,800
Translation adjustment - - - 73,421 73,421
Net income - - 14,121,885 - 14,121,885
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1995 11,358,227 30,415,716 51,142,268 (5,294) 81,552,690
Options exercised 90,191 526,415 - - 526,415
Tax benefit of options exercised - 256,417 - - 256,417
Common stock issued at
$13.50 per share 2,600 35,100 - - 35,100
Translation adjustment - - - 205,748 205,748
Net income - - 19,720,638 - 19,720,638
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1996 11,451,018 31,233,648 70,862,906 200,454 102,297,008
Options exercised 61,595 451,282 - - 451,282
Tax benefit of options exercised - 589,133 - - 589,133
Common stock issued at
$23.00 per share 4,500 103,500 - - 103,500
Translation adjustment - - - (476,179) (476,179)
Net income - - 25,985,779 - 25,985,779
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1997 11,517,113 $ 32,377,563 $ 96,848,685 $ (275,725) $128,950,523
============ ============ ============ ============ ============
The accompanying notes are an integral part of
these consolidated financial statements.
SIMPSON MANUFACTURING CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
Cash flows from operating activities
Net income $ 25,985,779 $ 19,720,638 $ 14,121,885
------------ ------------ ------------
Adjustments to reconcile net income
to net cash provided by operating
activities:
Loss (gain) on sale of capital equipment (11,194) (16,262) 11,558
Depreciation and amortization 6,712,157 7,197,718 5,291,466
Deferred income taxes and other
long-term liabilities (946,542) (212,450) 65,000
Equity in income of affiliates (142,500) (107,000) (24,554)
Noncash compensation related to
stock plans 103,500 35,100 61,250
Changes in operating assets and
liabilities, net of effects of
acquisitions:
Trade accounts receivable, net (2,277,797) (190,608) (2,916,665)
Inventories (6,867,089) (7,500,960) (2,655,355)
Other current assets (700,537) 278,047 (951,314)
Other noncurrent assets (14,450) (800,840) (256,380)
Trade accounts payable (2,429,650) 2,688,814 665,976
Accrued liabilities 379,910 751,120 307,968
Accrued profit sharing trust
contributions 440,874 446,262 279,135
Accrued cash profit sharing and
commission 802,777 1,002,913 (45,982)
Accrued workers' compensation (150,000) (32,853) (55,000)
Income taxes payable 247,507 1,349,876 (500,661)
------------ ------------ ------------
Total adjustments (4,853,034) 4,888,877 (723,558)
------------ ------------ ------------
Net cash provided by
operating activities 21,132,745 24,609,515 13,398,327
------------ ------------ ------------
Cash flows from investing activities
Capital expenditures (16,548,350) (7,364,326) (10,049,629)
Proceeds from sale of equipment 65,327 57,787 22,225
Asset acquisitions, net of cash acquired
and equity interest already owned (9,336,142) (1,041,780) (2,414,114)
Purchase of short-term investment - (3,896,428) -
Proceeds from sale of short-term investments 3,995,333 - -
Equity investments - (11,637) (667,002)
------------ ------------ ------------
Net cash used in investing
activities (21,823,832) (12,256,384) (13,108,520)
------------ ------------ ------------
Cash flows from financing activities
Issuance of debt - - 20,037
Repayment of debt (260,304) (20,037) -
Issuance of Company's common stock 554,783 526,415 835,351
------------ ------------ ------------
Net cash provided by
financing activities 294,479 506,378 855,388
------------ ------------ ------------
Net increase (decrease) in cash
and cash equivalents (396,608) 12,859,509 1,145,195
Cash and cash equivalents at
beginning of period 19,815,297 6,955,788 5,810,593
------------ ------------ ------------
Cash and cash equivalents at end of period $ 19,418,689 $ 19,815,297 $ 6,955,788
============ ============ ============
Supplemental Disclosure of Cash Flow Information
Cash paid during the year for
Interest $ 80,071 $ 31,311 $ 35,045
============ ============ ============
Income taxes $ 19,564,663 $ 13,036,713 $ 8,961,714
============ ============ ============
The accompanying notes are an integral part of
these consolidated financial statements.
SIMPSON MANUFACTURING CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Operations and Summary of Significant Accounting Policies
Nature of Operations
Simpson Manufacturing Co., Inc., through its subsidiaries Simpson Strong-
Tie Company Inc. and Simpson Dura-Vent Company, Inc. and its other
subsidiaries (collectively, the "Company"), designs, engineers and
manufactures wood-to-wood, wood-to-concrete and wood-to-masonry connectors
and venting systems for gas and wood burning appliances and markets its
products to the residential construction, light industrial and commercial
construction, remodeling and do-it-yourself markets.
The Company operates exclusively in the building products industry segment.
The Company's products are sold primarily throughout the United States of
America. Revenues have some geographic market concentration on the west
coast. A portion of the Company's business is therefore dependent upon
economic activity within this region and market.
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 reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of Simpson
Manufacturing Co., Inc. and its subsidiaries. Investments in less than 50%
owned affiliates are accounted for using the equity method. All significant
intercompany transactions have been eliminated.
Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Short-term Investments
The Company considers investments with an original maturity of more than
three months but less than one year to be short-term investments, which are
categorized as "held-to-maturity" and carried at amortized cost, which
approximates market value.
Inventory Valuation
Inventories are valued at the lower of cost or market, with cost determined
under the last-in, first-out (LIFO) method, except in Europe and Canada,
where inventories of approximately $4,782,000 and $1,483,000 at December
31, 1997 and 1996, respectively, are valued using the first-in, first-out
(FIFO) method.
Property, Plant and Equipment
Property, plant and equipment is carried at cost. Major renewals and
betterments are capitalized; maintenance and repairs are expensed on a
current basis. When assets are sold or retired, their costs and accumulated
depreciation are removed from the accounts; the resulting gains or losses
are reflected in the consolidated statements of operations.
Depreciation and Amortization
Depreciation of property, plant and equipment is provided for using
accelerated methods over the following estimated useful lives:
Factory machinery and equipment 5 to 10 years
Automobiles, trucks and other equipment 3 to 10 years
Office equipment 3 to 8 years
Buildings and site improvements 20 to 45 years
Leasehold improvements are amortized using the straight-line method over
the remaining term of the lease.
Product Research and Development Costs
Product research and development costs, which are included in cost of
sales, were charged against income as incurred and approximated $1,280,000,
$1,312,000 and $1,180,000 in 1997, 1996 and 1995, respectively.
Tooling Costs
Tool and die costs are included in product costs in the year incurred.
Income Taxes
Income taxes are calculated using an asset and liability approach. The
provision for income taxes includes federal and state taxes currently
payable and deferred taxes, due to temporary differences between the
financial statement and tax bases of assets and liabilities. In addition,
the future tax benefits are recognized to the extent that realization of
such benefits is more likely than not.
Foreign Currency Translation
The local currency is the functional currency of the Company's operating
branches in Europe and Canada. Assets and liabilities denominated in
foreign currencies are translated using the exchange rate on the balance
sheet date. Revenues and expenses are translated using average exchange
rates prevailing during the year. The translation adjustment resulting from
this process is shown separately as a component of shareholders' equity.
Foreign currency transaction gains or losses are included in the
determination of net income.
Common Stock
Subject to the rights of holders of any Preferred Stock that may be issued
in the future, holders of Common Stock are entitled to receive such
dividends, if any, as may be declared from time to time by the Board of
Directors (the "Board") out of funds legally available therefor and in the
event of liquidation, dissolution or winding-up of the Company, to share
ratably in all assets available for distribution. The holders of Common
Stock have no preemptive or conversion rights. Subject to the rights of any
Preferred Stock that may be issued in the future, the holders of Common
Stock are entitled to one vote per share on any matter submitted to a vote
of the shareholders, except that, on giving notice as required by law and
subject to compliance with other statutory conditions, shareholders may
cumulate their votes in an election of directors, and each shareholder may
give one candidate a number of votes equal to the number of directors to be
elected multiplied by the number of shares held by such shareholder or may
distribute such shareholder's votes on the same principle among as many
candidates as such shareholder thinks fit. There are no redemption or
sinking fund provisions applicable to the Common Stock.
Preferred Stock
The Board has the authority to issue the authorized and unissued Preferred
Stock in one or more series with such designations, rights and preferences
as may be determined from time to time by the Board. Accordingly, the Board
is empowered, without shareholder approval, to issue Preferred Stock with
dividend, liquidation, conversion, voting or other rights that could
adversely affect the voting power or other rights of the holders of the
Company's Common Stock.
Net Income per Common Share
Basic net income per common share is computed based upon the weighted
average number of common shares outstanding. Common equivalent shares,
using the treasury stock method, are included in the diluted per-share
calculations for all periods when the effect of their inclusion is
dilutive.
The following is a reconciliation of basic earnings per share ("EPS") to
diluted EPS:
1997 1996 1995
----------------------------------- ----------------------------------- -----------------------------------
Per Per Per
Income Shares Share Income Shares Share Income Shares Share
------------ ------------ ------- ------------ ------------ ------- ------------ ------------ -------
Basic EPS
Income available
to common
shareholders $ 25,985,779 11,474,592 $ 2.26 $ 19,720,638 11,424,945 $ 1.73 $ 14,121,885 11,316,673 $ 1.25
======= ======= =======
Effect of Dilutive
Securities
Stock options - 491,358 (0.09) - 330,239 (0.05) - 143,894 (0.02)
------------ ------------ ------- ------------ ------------ ------- ------------ ------------ -------
Diluted EPS
Income available
to common
shareholders $ 25,985,779 11,965,950 $ 2.17 $ 19,720,638 11,755,184 $ 1.68 $ 14,121,885 11,460,567 $ 1.23
============ ============ ======= ============ ============ ======= ============ ============ =======
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist of cash in banks, short-term
investments in U.S. Treasury instruments and trade accounts receivable. The
Company maintains its cash in demand deposit and money market accounts held
primarily by two banks.
Adoption of Statements of Financial Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income", and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components. SFAS No. 131 specifies
revised guidelines for determining an entity's operating segments and the
type and level of financial information to be disclosed. SFAS Nos. 130 and
131 are effective for financial statements issued for periods beginning
after December 15, 1997, and accordingly, management has not determined the
effect, if any, on the Company's financial statements for its fiscal year
ended December 31, 1997.
Reclassifications
Certain prior year amounts have been reclassified to conform to the 1997
presentation with no effect on net income as previously reported.
2. Acquisitions
In March 1997, the Company and its subsidiaries completed two acquisitions.
The first was a purchase of three Canadian companies and a related U.S.
company, the Isometric Group, which manufacture and distribute a line of
mechanical anchors and related products. The acquisition price was
approximately $7.6 million plus an earnout based on future sales increases.
The second was the purchase, for approximately $1.7 million, of the
remaining 66% equity in Patrick Bellion, S.A., a French manufacturer of
connector products (see Note 6).
In December 1996, Simpson Strong-Tie International, Inc. ("SSTI"), a
subsidiary of the Company, purchased the assets, including $675,000 in
equipment, of the Builders Products Division of MiTek Industries Ltd.
("MiTek") for approximately $1,040,000. The remaining $365,000 of the
purchase price represents the excess of the purchase price over the fair
value of the assets acquired. In conjunction with the purchase of the
assets, SSTI also agreed to supply MiTek and its customers with connector
products. As a result of this acquisition, the Company determined that
additional manufacturing space was needed and began the consolidation of
its UK facilities into a single location. In connection with this
consolidation, the intangible assets associated with the MiTek acquisition,
the Truline Group Ltd. ("Truline") acquisition in 1995, and the Stokes of
Cannock Ltd. acquisition in 1994, were written off during 1996.
In September 1995, the Company acquired the remaining 75% of the equity of
a U.S. company, Ackerman Johnson Fastening Systems, Inc., for $800,000 in
cash and $200,000 for an agreement not to compete for three years (see Note
6). In addition, in October 1995, the Company purchased for approximately
$1,450,000 in cash the assets of Truline, a manufacturer and distributor of
wall starter systems located in Chelmsford, England. Approximately
$1,100,000, $725,000 of which was written off during 1996, of the costs of
these two acquisitions represents the excess of the purchase price over the
fair value of the assets acquired and is being amortized over ten years
using the straight-line method. These acquisitions have been accounted for
under the purchase method of accounting. The pro forma effect on the
Company's consolidated revenue, net income and net income per share, as if
these acquisitions occurred at the beginning of the period, is immaterial
in all years presented.
3. Trade Accounts Receivable
Trade accounts receivable consist of the following:
December 31,
----------------------------
1997 1996
------------ ------------
Trade accounts receivable $ 26,398,046 $ 22,242,827
Allowance for doubtful accounts (1,539,691) (1,108,950)
Allowance for sales discounts (232,787) (203,387)
------------ ------------
$ 24,625,568 $ 20,930,490
============ ============
The Company sells product on credit and generally does not require
collateral.
4. Inventories
The components of inventories consist of the following:
December 31,
----------------------------
1997 1996
------------ ------------
Raw materials $ 17,882,930 $ 5,107,660
In-process products 5,384,709 3,763,634
Finished products 31,715,306 23,376,483
------------ ------------
$ 54,982,945 $ 42,247,777
============ ============
At December 31, 1997 and 1996, the replacement value of LIFO inventories
exceeded LIFO cost by approximately $852,000 and $1,186,000, respectively.
5. Property, Plant and Equipment, net
Property, plant and equipment consists of the following:
December 31,
----------------------------
1997 1996
------------ ------------
Land $ 3,366,519 $ 2,065,682
Buildings and site improvements 17,165,509 10,379,901
Leasehold improvements 3,474,278 2,869,612
Machinery and equipment 55,400,034 46,311,624
------------ ------------
79,406,340 61,626,819
Less accumulated depreciation and amortization (41,986,005) (35,916,354)
------------ ------------
37,420,335 25,710,465
Capital projects in progress 5,504,753 2,977,170
------------ ------------
$ 42,925,088 $ 28,687,635
============ ============
Included in property, plant and equipment at December 31, 1997 and 1996,
are fully depreciated assets with an original cost of approximately
$20,104,000 and $17,181,665, respectively. These fully depreciated assets
are still in use in the Company's operations.
6. Investments
In 1995, Simpson Strong-Tie Company Inc. acquired a 34% interest in Patrick
Bellion S.A., a French manufacturer and distributor of connector products,
for approximately $850,000 in cash. The Company exercised its option to
purchase the remaining 66% in March 1997 and no longer accounts for this
investment under the equity method (see Note 2). The Company's 49%
investment in Bulldog-Simpson GmbH is accounted for using the equity
method. The Company's equity in the earnings or losses of its equity
investments was not material in any of the three years in the period ended
December 31, 1997.
In 1995, Simpson Strong-Tie Company Inc. acquired the remaining 75%
interest in Ackerman-Johnson Fastening Systems Inc. (see Note 2) and no
longer accounts for this investment under the equity method.
7. Accrued Liabilities
Accrued liabilities consist of the following:
December 31,
----------------------------
1997 1996
------------ ------------
Sales incentive and advertising allowances $ 2,686,390 $ 1,470,656
Vacation liability 1,091,718 1,062,569
Other 1,728,795 1,604,423
------------ ------------
$ 5,506,903 $ 4,137,648
============ ============
8. Debt
The outstanding debt at December 31, 1997 and 1996, and the available
credit at December 31, 1997, consisted of the following:
Available
on Credit Debt Outstanding
Facility at at December 31,
December 31, ----------------------------
1997 1997 1996
------------ ------------ ------------
Revolving line of credit, interest at
bank's reference rate (at December 31,
1997, the bank's reference rate was 8.50%),
matures June 1998, commitment fees are
paid at the annual rate of 0.125% on the
unused portion of the facility $ 13,537,127 $ - $ -
Revolving line of credit, interest at
bank's prime rate (at December 31, 1997,
the bank's prime rate was 8.50%), matures
June 1998, commitment fees are paid at
the annual rate of 0.125% on the unused
portion of the facility 4,937,129 - -
Revolving term commitment, interest at
bank's prime rate (at December 31, 1997,
the bank's prime rate was 8.50%), matures
June 1998, commitment fees are paid at
the annual rate of 0.125% on the unused
portion of the facility 4,000,000 - -
Revolving line of credit, interest rate at
the bank's base rate of interest plus 2%
(at December 31, 1997, this rate was 9.25%),
matures June 1998, has an annual commission
charge of 0.45% 411,000 - -
Standby letter of credit facilities 525,744 - -
Other notes payable - 29,605 -
------------ ------------ ------------
23,411,000 $ 29,605 $ -
============ ============
Less standby letters of credit issued
and outstanding (525,744)
------------
Net credit available $ 22,885,256
============
The revolving lines of credit are guaranteed by the Company and its
subsidiaries. At December 31, 1997, the Company has two outstanding standby
letters of credit. These letters of credit, in the aggregate amount of
$525,744, are used to support the Company's self-insured workers'
compensation insurance requirements. These letters of credit mature in June
1998. Other notes payable represent debt associated with foreign businesses
acquired in March 1997.
9. Commitments and Contingencies
Leases
Certain properties occupied by the Company are leased. The leases expire at
various dates through 2012 and generally require the Company to assume the
obligations for insurance, property taxes, and maintenance of the
facilities.
Some of the properties are leased from partnerships formed by certain
current and former Company shareholders, directors, officers and employees.
Rental expenses under these related party leases are as follows:
Years Ended December 31,
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
Simpson Investment Company $ 185,100 $ 185,100 $ 185,100
Doolittle Investors 239,400 231,096 230,438
Vacaville Investors 437,640 437,640 437,640
Vicksburg Investors 334,279 329,017 322,289
Columbus Westbelt Investment Co. 581,064 581,064 418,525
McKinney Investors - - 70,620
------------ ------------ ------------
$ 1,777,483 $ 1,763,917 $ 1,664,612
============ ============ ============
Rental expense for 1997, 1996 and 1995 with respect to all other leased
property was approximately $2,128,000, $1,170,000 and $1,120,000,
respectively.
At December 31, 1997, minimum rental commitments under all noncancelable
leases are as follows:
1998 $ 4,567,098
1999 4,106,596
2000 4,012,430
2001 3,511,765
2002 2,752,470
Thereafter 10,161,126
------------
$ 29,111,485
============
Some of these minimum rental commitments involve the related parties
described above, contain renewal options, and provide for periodic rental
adjustments based on changes in the consumer price index or current market
rental rates.
In January 1998, Simpson Strong-Tie International, Inc. ("SSTI") signed the
lease, to which it was previously committed, for its recently completed
facility in the United Kingdom. The facility is approximately 78,000 square
feet and will be used for SSTI's UK operations. The nominal term of the
lease is 25 years but includes an option to terminate without penalty in
either the fifteenth or twentieth year upon one year written notice by
SSTI. As such, future minimum rental payments associated with the first 15
years of this lease are included in minimum rental commitments in the table
above. Also in January 1998, the Company issued a letter of credit in the
amount of approximately $773,000 to guarantee performance with regard to
this lease.
The Company has a commitment to purchase a 48,000 square foot building
which it currently leases in San Leandro, California, for approximately
$1,975,000. This purchase is expected to close in the third quarter of 1998
and future minimum rental payments associated with this property have been
excluded from the minimum rental commitments in the above table after the
expected purchase date. In addition, the Company has commenced the
construction of a new manufacturing and distribution facility for Simpson
Dura-Vent Company, Inc. in Ceres, Mississippi, to replace its existing
facility in Vicksburg, Mississippi. The facility is expected to be 302,000
square feet and is expected to cost approximately $5.9 million. The Company
plans to complete and occupy this facility in mid 1998.
Environmental
At two of the Company's operating facilities, evidence of contamination
resulting from activities of prior occupants was discovered. The Company
took certain remedial actions at one facility in 1990 and is considering
what additional action, if any, may be required. The Company has been
informed by the lessor of the other facility, Vicksburg Investors, that
appropriate remedial action has been taken. The Company does not believe
that either of these matters will have a material adverse effect on its
financial position or results of operations.
Litigation
From time to time, the Company is involved in various legal proceedings and
other matters arising in the normal course of business.
10. Income Taxes
The provision for income taxes consists of the following:
Years Ended December 31,
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
Current
Federal $ 15,546,000 $ 11,989,000 $ 7,536,000
State 3,115,000 2,353,000 1,526,000
Foreign 145,000 - -
Deferred (1,039,000) (773,000) (135,000)
------------ ------------ ------------
$ 17,767,000 $ 13,569,000 $ 8,927,000
============ ============ ============
Reconciliations between the statutory federal income tax rates and the
Company's effective income tax rates as a percentage of income before
income taxes are as follows:
Years Ended December 31,
--------------------------------
1997 1996 1995
-------- -------- --------
Federal tax rate 35.0% 35.0% 35.0%
State taxes, net of federal benefit 4.2% 4.7% 5.0%
Other 1.4% 1.1% (1.3)%
-------- -------- --------
Effective income tax rate 40.6% 40.8% 38.7%
======== ======== ========
The tax effects of the significant temporary differences that constitute
the deferred tax assets and liabilities at December 31, 1997, 1996 and
1995, are as follows:
Years Ended December 31,
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
Current deferred tax assets
State tax $ 1,037,753 $ 795,671 $ 533,943
Compensation related to
stock plans 140,579 165,967 246,514
Workers' compensation 155,416 89,657 101,815
Health claims 272,393 213,476 198,333
Vacation 416,268 422,392 367,379
Accounts receivable allowance 602,802 464,681 456,977
Inventory allowance 477,304 359,646 235,923
Sales incentive and
advertising allowances 206,210 237,050 508,457
Other 228,025 170,915 101,114
------------ ------------ ------------
$ 3,536,750 $ 2,919,455 $ 2,750,455
============ ============ ============
Long-term deferred tax assets (liabilities)
Depreciation $ 639,063 $ 255,683 $ 222,355
Goodwill amortization 574,269 545,068 (6,866)
Other (402,545) (174,255) (238,706)
------------ ------------ ------------
$ 810,787 $ 626,496 $ (23,217)
============ ============ ============
No valuation allowance has been recorded for deferred tax assets for the
years ended December 31, 1997, 1996 and 1995, due to the Company's taxable
income in 1997 and prior years.
11. Profit Sharing and Pension Plans
The Company has four profit sharing plans covering substantially all
salaried employees and nonunion hourly employees. Two of the plans,
covering U.S. employees, provide for annual contributions in amounts the
Board of Directors may authorize, subject to certain limitations, but in no
event more than the amount permitted under the Internal Revenue Code as
deductible expense. The other two plans, covering the Company's European
employees, require the Company to make contributions ranging from three to
ten percent of the employee's compensation. The total cost for these four
profit sharing plans for the years ended December 31, 1997, 1996 and 1995,
was approximately $2,775,000, $2,469,000 and $2,036,000, respectively.
The Company also contributes to various industry-wide, union-sponsored
defined benefit pension funds for union, hourly employees. Payments to
these funds aggregated approximately $708,000, $667,000 and $486,000 for
the years ended December 31, 1997, 1996 and 1995, respectively.
12. Related Party Transactions
The Chairman and the President and Chief Executive Officer of the Company,
who are directors and principal shareholders of the Company, served as
directors and officers of the Simpson PSB Fund (a charitable organization)
until October 1997. The Company contributed $207,156 and $50,000 to this
organization in 1997 and 1996, respectively.
Refer to Note 9 regarding related party transactions involving Company
leases.
13. Stock Bonus and Stock Options Plans
The Company applies Accounting Principles Board Opinion 25, Accounting for
Stock Issued to Employees, and related interpretations in accounting for
its stock option plans. Accordingly, no compensation cost has been
recognized for its non-qualified stock option plan as stock options granted
under this plan have an exercise price equal to 100% of the market price on
the date of grant. If the compensation cost for this plan had been
determined based on the fair value at the grant dates for awards consistent
with the method of SFAS No. 123, the pro forma effect on the Company's net
income and earnings per share in 1997, 1996 and 1995 would have been:
Years Ended December 31,
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
Net income as reported $ 25,985,779 $ 19,720,638 $ 14,121,885
Pro forma 25,479,439 19,442,196 14,006,182
Diluted earnings per share,
as reported 2.17 1.68 1.23
Pro forma 2.13 1.65 1.22
The fair value of each option granted was estimated on the date of grant
using the Black-Sholes option-pricing model with the following assumptions
for 1997, 1996 and 1995, respectively: risk-free interest rate of 5.5% for
all years; no dividend yield for all years; expected lives of 6.1, 6.0 and
6.0 years; and volatility of 27.5% for all years. The weighted average fair
value per share of options granted during 1997, 1996 and 1995 was $13.17,
$9.07 and $5.29, respectively.
The Company currently has two stock option plans. The first is principally
for the Company's employees and the second is for the Company's independent
directors. During the last three years, the Company met most of the
operating goals established for its two stock option plans and accordingly,
has committed to grant options to purchase 122,250 shares for 1997 and has
granted options to purchase 119,750 and 92,250 shares for 1996 and 1995,
respectively. These options have an exercise price range of $33.31 to
$36.64 per share and $23.00 to $29.25 per share for 1997 and 1996,
respectively, and an exercise price of $13.50 per share for 1995.
The following table summarizes the Company's stock option activity for the
years ended December 31, 1997, 1996 and 1995:
1997 1996 1995
---------------------- ---------------------- ----------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Non-Qualified Stock Options Shares Price Shares Price Shares Price
- -------------------------------- ---------- ---------- ---------- ---------- ---------- ----------
Outstanding at beginning of year 922,734 $ 11.29 904,114 $ 9.22 895,429 $ 8.77
Granted 122,250 33.32 110,750 23.12 92,250 13.50
Additional grants - - 9,000 23.00 - -
Exercised (61,595) 7.33 (90,191) 5.84 (82,231) 9.11
Forfeited (4,972) 18.66 (10,939) 13.30 (1,334) 10.25
---------- ---------- ---------
Outstanding at end of year 978,417 14.27 922,734 11.29 904,114 9.22
========== ========== =========
The number of stock options exercisable at the end of 1997, 1996 and 1995
was 700,497, 694,779 and 736,740, respectively.
The following table summarizes information about the Company's stock
options outstanding at December 31, 1997:
Options Outstanding Options Exercisable
-------------------------------------------- ----------------------------
Weighted-
Number Average Weighted- Number Weighted-
Outstanding Remaining Average Outstanding Average
at December Contractual Exercise at December Exercise
Range of Exercise Prices 31, 1997 Life Price 31, 1997 Price
- ---------------------------- ------------ ------------ ------------ ------------ ------------
$3.64 170,028 3.3 years $ 3.64 170,028 $ 3.64
$11.50 401,974 3.4 years 11.50 401,974 11.50
$10.00 to $11.28 93,248 4.1 years 10.24 66,181 10.23
$13.50 75,209 5.0 years 13.50 36,038 13.50
$23.00 to $29.25 115,708 6.0 years 23.12 24,276 23.51
$33.31 to $36.64 122,250 7.0 years 33.32 2,000 33.00
$3.64 to $36.64 978,417 4.3 years 14.27 700,497 9.96
The Company also maintains a Stock Bonus Plan whereby for each ten years of
continuous employment with the Company each employee who does not
participate in the Company's stock option plans receives 100 shares of
common stock. In 1997, 1996 and 1995, the Company committed to issue 5,300,
4,500 and 2,600 shares, resulting in compensation charges of $305,038,
$180,155 and $61,250, respectively. The shares are issued in the year
following the year in which they are earned.
SCHEDULE II
SIMPSON MANUFACTURING CO., INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
for the years ended December 31, 1997, 1996 and 1995
Column A Column B Column C Column D Column E
Additions
----------------------------
Charged Charged
Balance at to Costs to Other Balance
Beginning and Accounts - at End
Classification of Year Expenses Write-offs Deductions of Year
- ------------------------------------ ------------ ------------ ------------ ------------ ------------
YEAR ENDED DECEMBER 31, 1997
Allowance for doubtful accounts $ 1,108,950 $ 1,010,012 $ - $ 579,271 $ 1,539,691
Allowance for obsolete inventory 648,881 220,000 - 126,303 742,578
YEAR ENDED DECEMBER 31, 1996
Allowance for doubtful accounts 931,321 607,354 - 429,725 1,108,950
Allowance for obsolete inventory 389,611 60,000 270,994 71,724 648,881
YEAR ENDED DECEMBER 31, 1995
Allowance for doubtful accounts 1,269,587 443,000 - 781,266 931,321
Allowance for obsolete inventory 469,921 120,000 - 200,310 389,611
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information required by this Item will be contained in the Registrant's
proxy statement for the annual meeting of shareholders to be held on May
20, 1998, to be filed not later than 120 days following the end of the
Registrant's fiscal year ended December 31, 1997, which will set forth
certain information with respect to the directors and executive officers of
the Registrant and is incorporated herein by reference.
Item 11. Executive Compensation.
Information required by this Item will be contained in the Registrant's
proxy statement for the annual meeting of shareholders to be held on May
20, 1998, to be filed not later than 120 days following the end of the
Registrant's fiscal year ended December 31, 1997, which will set forth
certain information with respect to executive compensation of the
Registrant and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information required by this Item will be contained in the Registrant's
proxy statement for the annual meeting of shareholders to be held on May
20, 1998, to be filed not later than 120 days following the end of the
Registrant's fiscal year ended December 31, 1997, which will set forth
certain information with respect to security ownership of certain
beneficial owners and management of the Registrant and is incorporated
herein by reference.
Item 13. Certain Relationships and Related Transactions.
Information required by this Item will be contained in the Registrant's
proxy statement for the annual meeting of shareholders to be held on May
20, 1998, to be filed not later than 120 days following the end of the
Registrant's fiscal year ended December 31, 1997, which will set forth
certain information with respect to certain relationships and related
transactions of the Registrant and is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
a. Exhibits
10.1 Industrial Building Lease, dated as of January 16, 1998,
between Simpson Strong-Tie Company Inc. and Gerald and Susan
Hagel.
10.2 Industrial Building Lease, dated November 10, 1997, between
Simpson Strong-Tie Company Inc. and Pearson-Enfield
Development Company LLC.
10.3 First Amendment to Credit Agreement dated January 15, 1997,
dated March 2, 1998, between Simpson Manufacturing Co., Inc.
and Wells Fargo Bank, N.A.
10.4 Amendment to Loan Agreement dated January 14, 1997, dated
January 30, 1998, between Simpson Manufacturing Co., Inc.
and Union Bank of California, N.A.
11. Statement re computation of earnings per share.
21. List of Subsidiaries of the Registrant.
23. Consent of Independent Certified Public Accountants.
b. No reports on Form 8-K were filed during the last quarter of the
period for which this report is filed.
SIGNATURES
Pursuant to the requirements 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.
Dated: March 24, 1998 Simpson Manufacturing Co., Inc.
-------------- -----------------------------------
(Registrant)
By /s/Stephen B. Lamson
-----------------------------------
Stephen B. Lamson
Chief Financial Officer
and Duly Authorized Officer
of the Registrant
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 below.
Signature Title Date
- ------------------------- --------------------------- --------------
CHIEF EXECUTIVE OFFICER:
/s/Thomas J Fitzmyers President, Chief Executive March 24, 1998
- ------------------------- Officer and Director
(Thomas J Fitzmyers)
CHIEF FINANCIAL OFFICER:
/s/Stephen B. Lamson Chief Financial Officer, March 24, 1998
- ------------------------- Secretary and Director
(Stephen B. Lamson)
DIRECTORS:
/s/Barclay Simpson Chairman of the Board March 24, 1998
- -------------------------
(Barclay Simpson)
/s/Earl F. Cheit Director March 24, 1998
- -------------------------
(Earl F. Cheit)
/s/Alan R. McKay Director March 24, 1998
- -------------------------
(Alan R. McKay)
/s/Sunne Wright McPeak Director March 24, 1998
- -------------------------
(Sunne Wright McPeak)
/s/Barry Lawson Williams Director March 24, 1998
- -------------------------
(Barry Lawson Williams)