-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, K+3hPM1IJKGsxGvZaaoyHpkZXD16vJ2rvxH94tabMnQVvj056wVZIVowwLm/JkaI WbjRIjDzoAkvJ8CQXaIfpg== 0000920371-98-000002.txt : 19980325 0000920371-98-000002.hdr.sgml : 19980325 ACCESSION NUMBER: 0000920371-98-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980324 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SIMPSON MANUFACTURING CO INC /CA/ CENTRAL INDEX KEY: 0000920371 STANDARD INDUSTRIAL CLASSIFICATION: CUTLERY, HANDTOOLS & GENERAL HARDWARE [3420] IRS NUMBER: 943196943 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-13429 FILM NUMBER: 98571884 BUSINESS ADDRESS: STREET 1: 4637 CHABOT DR STREET 2: STE 200 CITY: PLEASANTON STATE: CA ZIP: 94588 BUSINESS PHONE: 5106099912 MAIL ADDRESS: STREET 1: 4637 CHABOT DR STREET 2: STE 200 CITY: PLEASANTON STATE: CA ZIP: 94588 10-K 1 1997 ANNUAL REPORT ON FORM 10K =========================================================================== 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 . ---------- ---------- Commission file number: 0-23804 - --------------------------------------------------------------------------- Simpson Manufacturing Co., Inc. ------------------------------------------------------ (Exact name of registrant as specified in its charter) California 94-3196943 ------------------------------- ------------------------------- (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 - --------------------------------------------------------------------------- Securities registered pursuant to Section 12(b) of the Act: Common Stock, without par value New York Stock Exchange, Inc. ------------------------------- ----------------------------- (Title of each class) (Name of each exchange on which registered) Securities registered pursuant to Section 12(g) of the Act: None ---------------- (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 ----- ----- 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. =========================================================================== 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) EX-10 2 INDUSTRIAL BUILDING LEASE EXHIBIT 10.1 ------------ INDUSTRIAL BUILDING LEASE 136 OFFICIAL ROAD ADDISON, ILLINOIS GERALD AND SUSAN HAGEL - LESSOR - AND SIMPSON STRONG-TIE CO., INC. - LESSEE - INDUSTRIAL BUILDING LEASE THIS LEASE is made and entered into as of January 16, 1998 (the "Lease"), by and between Simpson Strong-Tie Co., Inc., 4637 Chabot Road, Suite 200, Pleasanton, California 94588 (herein called "Lessee"), and Gerald & Susan Hagel, 260 N. Charlotte, Lombard, Illinois 60148 (herein called "Lessor"). 1. Premises/Term. Lessor hereby leases to Lessee and Lessee hereby leases to Lessee and Lessee hereby leases from Lessor for all lawful purposes approximately 52,400 square feet of space located at 136 Official Road, Addison, Illinois (the "Premises"), together with the appurtenances thereto, for a term commencing as of January 16, 1998 ("Commencement Date") and ending on the date that is five years following the Commencement Date. 2. Rent. Lessee shall pay Lessor or Lessor's agents as rent for the Premises the sum of $22,357 per month, in advance, until termination of this lease, at Lessor's address stated above or such other address as Lessor may designate in writing. Payment is due on the first of each month. 3. Option to Extend. Lessor hereby grants Lessee an option to extend the term of the Lease for one additional period of five years commencing immediately after the expiration of the term of the Lease, upon the same terms and conditions contained herein, except that the Rent for the Premises shall be equal to the fair market base rent for the Premises. Lessee must exercise the option granted herein on or before the date that is six (6) months prior to the expiration of the initial term of the Lease. In the event Lessee fails to timely exercise the option granted herein, Lessee shall have no right to extend the term of the Lease. If Lessee properly exercises the option granted herein, references in the Lease to the "term" shall be deemed to mean the option term unless the context clearly provides otherwise. a. If Lessee properly exercises its option to extend the term of the Lease, the Rent during the option term shall be determined in the following manner. The Rent shall be adjusted to an amount equal to the fair market base rent for the Premises as of the commencement of the option term for a term equal to the option term, as specified by Lessor by notice to Lessee not less than sixty (60) days prior to commencement of the option term, subject to Lessee's right of arbitration as set forth below. If Lessee believes that the fair market base rent specified by Lessor exceeds the actual fair market base rent for the Premises as of commencement of the option term, then Lessee shall so notify Lessor within ten (10) business days following receipt of Lessor's notice. If the parties are unable to agree upon the fair market base rent for the Premises within ten (10) days after Lessor's receipt of notice of Lessee's objection, the amount of base rent as of commencement of the option term shall be determined as follows: (1) Within twenty (20) days after receipt of Lessor's notice specifying fair market base rent, Lessee, at its sole expense, shall obtain and deliver in writing to Lessor a determination of the fair market base rent for the Premises for a term equal to the option term from a broker ("Lessee's Broker") licensed in the State of Illinois and engaged in the industrial brokerage business in the City of Addison (and surrounding areas) for at least the immediately preceding five (5) years. If Lessor accepts such determination, the Rent for the option term shall be adjusted to an amount equal to the amount determined by Lessee's Broker. (2) If Lessor does not accept such determination, within fifteen (15) days after receipt of the determination of Lessee's Broker, Lessor shall designate a broker ("Lessor's Broker") licensed in the State of Illinois and engaged in the industrial brokerage business in the City of Addison (and surrounding areas) for at least the immediately preceding five (5) years. Lessor's Broker and Lessee's Broker shall name a third broker, similarly qualified, within five (5) days after the appointment of Lessor's Broker. Each of said three brokers shall determine the fair market base rent for the Premises as of the commencement of the option term for a term equal to the option term of the Lease within fifteen (15) days after the appointment of the third broker. The Rent payable by Lessee effective as of the commencement of the option term shall be increased to an amount equal to the arithmetic average of such three determinations; provided, however, that if any such broker's determination deviates more than 10% from the median of such determinations, the Rent payable shall be an amount equal to the average of the two closest determinations. (3) Lessor shall pay the costs and fees of Lessor's Broker in connection with any determination hereunder, and Lessee shall pay the costs and fees of Lessee's Broker in connection with such determination. The costs and fees of any third broker shall be paid one- half by Lessor and one-half by Lessee. b. If the amount of the fair market base rent is not known as of the commencement of the option term, then Lessee shall continue to pay the Rent in effect at the expiration of the initial term until the amount of the fair market base rent is determined. When such determination is made, Lessee shall pay to Lessor any deficiency upon demand. 4. Condition and Upkeep of Premises. Lessee has examined and knows the condition of the Premises and has received the same in good order and repair, and acknowledges that no representations as to the condition and repair thereof have been made by Lessor, or his agent, prior to or at the execution of this lease that are not herein expressed; Lessee will keep the Premises including all appurtenances, in good repair, replacing all broken glass with glass of the same size and quality as that broken, and will replace all damaged plumbing fixtures with others of equal quality, and will keep the Premises, including adjoining alleys, in a clean and healthful condition according to the applicable municipal ordinances and the direction of the proper public officers during the term of this lease at Lessee's expense, and will without injury to the roof, remove all snow and ice from the same when necessary, and will remove the snow and ice from the sidewalk abutting the Premises; and upon the termination of this lease, in any way, will yield up the Premises to Lessor, in good condition and repair, loss by fire and ordinary wear excepted, and will deliver the keys therefor at the place of payment of said rent. Lessor, at its sole cost, shall repair, maintain and replace the structure of the building in which the Premises are located. 5. Lessee Not to Misuse; Sublet; Assignment. Lessee will not allow the Premises to be used for any purpose that will increase the rate of insurance thereon, nor for any purpose other than that hereinbefore specified, and will not load floors with machinery or goods beyond the floor load rating prescribed by applicable municipal ordinances, and will not allow the Premises to be occupied in whole, or in part, by any other person, and will not sublet the same or any part thereof, nor assign this Lease without in each case the written consent of the Lessor first , and Lessee will not permit any transfer by operation of law of the interest in the Premises acquired through this Lease, and will not permit the Premises to be used for any unlawful purpose, or for any purpose that will injure the reputation of the building or increase the fire hazard of the building, or disturb the tenants or the neighborhood; and will not permit any alteration of or addition to any part of the Premises, except by written consent of Lessor ; all alterations and additions to the Premises shall remain for the benefit of Lessor unless otherwise determined by Lessee. Notwithstanding the foregoing, Lessee shall have the right, without Lessor's consent, but with notice to Lessor, to assign this Lease or sublet all or a portion of the Premises to any parent, subsidiary, affiliate or successor of Lessee, to any person, firm or corporation which shall be controlled by, under the control of, or under common control with Lessee, or to any entity into which Lessee may be merged or consolidated or which purchases all or substantially all of the assets of Lessee. 6. Mechanic's Lien. Lessee will not permit any mechanic's lien or liens to be placed upon the Premises or any building or improvement thereon during the term hereof, and in case of the filing of such lien Lessee will promptly pay same. If default in payment thereof shall continue for thirty (30) days after written notice thereof from Lessor to the Lessee, the Lessor shall have the right and privilege at Lessor's option of paying the same or any portion thereof without inquiry as to the validity thereof, and any amounts so paid, including expenses and interest, shall be so much additional indebtedness hereunder due from Lessee to Lessor and shall be repaid to Lessor immediately on rendition of bill therefor. 7. Indemnity for Accidents. Except to the extent caused by Lessor's negligence or willful misconduct, Lessee covenants and agrees that it will protect and save and keep the Lessor forever harmless and indemnified against and from any penalty or damages or charges imposed for any violation of any laws or ordinances, whether occasioned by the neglect of Lessee or those holding under Lessee, and that Lessee will at all times protect, indemnify and save and keep harmless the Lessor against and from any and all loss, cost, damage or expense, arising out of or from any accident or other occurrence on or about the Premises, causing injury to any person or property whomsoever or whatsoever and will protect, indemnify and save and keep harmless the Lessor against and from any and all claims and against and from any and all loss, cost, damage or expense arising out of any failure of Lessee in any respect to comply with and perform all the requirements and provisions hereof. 8. Non-Liability of Lessor. Except as provided by Illinois statute, Lessor shall not be liable for any damage occasioned by failure to keep the Premises in repair, nor for any damage done or occasioned by or from plumbing, gas, water, sprinkler, steam or other pipes or sewerage or the bursting, leaking or running of any pipes, tank or plumbing fixtures, in, above, upon or about Premises or any building or improvement thereon nor for any damage occasioned by water, snow or ice being upon or coming through the roof, skylights, trap door or otherwise, nor for any damages arising from acts or neglect of any owners or occupants of adjacent or contiguous property. 9. Property Taxes. "Property Taxes" shall mean all taxes attributable in any manner to the Premises or the land on which the Premises is located. One month prior to such Property Taxes being due to the taxing authority, Tenant shall pay to the taxing authority all Property Taxes attributable to the term of this Lease. 10. Water, Gas and Electric Charges. Lessee will pay, in addition to the rent above specified, all water rents, gas and electric light and power bills taxed, levied or charged on the Premises, for and during the time for which this lease is granted, and in case said water rents and bills for gas, electric light and power shall not be paid when due, Lessor shall have the right to pay the same, which amounts so paid, together with any sums paid by Lessor to keep the Premises in a clean and healthy condition, as above specified, are declared to be so much additional rent and payable with the installment of rent next due thereafter. 11. Keep Premises in Repair. Except as otherwise provided herein, Lessor shall not be obliged to incur any expense for repairing any improvements upon the Premises or connected therewith, and the Lessee at his own expense will keep all improvements in good repair (injury by fire, or other caused beyond Lessee's control excepted) as well as in a good tenantable and wholesome condition, and will comply with all local or general regulations, laws and ordinances applicable thereto, as well as lawful requirements of all competent authorities in that behalf. Lessee will, as far as possible, keep said improvements from deterioration due to ordinary wear and from falling temporarily out of repair. If Lessee does not make repairs as required hereunder promptly and adequately, Lessor may but need not make such repairs and pay the costs thereof, and such costs shall be so much additional rent immediately due from and payable by Lessee to Lessor. 12. Access to Premises. Upon reasonable advance notice and provided such access in no way interferes with Lessee's use of the Premises, Lessee will allow Lessor access to the Premises for the purpose of examining or exhibiting the same, or to make any needful repairs, or alterations thereof which Lessor may see fit to make and will allow to have placed upon the Premises at all times notice of "For Sale" and "To Rent", and will not interfere with the same. 13. Reletting. If Lessee's right to occupy the Premises shall be terminated by Lessor by reason of Lessee's breach of any of the covenants herein, the same may be re-let by Lessor for such rent and upon such terms as Lessor may deem fit, subject to Illinois statute; and if a sufficient sum shall not thus be realized monthly, after paying the expenses of such re-letting and collecting to satisfy the rent hereby reserved, Lessee agrees to satisfy and pay all deficiency monthly during the remaining period of this lease. 14. Holding Over. Lessee will, at the termination of this lease by lapse of time or otherwise, yield up immediate possession to Lessor, and failing so to do, will pay as liquidated damages, for the whole time such possession is withheld, the sum of Five Hundred Dollars ($500.00) per day; but the provisions of this clause shall not be held as a waiver by Lessor of any right of re-entry as hereinafter set forth; nor shall the receipt of said rent or any part thereof, or any other act in apparent affirmance of tenancy, operate as a waiver of the right to forfeit this lease and the term hereby granted for the period still unexpired, for a breach of any of the covenants herein. 15. Extra Fire Hazard. There shall not be allowed, kept, or used on the Premises any inflammable or explosive liquids or materials save such as may be necessary for use in the business of the Lessee, and in such case, any such substances shall be delivered and stored in amount, and used, in accordance with the rules of the applicable Board of Underwriters and statutes and ordinances now or hereafter in force. 16. Default by Lessee. If default be made in the payment of the above rent, or any part thereof, or in any of the covenants herein contained to be kept by the Lessee, and such default shall continue for ten days after receipt of written notice from Lessor that such default has occurred, Lessor may at any time thereafter at his election declare said term ended and reenter the Premises or any part thereof, with or (to the extent permitted by law) without notice or process of law, and remove Lessee or any persons occupying the same, without prejudice to any remedies which might otherwise be used for arrears of rent, and Lessor shall have at all times the right to distrain for rent due, and shall have a valid and first lien upon all personal property which Lessee now owns, or may hereafter acquire or have an interest in, which is by law subject to such distraint, as security for payment of the rent herein reserved. 17. No Rent Deduction or Set Off. Lessee's covenant to pay rent is and shall be independent of each and every other covenant of this lease. Lessee agrees that any claim by Lessee against Lessor shall not be deducted from rent nor set off against any claim for rent in any action. 18. Rent After Notice or Suit. It is further agreed, by the parties hereto, that after the service of notice, or the commencement of a suit or after final judgment for possession of the Premises, Lessor may receive and collect any rent due, and the payment of said rent shall not waive or affect said notice, said suit, or said judgment. 19. Payment of Costs. If either party to this agreement shall bring an action to interpret or enforce this agreement or for any relief against the other, including, but not limited to, declaratory relief or a proceeding in arbitration, the losing party shall pay to the prevailing party a reasonable sum for attorney's fees, expert witness fees and other costs incurred in such action or proceeding. Additionally, the prevailing party shall be entitled to all additional attorney's fees and costs incurred in enforcing and collecting any such judgment or award. Any judgment or order entered in such action shall contain a specific provision providing for the recovery of attorney's fees and costs incurred in enforcing such award or judgment. 20. Rights Cumulative. The rights and remedies of Lessor under this lease are cumulative. The exercise or use of any one or more thereof shall not bar Lessor from exercise or use of any other right or remedy provided herein or otherwise provided by law, nor shall exercise nor use of any right to remedy by Lessor waive any other right or remedy. 21. Fire and Casualty. In case the Premises shall be rendered untenantable during the term of this lease by fire or other casualty and such damage is covered by insurance (excluding any deductible) and such damage can be repaired within 120 days of such damage, this lease shall remain in full force and effect. In case the Premises shall be rendered untenantable during the term of this lease by fire or other casualty and such damage is not covered by insurance (excluding any deductible) or such damage cannot be repaired within 120 days of such damage, either party, at its option, may terminate the Lease. If neither party elects to terminate this Lease, Lessor shall repair the Premises within 120 days thereafter; and this lease shall remain in effect provided such repairs are completed within said time. All rent shall abate during such time as the Premises are being repaired. If Lessor shall not have repaired the Premises within said time, then at the end of such time the term hereby created shall terminate. If this lease is terminated by reason of fire or casualty as herein specified, rent shall be apportioned and paid to the day of such fire or other casualty. 22. Subordination. This lease is subordinate to all mortgages which may now or hereafter affect the Premises, provided such mortgagee agrees to recognize this Lease . 23. Plurals; Successors. The words "Lessor" and "Lessee" wherever herein occurring and used shall be construed to mean "Lessors" and "Lessees" in case more than one person constitutes either party to this lease; and all the covenants and agreements contained shall be binding upon, and inure to, their respective successors, heirs, executors, administrators and assigns and may be exercised by his or their attorney or agent. 24. Severability. Wherever possible each provision of this lease shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this lease shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this lease. IN WITNESS WHEREOF, the parties hereto have executed this instrument as of the Date of Lease stated above. LESSEE: LESSOR: Simpson Strong-Tie Co., Inc. Gerald and Susan Hagel /s/Stephen B. Lamson /s/Gerald Hagel - ---------------------------- ---------------------------- Stephen B. Lamson Gerald Hagel CFO /s/Susan Hagel ---------------------------- Susan Hagel EX-10 3 INDUSTRIAL BUILDING LEASE EXHIBIT 10.2 ------------ THIS LEASE made this 10th day of November, 1997, by and between PEARSON-ENFIELD DEVELOPMENT COMPANY LLC, a Massachusetts limited liability company, with a usual place of business at c/o Pearson Systems, Inc., 31 Pearson Way, P.O. Box 180, West Springfield, Massachusetts (hereinafter called the "Lessor"), and SIMPSON STRONG-TIE, INC., a California corporation, with a usual place of business at 4637 Chabot Drive, Suite 200, Pleasanton, California 94588 (hereinafter called the "Lessee"). WITNESSETH as follows: Premises 1. That in consideration of the rent and covenants herein reserved and contained on the part of the Lessee to be paid, performed or observed, and subject to the terms and conditions herein below set forth, the Lessor does hereby demise and lease unto the Lessee the premises (hereinafter the "Demised Premises" or "premises") consisting of a building to be built by Lessor and which will contain approximately 54,177 leasable square feet on the first floor and a shipping office mezzanine of 900 square feet, as shown on the lease plan marked Exhibit "A" attached hereto and made a part hereof and the Lessor's land (hereinafter at times "Lessor's Land") commonly known as Lot 114, 7 Pearson Way, Enfield, Connecticut. Term 2. (a) The term of this Lease shall commence when a temporary Certificate of Occupancy is issued by the Town of Enfield Building Inspector for the Demised Premises (or earlier if Lessee commences its business operations in the premises) and shall be for the term of five (5) years. The commencement date is anticipated to be on or about April 30, 1998. If the term shall commence on other than the first day of a calendar month, the term shall be increased to terminate five (5) years after the first day of the calendar month immediately following the commencement date. In the event the Demised Premises are not available for Lessee's occupancy by August 1, 1998, then for each day beyond August 1, 1998 that the Lessee is unable to occupy the building because it was not substantially completed by Lessor as provided in subclause (b) below (unless the delay was caused by Lessee), Lessee shall receive one day's free rent based on the per diem of the Annual Minimum Base Rent. Preparation of Premises (b) The Lessor covenants that the Demised Premises shall be completed in a good and workmanlike manner in accordance with the plans prepared by Architectural Insights, Inc., Project #9750, dated 10/21/97. The Demised Premises shall be deemed to be substantially completed when said temporary Certificate of Occupancy is issued. The Lessor shall give Lessee sixty (60) days' advance notice of the date by which the Demised Premises is expected to be substantially completed. The Lessor shall permit the Lessee (at Lessee's sole risk and expense) to enter the Demised Premises prior to the commencement date for the purpose of installing equipment, furniture, furnishings and the like so long as the same does not interfere with the Lessor's work. Lessee shall indemnify, defend and hold Lessor harmless from all losses or liability arising from such access except for losses and liability incurred due to Lessor's own negligence. Lessor shall have no responsibility for Lessee's property in the Demised Premises prior to the commencement date. Annual Minimum Base Rent 3. (a) The Annual Minimum Base Rent payable by the Lessee during Lease Years 1 through 5 of the term shall be the minimum yearly rent of Two Hundred Seventy Five Thousand Eight Hundred Eighty-Five and 00/100 ($275,885) Dollars payable in equal monthly installments of Twenty-Two Thousand Nine Hundred Ninety and 42/100 ($22,990.42) Dollars; all payable in advance on the first day of each and every month during the term of this Lease, and proportionately at said rate for any partial month. (b) As used herein "Lease Year" shall mean the twelve (12) month period following the commencement date of this Lease (or if not commenced on the first day of a month, then first following such commencement date the first day of the first full calendar month) and each anniversary thereafter. Checks for rent shall be payable to the Lessor and sent to it c/o Pearson Systems, Inc., P.O. Box 180, West Springfield, Massachusetts 01090, until the Lessor directs otherwise in writing. Late Payment of Rent (c) If any rent obligation due hereunder is not paid within ten (10) days after Lessor's written notice, Lessee shall pay Lessor a late charge equal to five (5%) percent of such obligation, which late charge shall also be collectible as additional rent hereunder. Use of Premises 4. The Demised Premises shall be used solely and only for warehouse and distribution facility and for training of its personnel. Lessor represents and warrants to Lessee that the use of the Demised Premises as set forth in the preceding sentence are permitted uses under the zoning classifications applicable to Lessor's Land Neither Lessee nor anyone for whom or which it is legally responsible shall overload or deface the Demised Premises. Lessor reserves the right to create utility and similar easements, provided such easements will not interfere with Lessee's use of the Demised Premises. Lessee's Share of Lessor's Operating Costs and Expenses 5. This Lease is intended to be a so-called "triple net lease". The Lessee shall pay to the Lessor in addition to the Annual Minimum Base Rent and other payments to be paid hereunder, as additional rent, the Lessor's costs and expenses paid or incurred by Lessor in operating, repairing, maintaining and managing the Demised Premises. Such costs and expenses shall include, but not be limited to: real estate taxes, special assessments, landscaping, water and sewer charges, electric power and lighting, heating and cooling, repairs, maintenance, building, casualty and liability insurance, cleaning, refuse removal, snow plowing and repairs and maintenance (including repaving) of all the paved areas of roadways and parking lots. However, expressly excluded herefrom shall be any (i) major repairs of a capital nature (except repaving) or (ii) structural repairs due to defective workmanship or materials involving the Demised Premises, parking lot and roadways which occur within two (2) years after tenant occupies the premises. Except as otherwise expressly provided in this Lease, Lessor shall have no obligation to furnish any of the aforesaid. "Real estate taxes" are predicated upon the present system of taxation in the State of Connecticut. If taxes upon rentals or other taxes shall be substituted, in whole or in part, for the present system of real estate taxes, then Lessee's obligation for taxes (as set forth above) shall be based upon such taxes on rentals and such other taxes to the extent to which the same shall be a substitute for the present system of real estate taxes. Option to Extend 6. (a) Lessee shall have the right to extend the original term of this Lease for an additional term of five (5) years, provided that Lessee shall not be in default hereunder either at the time Lessee exercises such right or at the expiration of the original term and provided that this Lease shall not have been terminated. Lessee shall have no further options to extend. (b) Such extension shall be on the same terms, covenants and conditions as are contained in this Lease, except for the change in the Annual Minimum Base Rent payable as provided in subclause (c) below. Such right to extend shall be exercised by written notice to Lessor given at least twelve (12) months prior to the expiration of the original term. (c) During the extended Lease term Lessee shall pay a new Annual Minimum Base Rent equal to the fair market rental value of the Demised Premises as of the commencement of the new extended term based on a five (5) year Lease of comparable premises (the "market rent"), and shall be determined as follows: (1) Within thirty (30) days after Lessor receives Lessee's notice of its exercise of the option to extend the original term of this Lease, Lessor will submit to Lessee its determination of the then market rent. If Lessee disputes such determination in writing to Lessor, and the Lessor and Lessee cannot agree in writing on the market rent within sixty (60) days after Lessee's notice of the exercise of its option, Lessee, at its expense, shall obtain and deliver in writing to Lessor a determination of the market rent for the Premises for a term equal to the option term from a broker ("Lessee's Broker") licensed in the State of Connecticut and engaged in the commercial real estate brokerage business in the Greater Enfield area for at least the immediately preceding five (5) years. If Lessor accepts such determination, the Annual Minimum Base Rent for the option term shall be increased to an amount equal to the amount determined by Lessee's Broker. Lessee's Broker shall make such determination in writing within forty-five (45) days after the expiration of the aforesaid sixty (60) days, and a written determination of Lessee's Broker shall set forth in reasonable detail the basis for his determination. (2) If Lessor does not accept such determination in writing, within fifteen (15) days after the receipt of the determination of Lessee's Broker, Lessor shall designate its broker ("Lessor's Broker"), also licensed in the State of Connecticut and also engaged in the commercial real estate brokerage business in the Greater Enfield area for at least the immediately preceding five (5) years. Within forty-five (45) days of the appointment of Lessor's Broker, Lessor, at its expense, shall deliver in writing to Lessee the determination of such market rent by Lessor's Broker. Such determination shall be in writing and shall contain in reasonable detail the basis for the determination by Lessor's Broker. (3) If the difference between the market rent as determined by the two brokers is less than ten (10%) percent, then such rent shall be averaged and the market rent for the extended term shall be such average. If the difference between the market rents so determined shall exceed ten (10%) percent of the lesser of such amounts, then the two brokers shall have ten (10) days after written request by either party to appoint a third broker. If such brokers fail to do so within such ten (10) day period, then either Lessor or Lessee may request the American Arbitration Association or any successor organization to appoint an broker within ten (10) days thereafter. If no such broker shall be appointed within such ten (10) day period, either Lessor or Lessee may apply to any court having jurisdiction to have such appointment made by such court. Such broker must satisfy the qualifications for a broker as provided in the preceding Paragraphs (1) and (2). Any broker appointed by the original brokers or by the American Arbitration Association or its successor, or by the court, shall be instructed to determine the market rent in accordance with the definition of market rent set forth herein, such determination to be made within thirty (30) days after the appointment. If the third determination shall exceed the higher of the first two determinations, the market rent shall be the higher of the first two determinations. If the third determination is less than the lower of the first two determinations, the market rent shall be the lower of the first two determinations. In all other cases, the market rent shall be equal to the third determination. In no event shall the market rent determined above be less than Two Hundred Seventy Thousand Eight Hundred Eighty-Five and 00/100 ($270,885) Dollars per Lease Year. All such determinations of market rent shall be final and binding upon Lessor and Lessee as the market rent for the extended term. Each party shall pay for the fees and expenses of the broker appointed by it, but the fees and expenses of the third broker shall be shared equally by the parties. (d) If the amount of the market rent is not known as of the commencement of the option term, then Lessee shall continue to pay the Annual Minimum Base Rent in effect at the expiration of the initial term until the amount of the market rent is determined. When such determination is made, Lessee shall pay to Lessor any deficiency upon demand. Lessee's General Covenants 7. In addition to all other covenants and agreements of the Lessee contained in this Lease, the Lessee covenants and agrees at all times during the term hereof, and for any further time as it shall hold the Demised Premises or any part thereof: to pay when due all Annual Minimum Base Rent and additional rent provided for herein; to save the Lessor harmless from all loss and damage occasioned by the use of water in or escape of water from the Demised Premises, or by the bursting or cracking of the water pipes, or the stopping or leakage of water, gas, sewer, steam, or other pipes, including the sprinkler system if any, unless caused by Lessor's own negligence; to remove its goods and effects, and those of all persons claiming under it, at the termination or expiration of this Lease, and will peaceably yield up said Demised Premises and all additions thereto to the Lessor, and leave the same clean and in such repair, order and condition as the same are in at the commencement of the term or may be put in during the continuance thereof, excepting reasonable wear and tear, and damage by fire or other unavoidable casualty; not to commit any nuisance, or overload, damage or deface the Demised Premises; not to permit any holes to be drilled or made in the stone, brickwork, walls or partitions of the Demised Premises (except wall hangings but any damage caused by the removal thereof to be repaired by Lessee); not to carry on any business or occupation which shall be unlawful, or contrary to any applicable law or ordinance in force for the time being; not to do any act or thing upon the premises outside of the scope of uses permitted under Clause 4 which will make them uninsurable against fire, or which is liable to increase the premium for fire insurance on the Demised Premises and will reimburse Lessor for all extra and/or additional premiums caused by Lessee's use; to install, maintain and keep the premises equipped with all fire or safety appliances required by law or ordinances, or by any order or regulation of any public authority, or by the underwriting insurance company because of the use made of said premises by the Lessee, and will make all non-structural and non-capital (and if there is a material change of use, then also structural and capital) repairs, alterations, replacements, or additions so required; and will procure any authorizations or licenses required for Lessee's use of the premises; will permit the Lessor to enter at reasonable times, after twenty-four (24) hours' advance notice (unless there is an emergency) so as not to unreasonably interfere with Lessee's business activities, to view the premises and to make, if it so elects, repairs or alterations necessary for the preservation and safety of the Demised Premises and will permit the Lessor to show the premises to others. Lessor's Repairs 8. Upon written notice from the Lessee, the Lessor shall repair, if necessary, and if reasonably possible within thirty (30) days of the date of said notice, the building's roof, exterior walls (but not including plate or other glass of the Demised Premises) and shall make all structural repairs, repairs to the parking lot and roadways, and repairs to plumbing and electrical systems, except for (i) reasonable wear and tear, (ii) damage caused by any act or negligence of the Lessee, its agents, employees, invitees or any person for whom Lessee is legally responsible, but only to the extent Lessor cannot collect on its insurance for such damage, and (iii) except as provided in Clause 16 damage by fire or other unavoidable casualty. All repair costs shall be operating costs and expenses under Clause 5 (except as expressly excluded thereunder). Lessee's Repairs 9. (a) The Lessee covenants and agrees to keep the interior of the Demised Premises, its components and equipment, and all plate glass in good order, condition and repair, reasonable wear and tear and damage by fire or other unavoidable casualty excepted. Excepted from this provision shall be any repairs required due to any act or negligence of Lessor, its agents, employees, invitees or any person for whom Lessor is legally responsible. However, Lessee shall also be responsible for all repairs and damage caused by any act or negligence of Lessee, its agents, employees, invitees or any person for whom Lessee is legally responsible, but only to the extent Lessor cannot collect on its insurance for such damage. Lessee shall keep the outside areas clean and neat. (b) Notwithstanding the foregoing, the Lessee shall not be responsible for any defective materials or workmanship of the Lessor discovered within two (2) years from the date Lessor substantially completes the construction of the Demised Premises. (c) If the Lessee shall not within ten (10) days after written notice by the Lessor of repairs to be made by the Lessee commence to make such repairs and carry same through with dispatch (or in the cases of emergencies without any written notice), the Lessor may make such repairs and the reasonable expense thereof shall constitute a debt by the Lessee, payable as additional rent. Heat and Condition 10. The Lessee, at its expense, shall supply throughout the term hereof heat for the building on the Demised Premises, and Lessee shall at all times heat the Demised Premises to at least 45 degrees to avoid freezing of pipes. Utilities 11. Lessee shall pay for its own utilities including, but not limited to electricity and gas. The electric and gas meters for the Demised Premises shall be in Lessee's name. Alterations Improvements 12. The Lessee shall make no alterations, changes and or improvements in or to the Demised Premises without written consent of Lessor, which as to nonstructural and nonmechanical/electrical shall not be unreasonably withheld nor approval unreasonably delayed. Alterations, changes or improvements to the Demised Premises that are approved in writing by Lessor shall be constructed by Pearson Systems, Inc. at Lessee's cost and expense, provided said Company's prices are at market rates. Removal of Fixtures 13. The Lessee may, during the term hereof and at the termination of this lease, remove all fixtures and equipment installed by it but all additions made by either the Lessor or Lessee which are attached to the premises, including floor coverings, shall be allowed to remain in place unless the Lessor shall notify Lessee, within fourteen (14) days after Lessee's written notice stating what it intends to install, that the Lessee will be required to remove the same. The Lessee shall, at its own expense, repair any and all damage to the premises resulting from or caused by the removal of the fixtures or other equipment or property of the Lessee. Indemnification 14. (a) The Lessee covenants and agrees to indemnify and defend the Lessor against, and to save it harmless from, any and all claims of whatever nature, actions, loss, damages, liability and expense (including reasonable attorney's fees) in connection with loss of life, personal injury and property damage arising out of or resulting from (i) any occurrence within or on the Demised Premise, unless due to the act or omission of the Lessor, its agents, employees, invitees, or any other person for whom the Lessor is legally responsible or (ii) any act or omission of the Lessee, its agents, employees, invitees, or any other person for whom the Lessee is legally responsible, whether or not in or on the Demised Premises. (b) The Lessor covenants and agrees to indemnify and defend the Lessee against, and to save it harmless from, any and all claims of whatever nature, actions, loss, damages, liability and expense (including reasonable attorney's fees) in connection with loss of life, personal injury and property damage arising out of or resulting from (i) any occurrence outside of the Demised Premises or on the parking lot, unless due to the act or omission of the Lessee, its agents, employees, invitees, or any other person for whom the Lessee is legally responsible or (ii) any act or omission of the Lessor, its agents, employees, invitees, or any other person for whom the Lessor is legally responsible, whether or not in or on the Demised Premises. (c) The Lessor agrees not to seek indemnification directly from the assets of the Lessee pursuant to Section 14(a) until the Lessor has received all amounts recoverable after final judgment on an action by the Lessor to recover on, or payment of the policy limit on, the liability insurance policy or policies purchased by the Lessee pursuant to Clause 16. (d) The Lessee agrees not to seek indemnification directly from the assets of the Lessor pursuant to Section 14(b) until the Lessee has received all amounts recoverable after final judgment on an action by the Lessee to recover on, or payment of the policy limit on, the liability insurance policy or policies purchased or caused to be purchased by the Lessor. Insurance By Lessee 15. (a) The Lessee shall maintain with respect to the Demised Premises comprehensive general liability insurance (which may exclude hazardous wastes), with appropriate contractual liability endorsements covering all of the Lessee's obligations under Clause 14, and covering personal injuries and property damage with limits not less than $1,000,000 for any injury, death, or property damage which arises out of a single occurrence, and a $3,000,000 annual aggregate for multiple occurrences. Such insurance shall be written by a company licensed in Connecticut and shall not include any deductibles unless approved by Lessor in writing. The insurance policy shall name the Lessor as an "additional insured" and coverage shall not be canceled except on thirty (30) days' advance written notice to the Lessor. The Lessee shall deliver to the Lessor a certificate of said insurance by the term commencement date. If the Lessee shall fail to comply with this Clause, Lessor may purchase such insurance and the reasonable expense thereof shall constitute a debt by the Lessee payable to Lessor as additional rent. (b) Lessee shall insure its own personal property and leasehold improvements at its own expense. Damage By Fire, Eminent Domain 16. (a) The Lessor and Lessee covenant and agree that in case the Demised Premises, or any part thereof, or the whole or any part of the Demised Premises shall be taken for any street or other public use, or shall be destroyed or damaged for fire or other casualty, or by the action of the city or town or other authorities, or shall receive any direct or consequential damage for which the Lessor or the Lessee shall be entitled to compensation by reason of anything lawfully done in pursuance of any public authority, after the execution hereof and before the expiration of the then existing term hereof, then this Lease and the said term shall terminate at the election of the Lessor, and such election may be made in case of any such taking, notwithstanding the entire interest of the Lessor may have been divested by such taking; and if the Lessor shall not so elect, then in case of any such taking, or destruction of, or damage of the Demised Premises, rendering the same or any part thereof unfit for use and occupation, a just proportion of the rent hereinbefore reserved, according to the nature and extent of the injury sustained by the Demised Premises, shall be suspended or abated until the Demised Premises, or, in the case of such taking what may remain thereof, shall have been put in proper condition for the said use and occupation by Lessee substantially as it had prior to said taking, damage or destruction. However, the Lessor shall not make such election to terminate the lease if the damage to the building by fire or other casualty is less than $50,000. The Lessee hereby releases and discharges the Lessor from any claims it may have or may in the future have against the Lessor by reason of any taking as hereinbefore set forth; and the Lessee hereby assigns to the Lessor any and all claims and demands or damages on account of such taking or for compensation for anything lawfully done in pursuance of any public authority, and covenants with the Lessor that the Lessee will, from time to time, execute and deliver to the Lessor such further instruments of assignment of any such claims and demands as the Lessor shall reasonably request, provided, however, that the Lessee shall be entitled to recover for its fixtures, personal property and relocation expenses. (b) Notwithstanding anything herein to the contrary, in the event that as a result of such destruction or damage by fire or other casualty the parties determine in good faith that the building cannot be substantially restored or repaired within one hundred fifty (150) days after settlement of the insurance claim, but in any event not within one hundred eighty (180) days of the event of damage, then Lessee shall have the right to terminate this Lease upon thirty (30) days' advance written notice to Lessor but only provided that Lessee gives said notice within thirty (30) days of the date upon which such casualty occurred. Waiver of Subrogation 17. Each party will on request of the other, when it can be arranged without affecting the requested party's rights to settle losses and receive proceeds and without cost, or the requesting party agrees to pay the cost, cause the requested party's fire and casualty insurance with respect to the Demised Premises and property therein to be so written that the insurer will not have rights of subrogation against the requesting party. Each party hereby waives any right of recovery against the other for loss of injury to the extent the waiving party is protected by insurance so written. Assignment, Sublet 18. Notwithstanding any other provisions herein contained, the Lessee may not assign this lease without the written consent of the Lessor which shall not be unreasonably withheld or delayed. In the event of an assignment, Lessee shall remain liable for all obligations of the Lessee hereunder, including payment of rent and other charges under this Lease, notwithstanding any direct dealings which Lessor may thereafter have with such Assignee. The Lessee, subject to Lessor's approval not to be unreasonably withheld or delayed, shall have the right to sublet the whole or any part of the Demised Premises. If Lessee is a non-public corporation and if at any time during the term hereof the person or persons who own a majority of its voting shares at the time such company becomes a Lessee under this Lease cease to own a majority of such shares, such cessation shall be deemed an assignment of this Lease which shall be a default hereunder. Lessor's Remedies In Case Of Default 19. (a) A default shall be considered to have occurred if payment of all Annual Minimum Base Rent and/or additional rent shall not have been made when due and if such failure to pay shall continue for ten (10) days after Lessor's written notice, or Lessee's failure to insure as required in Clause 15(a) which is not cured within ten (10) days after Lessor's written notice, or if within thirty (30)days after written notice thereof from Lessor to Lessee specifying any other default or defaults Lessee has not cured such default or defaults (or if the same cannot be reasonably cured within said thirty (30) day time period by exercising due diligence, then such additional reasonable time for Lessee to cure provided Lessee continues to use due diligence to cure, but not more than an additional thirty (30) days). In the event (a) of any breach or default of any of the terms and covenants of this Lease to be performed or observed by Lessee, (b) the estate hereby created in Lessee is taken by process of law, (c) Lessee shall file a voluntary petition of bankruptcy, (d) any involuntary petition initiating a bankruptcy proceeding is filed against Lessee and is not dismissed within thirty (30) days, (e) Lessee is adjudicated bankrupt, (f) Lessee shall make an assignment for the benefit of creditors or take the benefit of any insolvency law, or (g) a receiver is appointed for Lessee, then Lessor may, upon five (5) days' prior written notice to the Lessee, expel and remove from the Demised Premises by summary process or other legal means, Lessee and those claiming under it and its effects, without being guilty of any manner of trespass, thereby terminating this Lease without prejudice to any remedies which Lessor might otherwise be entitled to for arrears of rent or otherwise. In the event of such termination, Lessee shall indemnify Lessor against all loss of rent and its costs and expenses which Lessor may reasonably incur by reason of such termination; provided, however, if the Demised Premises are relet in whole or in part, the Lessee shall be entitled to a credit in the net amount of rent received by the Lessor with respect to such reletting but after Lessor is first reimbursed for its reasonable expenses incurred in preparing the premises for reletting and its other costs and expenses due to such termination or reletting. (b) Lessee covenants and agrees to pay to Lessor reasonable legal costs and reasonable attorney's fees incurred by the Lessor in collecting any rent or other damages hereunder, in obtaining possession of the Demised Premises by summary process or otherwise, or in enforcing any provisions of this Lease. If Lessor re-enters the Demised Premises for any cause, or if Lessee abandons or vacates the Demised Premises, any property left in the Demised Premises by Lessee shall be deemed to have been abandoned by Lessee, and Lessor shall have the right to retain or dispose of such property in any manner without any obligation to account therefor to Lessee. Quiet Enjoyment 20. The Lessee, subject to the terms and provisions of this Lease, on payment of all rent and observing, keeping and performing all of the terms and provisions herein contained on Lessee's part to be performed, kept and observed, shall peaceably and quietly hold and enjoy the premises hereby demised. Holding Over 21. If Lessee holds over or continues in possession of the Demised Premises after the expiration of this Lease and without the execution of a new lease between the parties, the tenancy thus created shall be one from month to month. All covenants, obligation, conditions and agreements herein contained shall so far as applicable apply to all holding over by the Lessee as a tenant at will. However, notwithstanding the aforesaid, in the event the Lessee fails to vacate the Demised Premises upon expiration of the term of this Lease, or upon termination for default, the Lessee shall be liable for all damages incurred by the Lessor as well as future rental income lost to Lessor as a result of the Lessor's inability to deliver the premises to a new tenant; except, however, that Lessee's liability pursuant to this sentence shall not exceed an amount equal to six (6) months' rent hereunder. Governing Law; Headings 22. This Lease shall be governed by the laws of the State of Connecticut. The headings of the various clauses are for convenience only, and not to be considered in construing this Lease. This Lease shall be construed as if drafted by both parties. Notices 23. All notices that may be given hereunder by Lessor or Lessee shall be by registered or certified mail, return receipt requested, addressed in the case of Lessor to c/o Pearson Systems, Inc., P.O. Box 180, West Springfield, Massachusetts 01090; and all notices that may be given to Lessee shall be addressed to 4637 Chabot Drive, Suite 200, Pleasanton, California 94588. Invalidity 24. If any provision of this Lease shall prove to be invalid, such invalidity shall only affect the part of such provision which shall be invalid, and no other portion or provision of this Lease shall be invalidated, impaired, or affected thereby. Waiver by Lessor 25. Failure on the part of the Lessor or Lessee to complain of any action or non-action on the part of each other, no matter how long the same may continue, shall never be deemed to be a waiver by the Lessor or Lessee of any of its rights hereunder. Subordination 26. (a) It is agreed that the rights and interest of the Lessee under this lease shall be subject to and subordinate to any mortgages (or deeds of trust) that are now or may hereafter be placed upon the Demised Premises, and to any and all advances to be made thereunder, and to the interest thereon and charges thereunder, and all renewals, modifications, replacements and extensions thereof; provided, however, that Lessee receives a nondisturbance agreement in customary form. Any such mortgage (or deed of trust) to which the Lease shall be subordinated may contain such terms, provisions and conditions as the holder deems usual or customary, including but not limited to provisions requiring Lessee to attorn to the mortgagee (or trustee) and agreeing that such mortgagee (or trustee) shall have no liability for any defaults by Lessor prior to such mortgagee (or trustee) taking possession of Demised Premises nor responsibility for completion of construction of the building and other improvements. The Lessee shall execute and deliver whatever instruments may be required to effectuate such subordination, said attornment, said agreement of no liability, and to execute a consent to the assignment of this Lease if requested by any such mortgagee (or trustee), and in the event Lessee fails so to do within ten (10) days after written demand by Lessor, Lessee does hereby make, constitute and irrevocably appoint Lessor as its attorney in fact and in its name, place and stead to do so. This agreement shall be made to expressly bind and inure to the benefit of the successors and assigns of Lessee and of the mortgagee (or trustee) or upon anyone purchasing a interest in said Demised Premises at any foreclosure sale. (b) The Lessor will use reasonable diligence to obtain such nondisturbance agreement within sixty (60) days after the execution of this Lease for any existing mortgages and deeds of trust and within forty-five (45) days for any new mortgages or deeds of trust granted after the date hereof. (c) Notwithstanding the foregoing, any holder of a mortgage (or deed of trust) of property which includes the Demised Premises may at any time subordinate the mortgage (or deed of trust) to this Lease, without Lessee's consent, by notice to Lessee and thereupon this Lease shall be deemed prior in lien to such mortgage (or deed of trust) without regard to their respective dates of execution, delivery and record; and in that event such holder shall have the same rights with respect to this Lease as though it had been executed and delivered prior to the execution and delivery of the mortgage (or deed of trust) and had been assigned therein to such mortgagee (or trustee). This paragraph is supplementary to and not in derogation of any rights such a holder may otherwise have. Estoppel 27. The Lessee agrees from time to time, when reasonably needed for delivery to a prospective real estate purchaser or mortgagee or mortgage assignee upon not less than ten (10) days' prior written request by Lessor, to execute, acknowledge and deliver to Lessor a statement in writing certifying: (a) that this lease is unamended (or, if there have been any amendments, stating the amendments); (b) that it is then in full force and, effect, if that be the fact; (c) the last rent rates and other charges determined and the date to which paid; and (d) any defenses, offsets and counterclaims which Lessee, at the time of the execution of the statement, has against Lessee's obligation to pay rent and to perform its other obligations under this Lease or that there are none, if that be the fact. Any such statement delivered pursuant to this clause may be relied upon by such prospective purchaser, mortgagee or assignee. Occupation, Acknowledgment 28. Subject to a good faith mutually agreed punch list, Lessee's occupation of the Demised Premises will constitute acknowledgment that the same is in good and satisfactory order, repair and condition, and that Lessor has substantially satisfied its obligations to prepare the Demised Premises for occupancy. Rules & Regulations 29. Lessor shall have the right to make such reasonable rules and regulations as, in Lessor's judgment from time to time, be necessary or advisable for the appearance, safety, care and preservation of the Demised Premises and for the keeping of good order therein. Upon receipt by Lessee, such rules and regulations shall be deemed to be covenants of this lease, and shall include, but not be limited to, provisions regulating signs for Lessee, window covering or other treatment, use of outside areas, and the like. Trustee, Partnership 30. In the event that the Lessor is a partnership, no partner, General or Limited, of such partnership, or if a trust, no trustee thereof or beneficiary thereunder, or if a limited liability company or partnership, no member thereof shall be personally liable to anyone under any term, condition, covenant, obligation, or agreement expressed herein or implied hereunder or for any claim of damage or cause at law or in equity arising out of the occupancy of said Demised Premises, the use or the maintenance of the Lessor's building or its approaches and equipment. Persons Bound, etc. 31. Except as herein otherwise provided, the terms and provisions of this Lease shall be binding upon and inure to the benefit of the heirs, devisees, personal representatives, successors and assigns, respectively, of the Lessor and Lessee. Nothing in the immediately preceding sentence shall be construed as a consent by Lessor to an assignment of this Lease, and said sentence shall apply to an assignee only when Lessor has specifically and expressly consented to such an assignment pursuant to Clause 18. The person or entity who or which was the Lessor shall not be liable for obligations of the Lessor hereunder accruing after it has ceased to own the Demised Premises. Performance of Obligations 32. (a) With respect to any services to be furnished to Lessee or Lessor or any other obligations of Lessor or nonmonetary obligations of Lessee, each party ("first party") shall in no event be liable to the other ("second party") for failure or delay caused by war, strikes, labor difficulties, lockouts, breakdown, accident, order or regulation of governmental authority, failure of supply, or inability, by exercise of reasonable diligence, to obtain supplies, parts or employees necessary to perform such services or obligations, or for any other cause beyond the first party's reasonable control, or for any cause due to any act or neglect on the part of the second party or its agents, employees, invitees or any person for whom such party is legally responsible; and in no event shall the Lessor or Lessee (except as provided in the last sentence of Clause 21) ever be liable to each other for any indirect, consequential or punitive damages or any inconvenience to such other party, or interruption of such other party's business. (b) The Lessor shall in no event be in default in the performance of any of its obligations hereunder unless and until the Lessor shall have failed to perform such obligations within thirty (30) days or such additional time as is reasonably required to correct any such default after written notice by Lessee to Lessor properly specifying wherein the Lessor has failed to perform any such obligation. Covenant of Title 33. Lessor covenants and warrants that Lessor has full right and lawful authority to make this Lease for the full term hereof and it has good title to the Demised Premises, subject to any mortgage now or hereafter of record and further subject to such other encumbrances, easements, and restrictions of record which will not substantially adversely affect Lessee's use of the Demised Premises. Compliance with Laws 34. Lessor acknowledges and warrants that the Demised Premises, upon its completion of construction, shall be in full compliance with all applicable law, rule, regulation, code, by-law or ordinance in force in the Town of Enfield, Connecticut. In no event shall the Lessee conduct (or suffer or allow to be conducted) any trade, business or occupation in or make any use of, the Demised Premises which is or will be unlawful or contrary to any such governmental provision. Lessor acknowledges and warrants that the Demised Premises, upon its completion of construction, will comply with the applicable provisions of the Americans With Disabilities Act and regulations promulgated thereunder. However, if Lessee at any time hereafter makes any alterations to the Demised Premises, Lessee shall be responsible to comply with all applicable governmental requirements, including but not limited said Americans With Disabilities Act. Payment Under Protest 35. Lessor and Lessee agree that if at any time a dispute shall arise as to the propriety or necessity of the Lessee mailing any payment or performing any obligations required hereunder, the Lessee may pay or perform the same under protest and such payment or performance under protest shall not be construed to be voluntary on the part of the Lessee. Notice of Lease 36. Lessor and Lessee agree that within thirty (30) days of the execution of the Lease, each shall execute a Notice of Lease for recording in the Land Records. Environmental Provisions 37. (a) Lessee shall not cause or permit any Hazardous Substance to be used, stored, generated, or disposed of on or in or released from the Demised Premises by Lessee or its agents, employees, contractors or invitees, without first obtaining Lessor's written consent, except Lessee may to the extent reasonably necessary for the conduct of its business use such Hazardous Substance but only in such amounts reasonably necessary from time to time and provided they are properly stored and no contamination occurs and Lessee is in strict compliance with all laws, ordinances and regulations governing such activity. If Hazardous Substances are used, stored, generated, or disposed of on or in or released from the Demised Premises by Lessee or its agents, employees, contractors or invitees, or if the Demised Premises or any surrounding property become contaminated in any manner caused by Lessee or its agents, employees, contractors or invitees, Lessee shall indemnify, defend, and hold harmless the Lessor from any and all claims, damages, fines, judgments, penalties, costs, liabilities, or losses (including without limitation, a decrease in value of the Demised Premises or the buildings of which they are a part, damages because of adverse impact on marketing of the space, lost rental income, lost profits and any and all sums paid for settlement of claims, attorneys, consultant, and expert fees) arising during or after the lease term and arising as a result of such contamination by Lessee. This indemnification includes, without limitation, any and all costs incurred because of any investigation of the site or any cleanup, removal, or restoration mandated by a federal, state or other applicable governmental agency or authority if the condition of occurrence necessitating the same is caused by the Lessee or its agents, employees, contractors or invitees. In addition, if Lessee causes or permits the presence of any Hazardous Substance on the Demised Premises and this results in contamination, Lessee shall promptly, at its sole expense, take any and all necessary actions to return the Demised Premises to the condition existing before the presence of any such Hazardous Substance on the Demised Premises provided, however, that Lessee shall first obtain Lessor's written approval for any such remedial action. (b) As used herein, "Hazardous Substance" means any substance which is toxic, ignitable, reactive, corrosive, and which is regulated by any local government, the State of Connecticut, or the United States Government. "Hazardous Substance" also includes any and all material or substances which are defined as "hazardous waste," "extremely hazardous waste," or a "hazardous substances," pursuant to state, federal, or local governmental law. "Hazardous Substance" also includes but is not restricted to asbestos, polychlorinated biphenyls ("PCBs"), and oil, petroleum products and their by-products. (c) Lessee shall use reasonable efforts to prevent unnecessary noise or vibrations from carrying outside the Demised Premises and to prevent the omission of any detrimental or obnoxious fumes or smells. Brokerage 38. Lessor and Lessee each warrant and covenant with the other that neither has retained or contracted with any realtor or real estate broker with regard to this lease. However, CB Commercial is Lessor's broker. Signage 39. Lessee may install a freestanding sign subject to applicable governmental laws or regulations. IN WITNESS WHEREOF, the parties hereto have hereunto set their respective hands and seals on the day and year first above written. Signed and sealed in the LESSOR: presence of: PEARSON-ENFIELD DEVELOPMENT COMPANY LLC /s/Joeseph Korecki By: Thomas J. Henshon - ----------------------------- ----------------------------- Thomas J. Henshon Manager LESSEE: SIMPSON STRONG-TIE COMPANY, INC. November 10, 1997 By: /S/Steve Lamson - ----------------------------- ----------------------------- Name: STEVE LAMSON Title: CFO COMMONWEALTH OF MASSACHUSETTS Hampden, ss November 18, 1997 Then personally appeared the above-named THOMAS J. HENSHON, Manager of Pearson-Enfield Development Company LLC, Lessor, and acknowledged the foregoing instrument to be the free act and deed of said Lessor, before me, /s/signature not legible ------------------------------ Notary Public My commission expires: 3/11/98 STATE OF CALIFORNIA County of Alameda November 10, 1997 Then personally appeared the above-named STEVE LAMSON, the CFO of Simpson Strong-Tie Company, Inc., Lessee, and acknowledged the foregoing instrument to be the free act and deed of the Lessee, before me, /s/Kathleen M. Kuwitzky ------------------------------- Notary Public My commission expires: 5/4/2001 EXHIBIT A - DRAWINGS OF PREMISIS LEASE GUARANTY SIMPSON MANUFACTURING CO., INC., a California Corporation, having a principal place of business at Pleasanton, California 94588, in order to induce PEARSON-ENFIELD DEVELOPMENT COMPANY LLC, ("Lessor") as Lessor, to execute certain lease with SIMPSON STRONG-TIE COMPANY INC. ("Lessee") as Lessee, for certain premises located in Lessor's Building at 7 Pearson Way, Enfield, Connecticut, which as a result of this inducement Lessor has executed said Lease to which this Lease Guaranty is attached, and in further consideration of One Dollar and other valuable consideration to us paid by Lessor, the receipt whereof we hereby acknowledge, we do hereby unconditionally guaranty to Lessor (which term shall include its successors and assigns where the context so requires and admits) the punctual payment of rent by Lessee and the performance and observance by Lessee of all the other terms, covenants and conditions of the said Lease to be performed or observed by the Lessee thereunder. And for further consideration aforesaid, we do hereby agree that this Guaranty shall be absolute, unconditional and irrevocable and that without in any way exonerating the guaranty hereunder or releasing or affecting the liability of guaranty hereunder, Lessor may grant at any time or times any extension of time or other indulgence to or compound with Lessee, including, but without limiting the generality of the foregoing, any variation, modification or waiver of any term, covenant or condition of said Lease or may take any note, obligation, security or other guaranty as further security for said Lease and Lessor may take any action or lack of action without our consent hereunder and without notice to us; and we do hereby waive notice of any and every kind whatsoever hereunder, and particularly, but without limiting the generality of the foregoing, do hereby waive notice of breach or default of any of the terms, covenants and conditions of said Lease. This guaranty shall continue in full force and effect notwithstanding any assignment of said Lease by Lessee, whether or not approved by Lessor. This guaranty shall be binding upon each of the undersigned and its successors and assigns. IN WITNESS WEREOF, the undersigned, by STEVE LAMSON, its CFO, duly authorized has set its hand and seal hereto, on this 23 day of December, 1997. SIMPSON MANUFACTURING CO., INC. By: /s/Steve Lamson ----------------------------- Name: Steve Lamson Title: CFO Attest: /s/Steve Lamson ----------------------------- Name: Steve Lamson Secretary STATE OF CALIFORNIA County of Alameda December 23, 1997 Then personally appeared the above-named STEVE LAMSON, the CFO of Simpson Manufacturing Co., Inc., Guarantor, and acknowledged the foregoing instrument to be the free act and deed of the Lessee, before me, /s/Kathleen M. Kuwitzky ------------------------------- Notary Public My commission expires: 5/4/2001 ADDENDUM I TO LEASE REFERENCE is made to the Lease between Pearson-Enfield Development Company LLC, as Lessor, and Simpson Strong-Tie Company, Inc., as Lessee. This Addendum is being executed contemporaneously with said Lease and is intended to be a part thereof. 1. Lessee shall have the option to lease an additional 51,004 square feet to be attached to the building which is being constructed pursuant to the Lease, and being a portion of the Lessor's Land (hereinafter the "Additional Building Space"), located at 7 Pearson Way, Enfield, Connecticut. Said option shall be exercisable at any time during the original term of this Lease. 2. It is contemplated by the parties that the Additional Building Space, as will be constructed, will be substantially similar to the original building (except that it will not contain any additional office space; and additional truck docks, if any, to be determined). 3. The Annual Minimum Base Rent payable by the Lessee for the Additional Building Space will be mutually determined by the parties based on the then prevailing rent rates for comparable new construction in the Enfield area and with a new lease term for both the Demised Premises and Additional Building Space based on a reasonable term of years to justify Lessor's cost of such new construction. The parties agree to negotiate such rent rate and lease term in a reasonable good faith manner. Except as stated herein, all of the other terms, covenants and provisions of the Lease shall remain in full force and effect. IN WITNESS WHEREOF, the parties have set their respective hands and seals on the day first above-mentioned. Signed and sealed in the PEARSON-ENFIELD DEVELOPMENT presence of: COMPANY LLC, as Lessor /s/Joeseph Korecki By: Thomas J. Henshon - ----------------------------- ----------------------------- Thomas J. Henshon Its Manager LESSEE: SIMPSON STRONG-TIE COMPANY, INC. November 10, 1997 By: /S/Steve Lamson - ----------------------------- ----------------------------- Name: STEVE LAMSON Title: CFO Duly authorized COMMONWEALTH OF MASSACHUSETTS Hampden, ss November 18, 1997 Then personally appeared the above-named THOMAS J. HENSHON, as Manager of Pearson-Enfield Development Company LLC, Lessor, and acknowledged the foregoing instrument to be the free act and deed of said Lessor, before me, /s/signature not legible ------------------------------ Notary Public My commission expires: 3/11/98 STATE OF CALIFORNIA County of Alameda November 10, 1997 Then personally appeared the above-named STEVE LAMSON, the CFO of Simpson Strong-Tie Company, Inc., Lessee, and acknowledged the foregoing instrument to be the free act and deed of the Lessee, before me, /s/Kathleen M. Kuwitzky ------------------------------- Notary Public My commission expires: 5/4/2001 EX-10 4 AMENDMENT TO CREDIT AGREEMENT EXHIBIT 10.3 ------------ FIRST AMENDMENT TO CREDIT AGREEMENT THIS FIRST AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is entered into as of March 2, 1998, by and between SIMPSON MANUFACTURING CO., INC, a California corporation ("Borrower"), and WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank"). RECITALS WHEREAS, Borrower is currently indebted to Bank pursuant to the terms and conditions of that certain Credit Agreement between Borrower and Bank dated as of January 15, 1997, as amended from time to time ("Credit Amendment"). WHEREAS, Bank and Borrower have agreed to certain changes in the terms and conditions set forth in the Credit Agreement and have agreed to amend the Credit Agreement to reflect said changes. NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree that the Credit Agreement shall be amended as follows: 1. Section 5.4 is hereby deleted in its entirety, and the following substituted therefor: "Section 5.4. GUARANTIES. Guarantee or become liable in any way as surety, endorser (other than as endorser of negotiable instruments for deposit or collection in the ordinary course of business), accommodation endorser or otherwise for, nor pledge or hypothecate any assets of Borrower as security for, any liabilities or obligations of any other person or entity in an aggregate amount at any time in excess of $4,000,000.00, except any of the foregoing in favor of Bank." 2. Except as specifically provided herein, all terms and conditions of the Credit Agreement remain in full force and effect, without waiver or modification. All terms defined in the Credit Agreement shall have the same meaning when used in this Amendment. This Amendment and the Credit Agreement shall be read together, as one document. 3. Borrower hereby remakes all representations and warranties contained in the Credit Agreement and reaffirms all covenants set forth therein. Borrower further certifies that as of the date of this Amendment there exists no Event of Default as defined in the Credit Agreement, nor any condition, act or event which with the giving notice or the passage of time or both would constitute any such event of Default. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the day and year first written above. WELLS FARGO BANK, SIMPSON MANUFACTURING CO., INC. NATIONAL ASSOCIATION By: /s/Steve Lamson By: Brian Phillips ---------------------------- ---------------------------- Steve Lamson Brian Phillips Vice-President Title: CFO ------------------------- By: /s/Thomas J Fitzmyers ---------------------------- Title: President ------------------------- EX-10 5 AMENDMENT TO LOAN AGREEMENT EXHIBIT 10.4 ------------ Mr. Thomas Fitzmyers, President Mr. Steve Lamson, CFO SIMPSON MANUFACTURING CO., INC. 4637 Chabot Dr., Suite 200 Pleasanton, CA 94588 Gentlemen: In reference to the Agreement between Union Bank of California, N.A. ("Bank") and Simpson Manufacturing Co., Inc. ("Borrower") dated January 14, 1997, the Bank and Borrower desire to amend the Agreement. This amendment shall be called the Second Amendment to the Agreement. Initially capitalized terms used herein which are not otherwise defined shall have the meaning assigned thereto in the agreement. Amendment to the Agreement: (a) "Section 5.4 Guaranties, the amount $1,000,000 on line two is deleted and the amount $4,000,000 is substituted therefore" This Loan Amendment shall become effective when the Bank shall have received the acknowledgment copy of this Loan Amendment executed by the Borrower and the following executed documents, all of which the Bank must received before February 15, 1998. Except as specifically amended hereby, the Agreement shall remain in full force and effect and is hereby ratified and confirmed. This Loan Amendment shall not be a waiver of any existing default or breach of a condition to covenant unless specified herein. Very truly yours, UNION BANK OF CALIFORNIA, N.A. /s/Joellen Ademski - ------------------------------- ------------------------------- Joellen Ademski, Vice President Lebbeus S. Case, Jr., VP Agreed and Accepted to this 4 day of February, 1998. SIMPSON MANUFACTURING CO., INC. /s/Thomas J Fitzmyers /s/Steve Lamson - ------------------------------- ------------------------------- Thomas Fitzmyers, President Steve Lamson, Chief Financial Officer EX-11 6 COMPUTATION RE EARNINGS PER SHARE
SIMPSON MANUFACTURING CO., INC. AND SUBSIDIARIES Computation of Earnings Per Common Share For the Three Years Ended December 31, 1997, 1996 and 1995 Exhibit 11 Basic Earnings per Share 1997 1996 1995 ------------ ------------ ------------ Weighted average number of common shares outstanding 11,471,217 11,422,995 11,316,073 Shares issuable pursuant to stock bonus plan 3,375 1,950 600 ------------ ------------ ------------ Number of shares for computation of basic net income per share 11,474,592 11,424,945 11,316,673 ============ ============ ============ Net income for computation of basic net income per share $ 25,985,779 $ 19,720,638 $ 14,121,885 ============ ============ ============ Basic net income per share $ 2.26 $ 1.73 $ 1.25 ============ ============ ============
SIMPSON MANUFACTURING CO., INC. AND SUBSIDIARIES Computation of Earnings Per Common Share For the Three Years Ended December 31, 1997, 1996 and 1995 Exhibit 11 (continued) Diluted Earnings per Share 1997 1996 1995 ------------ ------------ ------------ Weighted average number of common shares outstanding 11,471,217 11,422,995 11,316,073 Shares issuable pursuant to employee stock option plans, less shares assumed repurchased at the average fair value during the period 486,337 326,604 142,822 Shares issuable pursuant to the independent director stock option plan, less shares assumed repurchased at the average fair value during the period 5,021 3,635 1,072 Shares issuable pursuant to stock bonus plan 3,375 1,950 600 ------------ ------------ ------------ Number of shares for computation of diluted net income per share 11,965,950 11,755,184 1,460,567 ============ ============ ============ Net income for computation of diluted net income per share $ 25,985,779 $ 19,720,638 $ 14,121,885 ============ ============ ============ Diluted net income per share $ 2.17 $ 1.68 $ 1.23 ============ ============ ============
EX-21 7 LIST OF SUBSIDIARIES SIMPSON MANUFACTURING CO., INC. AND SUBSIDIARIES List of Subsidiaries of Simpson Manufacturing Co., Inc. At March 15, 1998 Exhibit 21 1. Simpson Strong-Tie Company Inc., a California corporation 2. Simpson Dura-Vent Company, Inc., a California corporation 3. Simpson Strong-Tie International, Inc., a California corporation 4. Simpson Manufacturing International Corporation, a Barbados corporation 5. Simpson Strong-Tie Canada, Limited., a Canadian corporation 6. Simpson Strong-Tie France, Limited., a French corporation 7. Patrick Bellion, S.A., a French corporation 8. Simpson Strong-Tie Japan, Inc., a California corporation 9. Simpson Strong-Tie Australia, Inc., a California corporation Each subsidiary of Registrant does business using its respective name listed above, and Simpson Strong-Tie Canada, Limited, uses as a fictitious business name, "Isometric Limited." EX-23 8 CONSENT OF INDEPENDENT ACCOUNTANTS Simpson Manufacturing Co., Inc. and Subsidiaries Consent of Independent Certified Public Accountants Exhibit 23 We consent to the incorporation by reference in the registration statements of Simpson Manufacturing Co., Inc. on Form S-3 (File No. 333-44603) and Forms S-8 (File No. 33-85662 and File No. 33-90964) of our report dated January 29, 1998, on our audits of the consolidated financial statements and the financial statement schedule of Simpson Manufacturing Co., Inc. and subsidiaries as of December 31, 1997 and 1996 and for the years ended December 31, 1997, 1996 and 1995, which report is included in this Annual Report on Form 10-K. COOPERS & LYBRAND L.L.P. San Francisco, California March 24, 1998 EX-27 9 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the Consolidated Balance Sheet at December 31, 1997, and the Consolidated Statement of Operations for the twelve months ended December 31, 1997, and is qualified in its entirety by reference to such financial statements. 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 19,418,689 0 26,398,046 1,772,478 54,982,945 104,287,538 84,911,093 41,986,005 150,764,940 20,990,685 0 0 0 32,377,563 96,572,960 150,764,940 246,074,446 246,074,446 149,279,718 149,279,718 53,471,051 0 0 43,752,779 17,767,000 25,985,779 0 0 0 25,985,779 2.26 2.17 Interest income for the twelve months ended December 31, 1997, was $429,102.
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