-----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, JngX6nnKVkUPRFuDHTF9ZWpfbTLmHLZpiWXWvn9wQur/FcqS4TqDY+t/a3cY9Yzx 9NtX0H1cTVXLa3mSdL4Qcg== 0000920371-00-000002.txt : 20000411 0000920371-00-000002.hdr.sgml : 20000411 ACCESSION NUMBER: 0000920371-00-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000329 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: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-13429 FILM NUMBER: 581814 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 1999 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, 1999 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) DELAWARE 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: (925)460-9912 - -------------------------------------------------------------------------- Securities registered pursuant to Section 12(b) of the Act: COMMON STOCK, PAR VALUE $0.01 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 March 1, 2000, there were outstanding 12,019,498 shares of the registrant's common stock, par value $0.01, which is the only outstanding class of common or voting stock of the registrant. 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 March 1, 2000) was approximately $335,199,437. 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 16, 2000, which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 1999. ========================================================================== 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. See Note 14 to the Company's consolidated financial statements for information regarding the net sales, income from operations, depreciation and amortization, capital expenditures and acquisitions and total assets for the Company's two primary segments. 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. SST's Anchoring Systems product line is included in the connector product segment. 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 over 5,000 standard and custom products. 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 approximately 2,000 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, Japan, Australia, New Zealand and several countries in Central and South America. 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 12 manufacturing locations in the United States, Canada, France and the United Kingdom. The Company is a Delaware corporation organized and merged with its predecessor company in 1999. The Company serves as a holding company for Simpson Strong-Tie, and its subsidiaries, and for 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. 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, such as the recently adopted 1997 Uniform Building Code, have been 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 1998 and 1999. 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 U.S. Census Bureau, the share of residential space heating in 1997 heated with natural gas was 70%, an increase from 61% in 1978. In the hearth appliance market, sales of gas stoves and gas fireplaces have increased in recent years relative to those of traditional wood burning appliances. According to the Hearth & Home Magazine (April 1999), the share of hearth appliances fired with natural gas in 1998 was 58%, an increase from 43% in 1994. 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 Company's sales to home centers increased significantly in 1998 and 1999. 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 represented approximately 47% of the Company's 1999 domestic sales. Since 1993, the Company commenced manufacturing in England, opened warehouse and distribution facilities in Western Canada and the Northeastern United States, purchased anchoring products manufacturers in Illinois and Eastern Canada and a connector product manufacturer in France, established a distribution operation in Chile, made an equity investment in a product design and distribution company in Germany and entered into distribution arrangements in Japan and Australia. 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. 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 100 patents that the Company owns, 81 cover products that the Company currently manufactures and markets. The Company has filed 60 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 over 5,000 standard and custom products. 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. 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 70 U.S. and 27 foreign patents that SST owns, 78 cover products that SST currently manufactures and markets. Over a quarter of SST's 1999 revenues were derived from products that are protected by patents. SST typically has developed 10 to 15 new products each year. SST's research and development expense for the three years ended December 31, 1999, 1998 and 1997, was $1,376,000, $1,087,000 and $957,000, 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 pre-fabricated shear-wall product for the new construction market and has expanded its line of chemical and mechanical anchoring products. 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, home centers, manufacturers of engineered wood products, and specialized contractors such as roof framers. In 1999, sales to The Home Depot were more than 10% of the Company's consolidated net sales (see Note 14 to the Company's consolidated financial statements). SST's DIY and dealer products are used to build projects such as decks, patio covers and shelf and bench systems. SST received C-Mark equivalency clearance from the Japanese building code authorities, which is expected to facilitate acceptance of its products into the Japanese market, and has increased the distribution of its products in Australia and Chile. 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. SST also maintains a website (www.strongtie.com) that includes catalogs, product and technical information, code reports and other general information. 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, seminars and 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 manufactures chimney systems for use on wood burning stoves. Historically, sales of wood burning stoves (considered an alternative energy source) have increased during periods of high oil prices and energy shortages. 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 high 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 also markets 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. Simpson Dura- Vent's Dura-Plus safety valve design, a patented chimney system for use with wood burning stoves, provides enhanced fire safety in the event of a creosote chimney fire. 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. 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. Simpson Dura-Vent has established OEM and distribution relationships with several large manufacturers of gas stoves and gas fireplaces to supply direct-vent venting products. 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. The 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, 1999, 1998 and 1997, was $433,000, $431,000 and $323,000, 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, SDV introduced the first direct vent system for the increasingly popular direct vent gas appliances. In 1999, SDV introduced DuraTech, a twin-walled insulated chimney system for use on wood burning stoves, fireplaces and oil fired appliances. This product line has been designed and manufactured to a new standard of excellence. It is constructed from stainless steel and incorporates blanket insulation for enhanced safety and efficiency. 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 established 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. To enhance its marketing effort, SDV has developed a website (www.duravent.com) that includes product descriptions, catalogs and installation instructions, as well as a direct link to SDV's customer service and engineering departments. MANUFACTURING PROCESS The Company has concentrated on making its manufacturing processes as efficient as possible without compromising quality or flexibility necessary to serve 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, Connecticut, Illinois, Washington, British Columbia, Ontario, England, France and Chile. 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 over 500 million product pieces per year. Over half of SST's products (SKUs) are bar coded with a UPC number for easy identification, and nearly all of the products sold to home centers are labeled with bar codes. 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. 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 machining (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, increase automation, and take advantage of new types of materials. For example, in 1999, Simpson Strong-Tie introduced two new products made from an engineered composite plastic, the AnchorMate and the StrapMate. 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. Most of the Company's current and planned manufacturing facilities are 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 has developed a disaster recovery plan, but it 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 could 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 and maintaining 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. As a result of differences in structural design and building practices and codes, SST's markets tend to differ by region. Within these regions, Simpson Strong-Tie competes with companies of varying size, several of which also distribute their 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 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 100 U.S. and foreign patents, of which 81 cover products that they currently manufacture and market. Its subsidiaries have filed 19 U.S. and 41 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 has developed an international patent program to protect new products that its subsidiaries may develop. The Company's subsidiaries hold 151 trademark registrations in the U.S. and foreign countries covering 61 trademarks, have 23 trademark registration applications pending in the U.S. and foreign countries covering 12 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 "Industry and Market Trends" and "Business Strategy." 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, all of 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." 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 the third quarter of 1999, Simpson Strong-Tie International, Inc. ("SSTI"), a subsidiary of the Company, purchased the assets of Furfix Products Limited and Easy Arches Limited (together, "Furfix"), which manufacture a line of structural connectors for the wood and masonry construction markets in the United Kingdom and Europe. The purchase price was approximately $7.8 million in cash plus an earnout based on future operating performance. Included in the purchase price were costs associated with the closure of Furfix's existing facility and integration into SSTI's facility in Tamworth, England. 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 $7.7 million plus an earnout based on future sales increases through December 2000. 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. With some exceptions, 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. 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 March 1, 2000, the Company had 1,556 full-time employees, of whom 1,068 were hourly employees and 488 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 Thomas J Fitzmyers, Stephen B. Lamson, Barclay Simpson 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. Two of the Company's collective bargaining agreements cover the Company's sheetmetal workers and its tool and die craftsmen in Brea. These two contracts expire in June 2001 and February 2002, respectively. Two other contracts, covering sheetmetal workers and tool and die personnel in San Leandro, expire in July 2000 and June 2003, respectively. 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, Connecticut, Washington, British Columbia, Ontario, England and France. As of March 15, 2000, the Company's facilities were as follows:
Approximate Square Owned or Lease Location Footage Leased Lessee Expires Function - --------------------------- ----------- ---------- -------- ------- -------------------------- Pleasanton, California 22,200 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 Owned Office and Warehouse San Leandro, California 27,000 Owned Manufacturing and Warehouse San Leandro, California 61,800 Leased SST 2002 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 Brea, California 19,200 Owned Warehouse McKinney, Texas 84,300 Owned Office, Manufacturing and Warehouse McKinney, Texas 117,100 Owned Office and Warehouse Columbus, Ohio 153,500 Leased(3) 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 55,100 Leased SST 2003 Office and Warehouse Kent, Washington 24,000 Leased SST 2004 Office, Manufacturing and Warehouse Visalia, California 20,000 Leased SST 2000 Warehouse Tamworth, England 78,100 Leased SST(4) 2012 Office, Manufacturing and Warehouse Cannock, Staffordshire, 26,900 Leased SST(4) 2000 (5) England Vacaville, California 125,000 Leased(6) SDV 2007 Office, Manufacturing and Warehouse Vacaville, California 120,300 Owned Office, Manufacturing and Warehouse Vacaville, California 40,200 Leased SDV 2001 Warehouse Fontana, California 17,900 Leased SDV 2001 Warehouse Vicksburg, Mississippi 172,000 Leased(7) SDV 2003 (8) Vicksburg, Mississippi 302,000 Owned Office, Manufacturing and Warehouse Vancouver, British Columbia 7,000 Leased SST 2004 Warehouse Toronto, Ontario 104,000 Leased SST(9) 2009 Office, Manufacturing and Warehouse St. Hermine, France 11,300 Leased SST(10) 2002 Office, Manufacturing and Warehouse St. Hermine, France 20,900 Leased SST(10) 2001 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) Lessor is Columbus Westbelt Investment Company, a related party. See Note 9 to the Consolidated Financial Statements contained elsewhere herein. (4) Lessee is Simpson Strong-Tie International, Inc., a wholly-owned subsidiary of SST. (5) The Company no longer occupies this property and it is currently being subleased to an unrelated tenant. (6) Lessor is Vacaville Investors, a related party. See Note 9 to the Consolidated Financial Statements contained elsewhere herein. (7) Lessor is Vicksburg Investors, a related party. See Note 9 to the Consolidated Financial Statements contained elsewhere herein. (8) The Company no longer occupies this property and is attempting to sublease the property. (9) Lessee is Simpson Strong-Tie Canada, Ltd., a wholly-owned subsidiary of SST. (10) Lessee is Simpson Strong-Tie, S.A., 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 2000. The manufacturing facilities currently are being operated with one full shift and at most plants with at least a partial second or third shift. The Company anticipates that it may require additional facilities to accommodate possible future 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 is listed on the New York Stock Exchange ("NYSE") under the symbol "SSD." The following table shows the range of high and low closing sale prices per share of the Common Stock as reported by the NYSE, as applicable, for the calendar quarters indicated:
Market Price Quarter High Low --------- --------- 1999 Fourth $46 13/16 $39 3/16 Third 54 3/8 45 5/16 Second 49 3/16 39 3/16 First 40 1/4 32 7/8 1998 Fourth $38 11/16 $25 15/16 Third 40 5/16 29 1/8 Second 42 1/16 37 7/16 First 42 1/2 32 3/4
The Company estimates that as of March 1, 2000, 2,937 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 $100.0 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, 1999, the Company had a Tangible Net Worth of $204.0 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, 1999, 1998, 1997, 1996 and 1995, 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) 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- STATEMENT OF OPERATIONS DATA: Net sales $328,440 $279,081 $246,074 $202,409 $167,958 Cost of sales 195,839 170,045 149,279 124,394 109,368 -------- -------- -------- -------- -------- Gross profit 132,601 109,036 96,795 78,015 58,590 Selling expense 32,204 24,706 23,113 20,104 17,110 General and administrative expense 37,846 33,100 30,358 25,216 18,573 -------- -------- -------- -------- -------- Income from operations 62,551 51,230 43,324 32,695 22,907 Interest income, net 1,669 940 429 595 142 -------- -------- -------- -------- -------- Income before income taxes 64,220 52,170 43,753 33,290 23,049 Provision for income taxes 25,753 21,028 17,767 13,569 8,927 -------- -------- -------- -------- -------- Net income $ 38,467 $ 31,142 $ 25,986 $ 19,721 $ 14,122 ======== ======== ======== ======== ======== Diluted net income per share of common stock $ 3.14 $ 2.58 $ 2.17 $ 1.68 $ 1.23 ======== ======== ======== ======== ========
As of December 31, -------------------------------------------------------- (Dollars in thousands) 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- BALANCE SHEET DATA: Working capital $142,056 $105,643 $ 83,297 $ 70,676 $ 51,984 Property, plant and equipment, net 61,144 54,965 42,925 28,688 26,420 Total assets 247,254 191,600 150,765 122,521 96,642 Total debt 2,764 2,896 30 - 20 Total liabilities 36,665 30,317 21,814 20,224 15,089 Total stockholders' equity 210,589 161,282 128,951 102,297 81,553
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) 1999 1998 -------------------------------------------- -------------------------------------------- (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 $ 81,218 $ 88,808 $ 83,753 $ 74,661 $ 71,832 $ 77,208 $ 70,786 $ 59,254 Cost of sales 48,179 52,359 49,089 46,212 43,930 47,025 41,708 37,381 -------- -------- -------- -------- -------- -------- -------- -------- Gross profit 33,039 36,449 34,664 28,449 27,902 30,183 29,078 21,873 Selling expense 8,141 8,123 8,042 7,898 6,401 6,551 6,130 5,625 General and administrative expense 9,446 10,278 9,999 8,122 8,615 8,603 8,961 6,921 -------- -------- -------- -------- -------- -------- -------- -------- Income from operations 15,452 18,048 16,623 12,429 12,886 15,029 13,987 9,327 Interest income, net 589 477 255 348 386 233 114 207 -------- -------- -------- -------- -------- -------- -------- -------- Income before income taxes 16,041 18,525 16,878 12,777 13,272 15,262 14,101 9,534 Provision for income taxes 6,411 7,408 6,805 5,129 5,400 6,027 5,728 3,873 -------- -------- -------- -------- -------- -------- -------- -------- Net income $ 9,630 $ 11,117 $ 10,073 $ 7,648 $ 7,872 $ 9,235 $ 8,373 $ 5,661 ======== ======== ======== ======== ======== ======== ======== ======== Diluted net income per share of common stock $ 0.78 $ 0.90 $ 0.82 $ 0.63 $ 0.65 $ 0.77 $ 0.69 $ 0.47 ======== ======== ======== ======== ======== ======== ======== ========
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. 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, 1999, 1998 and 1997, 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 Annual net sales of the Company increased 33.5% to $328.4 million in 1999 from $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 1997 to 1999 in all regions of the United States, with above average rates of growth in the California and Southeastern markets. Expansion into overseas markets also contributed to the net sales growth over the last three years. For the year ended December 31, 1999, gross profit margin increased to 40.4%, from 39.3% in 1997. The increase since 1997 was due primarily to lower product costs as a percentage of net sales, LIFO gains and lower overhead costs as a percentage of net sales. Income from operations as a percentage of net sales, increased to 19.1% in 1999 from 17.6% in 1997. 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, -------------------------------- 1999 1998 1997 -------- -------- -------- Net sales 100.0% 100.0% 100.0% Cost of sales 59.6% 60.9% 60.7% -------- -------- -------- Gross profit 40.4% 39.1% 39.3% Selling expense 9.8% 8.9% 9.4% General and administrative expense 11.5% 11.9% 12.3% -------- -------- -------- Income from operations 19.1% 18.4% 17.6% Interest income, net 0.5% 0.3% 0.2% -------- -------- -------- Income before income taxes 19.6% 18.7% 17.8% Provision for income taxes 7.9% 7.5% 7.2% -------- -------- -------- Net income 11.7% 11.2% 10.6% ======== ======== ========
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1999 AND 1998 Net Sales Net sales increased 17.7% to $328.4 million in 1999 from $279.1 million in 1998. Net sales of Simpson Strong-Tie's products increased 18.4% to $260.9 million in 1999 from $220.3 million in 1998, while net sales of Simpson Dura-Vent's products increased by 14.9% to $67.5 million in 1999 from $58.8 million in 1998. SDV accounted for approximately 20.6% of the Company's total net sales in 1999, a decrease from 21.1% in 1998. The increases in net sales at both SST and SDV resulted from increases in sales volume, with an overall decrease in average prices. Most of the sales growth occurred domestically, particularly in California and the midwestern and southeastern regions of the country. International sales grew at approximately the same rate as the rest of the Company, partially due to the acquisition of Furfix Products Limited and Easy Arches Limited (together, "Furfix"), in the third quarter of 1999. See "Item 1. Business. Acquisitions and Expansion into New Markets." Home centers were the fastest growing connector sales channel. The sales increase was broad based across most of Simpson Strong-Tie's major product lines. Anchoring Systems products had the highest growth rate in sales and Simpson Strong-Tie's new Strong-Wall product line also experienced strong sales growth. Sales of most of Simpson Dura-Vent's major product lines increased in 1999 compared to 1998, led by above average growth rates for its chimney products and Direct-Vent product lines. Gross Profit Gross profit increased 21.6% to $132.6 million in 1999 from $109.0 million in 1998. As a percentage of net sales, gross profit increased to 40.4% in 1999 from 39.1% in 1998. This increase resulted from an increase in the LIFO gain to $1.9 in 1999 from $0.5 million in 1998, as well as lower overall product costs. Selling Expense Selling expense increased 30.3% to $32.2 million in 1999 from $24.7 million in 1998. The increase was primarily due to higher promotional expenses, as well as to higher personnel costs, including those associated with the increase in the number of sales and merchandising personnel. General and Administrative Expense General and administrative expenses increased 14.0% to $37.8 million in 1999 from $33.1 million in 1998, but decreased as a percentage of net sales to 11.5% in 1999 from 11.9% in 1998. The increase in these expenses was primarily due to increased cash profit sharing, which resulted from higher operating profit, and other administrative overhead costs. European Operations In August 1999, Simpson Strong-Tie International, Inc. ("SSTI"), a subsidiary of the Company, purchased the assets of Furfix which manufactures a line of structural connectors for the wood and masonry construction markets in the United Kingdom and Europe. The purchase price was approximately $7.8 million in cash plus an earnout based on future operating performance. Included in the purchase price were costs associated with the closure of Furfix's existing facility and integration into SSTI's facility in Tamworth, England. For its combined European operations, including the operations of Furfix, the Company recorded an after-tax net loss of $2.4 million in 1999, including $1.9 million in intercompany interest charges, compared to after- tax net losses of $2.3 million in 1998. 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 2000. Other Information In the first quarter of 2000, Simpson Strong-Tie entered into a joint venture with Keymark Enterprises, Inc., a developer of software for the wood and light gauge steel construction industry, to explore the feasibility of using computer systems to link designers, engineers and building materials suppliers to enhance the construction process. COMPARISON OF THE YEARS ENDED DECEMBER 31, 1998 AND 1997 Net Sales Net sales increased 13.4% to $279.1 million in 1998 from $246.1 million in 1997. Net sales of Simpson Strong-Tie's products increased 15.6% to $220.3 million in 1998 from $190.6 million in 1997, while net sales of Simpson Dura-Vent's products increased by 5.8% to $58.8 million in 1998 from $55.5 million in 1997. SDV accounted for approximately 21.1% of the Company's total net sales in 1998, a decrease from 22.6% in 1997. The increases in net sales at both SST and SDV resulted from increases in sales volume, with an overall decrease in average prices. The increase in net sales reflected sales growth throughout the United States, particularly in the Southeastern region of the country and in California. International sales also increased at an above average rate, a portion of which was related to the businesses purchased in March 1997. See "Item 1. Business. Acquisitions and Expansion into New Markets." Home centers and contractor distributors were the fastest growing connector sales channels. The growth rate of Simpson Strong-Tie's seismic and high wind and engineered wood product sales was strong. Anchoring Systems products also contributed significantly to the increase in net sales. Direct-Vent products led Simpson Dura-Vent's net sales with a strong growth rate as compared to the prior year, while sales of chimney and pellet stove products declined. Gross Profit Gross profit increased 12.6% to $109.0 million in 1998 from $96.8 million in 1997. As a percentage of net sales, gross profit decreased to 39.1% in 1998 from 39.3% in 1997. The small decrease was primarily due to increased labor costs, depreciation on factory equipment and other production costs, offset somewhat by a slightly larger LIFO gain recorded in 1998 as compared to 1997. Selling Expense Selling expense increased 6.9% to $24.7 million in 1998 from $23.1 million in 1997, but decreased as a percentage of net sales to 8.9% in 1998 from 9.4% in 1997. The increase in selling expense was primarily due to higher promotional expenses, as well as higher costs related to the increase in the number of sales and marketing personnel, due in part to expenses associated with the expansion of the Anchoring Systems product line and introduction of the Strong-Wall product line. General and Administrative Expense General and administrative expenses increased 9.5% to $32.9 million in 1998 from $30.1 million in 1997, but decreased as a percentage of net sales to 11.8% in 1998 from 12.2% in 1997. The increase in these expenses was primarily due to increased cash profit sharing, which resulted from higher operating profit. European Operations The Company recorded an after-tax net loss in its combined European operations of $2.3 million in 1998, including $1.2 million in intercompany interest charges, compared to after-tax net losses of $2.4 million in 1997. These losses were 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. Other Information In 1999, in order to concentrate on more profitable product lines, the Company sold its metal shapes business, acquired in 1994, to an unrelated buyer. The Company recorded a small loss on the sale of this product line. 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, 1999, the Company has relied primarily on internally generated funds 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 $54.5 million and $37.4 million at December 31, 1999 and 1998, respectively. Working capital was $142.1 million and $105.6 million at December 31, 1999 and 1998, respectively. As of December 31, 1999, the Company had approximately $2.8 million in debt outstanding and had available to it unused credit facilities of approximately $21.6 million. The Company had cash flows from operating activities of $36.0 million, $34.5 million and $21.1 million for 1999, 1998 and 1997, respectively. In 1999, cash was provided by net income of $38.5 million and noncash expenses, such as depreciation and amortization, of $10.9 million, and the tax benefit of stock options exercised during the year, a reduction of the Company's income tax liability, of $6.3 million. Operating cash flows were also increased by increases in income taxes payable, trade accounts payable and accrued liabilities, totaling approximately $5.1. The Company's primary operating cash flow requirements resulted from increased levels of inventory and accounts receivable that were required as the Company's sales increased. In 1999, 1998 and 1997, the Company used cash of $24.0 million, $11.0 million and $9.1 million, respectively, to fund inventory and accounts receivable requirements. In addition, cash in the amount of approximately $1.3 million was used to pay costs associated with the integration of Furfix's operations in the UK. The balance of the cash used in 1999 resulted from changes in the other current asset and liability accounts. Cash used in investing activities was $23.3 million, $20.0 million and $21.8 million for 1999, 1998 and 1997, respectively. Asset acquisitions, primarily related to the Furfix purchase, and capital expenditures related primarily to expanding capacity, increased to $23.6 million in 1999 from $20.1 million in 1998. In 1999, $2.5 million of such capital expenditures was used for real estate and related purchases. Financing activities provided net cash of $4.4 million, $3.4 million and $0.3 million in 1999, 1998 and 1997, respectively. In 1999, cash was provided primarily by the issuance the Company's Common Stock through the exercise of stock options 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 2000, and other available financing will be sufficient for the Company's working capital needs and planned capital expenditures through at least 2000. 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. 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, 1999 and 1998............25 Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997...................................26 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997, 1998 and 1999.......................27 Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997...................................28 Notes to the Consolidated Financial Statements.......................29 Financial Statement Schedule Schedule II - Valuation and Qualifying Accounts......................41 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Simpson Manufacturing Co., Inc.: In our opinion, the accompanying consolidated financial statements listed in the index on page 23 of this Form 10-K present fairly, in all material respects, the financial position of Simpson Manufacturing Co., Inc. and its subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. 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 of these financial statements in accordance with auditing standards generally accepted in the United States which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP San Francisco, California February 2, 2000 Simpson Manufacturing Co., Inc. and Subsidiaries Consolidated Balance Sheets SIMPSON MANUFACTURING CO., INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, ---------------------------- 1999 1998 ------------ ------------ ASSETS Current assets Cash and cash equivalents $ 54,509,610 $ 37,402,450 Trade accounts receivable, net 42,420,223 34,089,122 Inventories 72,751,245 56,340,053 Deferred income taxes 4,745,534 3,749,599 Other current assets 1,323,215 1,282,814 ------------ ------------ Total current assets 175,749,827 132,864,038 Property, plant and equipment, net 61,143,524 54,964,704 Investments 374,455 524,964 Other noncurrent assets 9,986,187 3,246,045 ------------ ------------ Total assets $247,253,993 $191,599,751 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Notes payable and current portion of long-term debt $ 349,541 $ 330,704 Trade accounts payable 12,780,621 11,761,237 Accrued liabilities 7,819,155 5,591,292 Accrued profit sharing trust contributions 3,504,286 3,173,362 Accrued cash profit sharing and commissions 4,531,861 4,019,806 Accrued workers' compensation 1,345,764 879,272 Income taxes payable 3,362,254 1,465,384 ------------ ------------ Total current liabilities 33,693,482 27,221,057 Long-term debt 2,414,562 2,565,182 Long-term liabilities 556,783 531,149 ------------ ------------ Total liabilities 36,664,827 30,317,388 ------------ ------------ Commitments and contingencies (Note 9) Stockholders' equity Preferred Stock, par value $0.01; authorized shares, 5,000,000; issued and outstanding shares, none - - Common Stock, par value $0.01; authorized shares, 20,000,000; issued and outstanding shares, 12,018,839 and 11,579,360 at December 31, 1999 and 1998, respectively 44,716,488 33,723,845 Retained earnings 166,457,600 127,990,208 Accumulated other comprehensive income (584,922) (431,690) ------------ ------------ Total stockholders' equity 210,589,166 161,282,363 ------------ ------------ Total liabilities and stockholders' equity $247,253,993 $191,599,751 ============ ============
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, -------------------------------------------- 1999 1998 1997 ------------ ------------ ------------ Net sales $328,439,897 $279,081,489 $246,074,446 Cost of sales 195,839,260 170,044,933 149,279,718 ------------ ------------ ------------ Gross profit 132,600,637 109,036,556 96,794,728 ------------ ------------ ------------ Operating expenses Selling 32,204,008 24,706,371 23,113,344 General and administrative 37,845,480 33,100,454 30,357,707 ------------ ------------ ------------ 70,049,488 57,806,825 53,471,051 ------------ ------------ ------------ Income from operations 62,551,149 51,229,731 43,323,677 Interest income, net 1,669,243 939,792 429,102 ------------ ------------ ------------ Income before income taxes 64,220,392 52,169,523 43,752,779 Provision for income taxes 25,753,000 21,028,000 17,767,000 ------------ ------------ ------------ Net income $ 38,467,392 $ 31,141,523 $ 25,985,779 ============ ============ ============ Net income per common share Basic $ 3.25 $ 2.69 $ 2.26 Diluted $ 3.14 $ 2.58 $ 2.17 Number of shares outstanding Basic 11,837,315 11,560,454 11,474,592 Diluted 12,233,865 12,048,197 11,965,950
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, 1997, 1998 AND 1999
Accumulated Common Stock Other Comp- ---------------------------- Retained rehensive Shares Amount Earnings Income Total ------------ ------------ ------------ ------------ ------------ Balance, January 1, 1997 11,451,018 $ 31,233,648 $ 70,862,906 $ 200,454 $102,297,008 Comprehensive income: Net income - - 25,985,779 - 25,985,779 Other comprehensive income: Translation adjustment - - - (476,179) (476,179) ------------ Comprehensive income 25,509,600 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 ------------ ------------ ------------ ------------ ------------ Balance, December 31, 1997 11,517,113 32,377,563 96,848,685 (275,725) 128,950,523 Comprehensive income: Net income - - 31,141,523 - 31,141,523 Other comprehensive income: Translation adjustment - - - (155,965) (155,965) ------------ Comprehensive income 30,985,558 Options exercised 57,147 576,343 - - 576,343 Tax benefit of options exercised - 600,045 - - 600,045 Common stock issued at $33.3125 per share 5,100 169,894 - - 169,894 ------------ ------------ ------------ ------------ ------------ Balance, December 31, 1998 11,579,360 33,723,845 127,990,208 (431,690) 161,282,363 Comprehensive income: Net income - - 38,467,392 - 38,467,392 Other comprehensive income: Translation adjustment - - - (153,232) (153,232) ------------ Comprehensive income 38,314,160 Options exercised 436,279 4,568,970 - - 4,568,970 Tax benefit of options exercised - 6,303,873 - - 6,303,873 Common stock issued at $37.4375 per share 3,200 119,800 - - 119,800 ------------ ------------ ------------ ------------ ------------ Balance, December 31, 1999 12,018,839 $ 44,716,488 $166,457,600 $ (584,922) $210,589,166 ============ ============ ============ ============ ============
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, -------------------------------------------- 1999 1998 1997 ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 38,467,392 $ 31,141,523 $ 25,985,779 ------------ ------------ ------------ Adjustments to reconcile net income to net cash provided by operating activities: Loss (gain) on sale of capital equipment (44,649) 24,226 (11,194) Depreciation and amortization 10,861,925 8,257,937 6,712,157 Deferred income taxes and other long-term liabilities (970,301) (505,434) (946,542) Equity in loss (income) of affiliates 107,273 (9,000) (142,500) Noncash compensation related to stock plans 119,800 169,894 103,500 Changes in operating assets and liabilities, net of effects of acquisitions: Trade accounts receivable, net (8,352,836) (9,619,171) (2,277,797) Inventories (15,604,370) (1,379,424) (6,867,089) Other current assets (40,401) 440,773 (700,537) Other noncurrent assets (1,322,851) (509,138) (14,450) Trade accounts payable 1,019,384 2,948,041 (2,429,650) Accrued liabilities 2,227,864 84,388 379,910 Accrued profit sharing trust contributions 330,924 286,487 440,874 Accrued cash profit sharing and commissions 512,055 924,972 802,777 Accrued workers' compensation 466,492 220,000 (150,000) Income taxes payable 8,200,744 2,065,429 247,507 ------------ ------------ ------------ Total adjustments (2,488,947) 3,399,980 (4,853,034) ------------ ------------ ------------ Net cash provided by operating activities 35,978,445 34,541,503 21,132,745 ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (15,305,226) (20,057,435) (16,548,350) Proceeds from sale of capital equipment 263,158 57,069 65,327 Asset acquisitions, net of cash acquired and equity interest already owned (8,266,403) - (9,336,142) Proceeds from sale of short-term investments - - 3,995,333 ------------ ------------ ------------ Net cash used in investing activities (23,308,471) (20,000,366) (21,823,832) ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Issuance of debt 266,700 3,019,247 - Repayment of debt (398,484) (152,966) (260,304) Issuance of Company's common stock 4,568,970 576,343 554,783 ------------ ------------ ------------ Net cash provided by financing activities 4,437,186 3,442,624 294,479 ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents 17,107,160 17,983,761 (396,608) Cash and cash equivalents at beginning of period 37,402,450 19,418,689 19,815,297 ------------ ------------ ------------ Cash and cash equivalents at end of period $ 54,509,610 $ 37,402,450 $ 19,418,689 ============ ============ ============ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION CASH PAID DURING THE YEAR FOR Interest $ 268,184 $ 180,607 $ 80,071 ============ ============ ============ Income taxes $ 18,964,736 $ 18,660,244 $ 19,564,663 ============ ============ ============
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 accounting principles generally accepted in the United States 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 $9,269,000 and $5,553,000 at December 31, 1999 and 1998, 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 $1,809,000, $1,518,000 and $1,280,000 in 1999, 1998 and 1997, 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 stockholders' 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 therefore 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 stockholders, except that, on giving notice as required by law and subject to compliance with other statutory conditions, stockholders may cumulate their votes in an election of directors, and each stockholder 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 stockholder or may distribute such stockholder's votes on the same principle among as many candidates as such stockholder thinks fit. There are no redemption or sinking fund provisions applicable to the Common Stock. In 1999, the Company declared a dividend distribution of one Right to purchase Series A Participating Preferred Stock per share of Common Stock. The Rights will be exercisable, unless redeemed earlier by the Company, if a person or group acquires, or obtains the right to acquire, 15% or more of the outstanding shares of Common Stock or commences a tender or exchange offer that would result in it acquiring 15% or more of the outstanding shares of Common Stock, either event occurring without the prior consent of the Company. The amount of Series A Participating Preferred Stock that the holder of a Right is entitled to receive and the purchase price payable on exercise of a Right are both subject to adjustment. Any person or group that acquires 15% or more of the outstanding shares of Common Stock without the prior consent of the Company would not be entitled to this purchase. Any stockholder who holds 25% or more of the Company's Common Stock on the date of the Rights distribution would not be treated as having acquired 15% or more of the outstanding shares unless such stockholder's ownership is increased to more than 40% of the outstanding shares. The Rights will expire on July 29, 2009, or they may be redeemed by the Company at one cent per Right prior to that date. The Rights do not have voting or dividend rights and, until they become exercisable, have no dilutive effect on the earnings of the Company. One million shares of the Company's Preferred Stock have been designated Series A Participating Preferred Stock and reserved for issuance on exercise of the Rights. No event during 1999 made the Rights exercisable. 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 stockholder 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:
1999 1998 1997 ----------------------------------- ----------------------------------- ----------------------------------- Per Per Per Income Shares Share Income Shares Share Income Shares Share ------------ ------------ ------- ------------ ------------ ------- ------------ ------------ ------- BASIC EPS Income available to common stockholders $ 38,467,392 11,837,315 $ 3.25 $ 31,141,523 11,560,454 $ 2.69 $ 25,985,779 11,474,592 $ 2.26 EFFECT OF DILUTIVE SECURITIES Stock options - 396,550 (0.11) - 487,743 (0.11) - 491,358 (0.09) ------------ ------------ ------- ------------ ------------ ------- ------------ ------------ ------- DILUTED EPS Income available to common stockholders $ 38,467,392 12,233,865 $ 3.14 $ 31,141,523 12,048,197 $ 2.58 $ 25,985,779 11,965,950 $ 2.17 ============ ============ ======= ============ ============ ======= ============ ============ =======
Comprehensive Income Comprehensive income, which is included in the consolidated statement of stockholders' equity, is defined as net income and other comprehensive income. Other comprehensive income includes changes in foreign currency translation adjustments recorded directly into stockholders' equity. 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 1998, Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities" was issued. This standard was amended by Accounting Standard No. 137, which deferred the effective date of implementation to the first quarter of fiscal years beginning after June 15, 2000. Accounting Standard No. 133 requires companies to record derivative financial instruments on the balance sheet as assets or liabilities, as appropriate, at fair value. Gains or losses resulting from changes in the fair value of those derivatives are accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. The Company does not believe that the implementation of this standard will have a material adverse effect on its financial position or results of operations. Reclassifications Certain prior year amounts have been reclassified to conform to the 1999 presentation with no effect on net income or retained earnings as previously reported. 2. Acquisitions In August 1999, Simpson Strong-Tie International, Inc. ("SSTI"), a subsidiary of the Company, purchased the assets of Furfix Products Limited and Easy Arches Limited (together, "Furfix"), which manufacture a line of structural connectors for the wood and masonry construction markets in the United Kingdom and Europe. The purchase price was approximately $7.8 million in cash plus an earnout based on future operating performance. Included in the purchase price were costs associated with the closure of Furfix's existing facility and integration into SSTI's facility in Tamworth, England. 3. Trade Accounts Receivable Trade accounts receivable consist of the following:
December 31, ---------------------------- 1999 1998 ------------ ------------ Trade accounts receivable $ 43,952,137 $ 35,550,836 Allowance for doubtful accounts (1,203,147) (1,173,656) Allowance for sales discounts (328,767) (288,058) ------------ ------------ $ 42,420,223 $ 34,089,122 ============ ============
The Company sells product on credit and generally does not require collateral. 4. Inventories The components of inventories consist of the following:
December 31, ---------------------------- 1999 1998 ------------ ------------ Raw materials $ 22,816,584 $ 18,904,545 In-process products 7,593,038 5,255,755 Finished products 42,341,623 32,179,753 ------------ ------------ $ 72,751,245 $ 56,340,053 ============ ============
At December 31, 1999, LIFO cost exceeded the replacement value of LIFO inventories by approximately $1,503,000. At December 31, 1998, the replacement value of LIFO inventories exceeded LIFO cost by approximately $359,000. 5. Property, Plant and Equipment, net Property, plant and equipment consists of the following:
December 31, ---------------------------- 1999 1998 ------------ ------------ Land $ 4,316,015 $ 3,891,519 Buildings and site improvements 26,724,935 25,743,968 Leasehold improvements 3,942,613 3,463,063 Machinery and equipment 81,147,265 67,052,907 ------------ ------------ 116,130,828 100,151,457 Less accumulated depreciation and amortization (58,949,908) (49,498,717) ------------ ------------ 57,180,920 50,652,740 Capital projects in progress 3,962,604 4,311,964 ------------ ------------ $ 61,143,524 $ 54,964,704 ============ ============
Included in property, plant and equipment at December 31, 1999 and 1998, are fully depreciated assets with an original cost of approximately $24,453,000 and $22,166,000, respectively. These fully depreciated assets are still in use in the Company's operations. 6. Investments 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, 1999. 7. Accrued Liabilities Accrued liabilities consist of the following:
December 31, ---------------------------- 1999 1998 ------------ ------------ Sales incentive and advertising allowances $ 3,138,607 $ 2,124,242 Vacation liability 1,505,409 1,409,518 Other 3,175,139 2,057,532 ------------ ------------ $ 7,819,155 $ 5,591,292 ============ ============
8. Debt The outstanding debt at December 31, 1999 and 1998, and the available credit at December 31, 1999, consisted of the following:
Available on Credit Debt Outstanding Facility at at December 31, December 31, ---------------------------- 1999 1999 1998 ------------ ------------ ------------ Revolving line of credit, interest at bank's reference rate (at December 31, 1999, the bank's reference rate was 8.50%), matures June 2000, commitment fees are paid at the annual rate of 0.125% on the unused portion of the facility $ 12,456,845 $ - $ - Revolving term commitment, interest at bank's prime rate (at December 31, 1999, the bank's prime rate was 8.50%), matures June 2000, commitment fees are paid at the annual rate of 0.125% on the unused portion of the facility 8,616,628 - - Revolving line of credit, interest rate at the bank's base rate of interest plus 2% (at December 31, 1999, this rate was 7.50%), matures July 2000, has an annual commission charge of 0.45% 404,139 - - Revolving line of credit, interest rate at the weighted average European interbank rate of interest plus 1% (at December 31, 1999, this rate was 4.75%), matures March 2000, has an annual commission charge of 0.25% 153,071 - - Term loan, interest at LIBOR plus 1.375% (at December 31, 1999, the LIBOR plus 1.375% was 7.1975%), expires May 2008 - 2,550,000 2,850,000 Term loan, fixed interest rate of 5.3%, expires September 2006 - 164,562 - Standby letter of credit facilities 1,926,528 - - Other notes payable - 49,541 45,886 ------------ ------------ ------------ 23,557,211 2,764,103 2,895,886 Less current portion (349,541) (330,704) ------------ ------------ $ 2,414,562 $ 2,565,182 ============ ============ Less standby letters of credit issued and outstanding (1,926,528) ------------ Net credit available $ 21,630,683 ============
The revolving lines of credit are guaranteed by the Company and its subsidiaries. At December 31, 1999, the Company had three outstanding standby letters of credit. Two of these letters of credit, in the aggregate amount of $1,166,748, were used to support the Company's self-insured workers' compensation insurance requirements. The third, in the amount of $759,780, was used to guarantee performance on the Company's leased facility in the UK. These letters of credit mature between June 2000 and January 2001. 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 were leased from partnerships formed by certain current and former Company stockholders, directors, officers and employees. Rental expenses under these related party leases were as follows:
Years Ended December 31, -------------------------------------------- 1999 1998 1997 ------------ ------------ ------------ Simpson Investment Company $ 185,100 $ 185,100 $ 185,100 Doolittle Investors 253,080 239,400 239,400 Vacaville Investors 437,640 437,640 437,640 Vicksburg Investors 354,868 353,411 334,279 Columbus Westbelt Investment Co. 581,064 581,064 581,064 ------------ ------------ ------------ $ 1,811,752 $ 1,796,615 $ 1,777,483 ============ ============ ============
Rental expense for 1999, 1998 and 1997 with respect to all other leased property was approximately $2,362,000, $2,285,000 and $2,128,000, respectively. At December 31, 1999, minimum rental commitments under all noncancelable leases are as follows: 2000 $ 4,790,868 2001 4,287,509 2002 3,344,345 2003 2,817,851 2004 2,134,407 Thereafter 8,533,697 ------------ $ 25,908,677 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. The nominal term of SSTI's lease in the United Kingdom 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. 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 continues to monitor the condition of this property. The Company does not believe that any further action will 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 condition or results of operations. Litigation 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. 10. Income Taxes The provision for income taxes consists of the following:
Years Ended December 31, -------------------------------------------- 1999 1998 1997 ------------ ------------ ------------ Current Federal $ 22,509,000 $ 18,075,000 $ 15,546,000 State 4,354,000 3,345,000 3,115,000 Foreign 97,000 82,000 145,000 Deferred (1,207,000) (474,000) (1,039,000) ------------ ------------ ------------ $ 25,753,000 $ 21,028,000 $ 17,767,000 ============ ============ ============
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, -------------------------------- 1999 1998 1997 -------- -------- -------- Federal tax rate 35.0% 35.0% 35.0% State taxes, net of federal benefit 4.3% 4.5% 4.2% Other 0.8% 0.8% 1.4% -------- -------- -------- Effective income tax rate 40.1% 40.3% 40.6% ======== ======== ========
The tax effects of the significant temporary differences that constitute the deferred tax assets and liabilities at December 31, 1999, 1998 and 1997, were as follows:
Years Ended December 31, -------------------------------------------- 1999 1998 1997 ------------ ------------ ------------ Current deferred tax assets State tax $ 1,488,904 $ 1,170,805 $ 1,037,753 Compensation related to stock plans 46,728 128,657 140,579 Workers' compensation 298,808 115,436 155,416 Health claims 604,580 435,294 272,393 Vacation 555,420 399,472 416,268 Accounts receivable allowance 600,439 573,265 602,802 Inventory allowance 874,726 619,447 477,304 Sales incentive and advertising allowances 125,277 163,008 206,210 Other 150,652 144,215 228,025 ------------ ------------ ------------ $ 4,745,534 $ 3,749,599 $ 3,536,750 ============ ============ ============ Long-term deferred tax assets (liabilities) Depreciation $ 1,161,552 $ 911,723 $ 639,063 Goodwill amortization 560,479 602,182 574,269 Other (419,829) (421,710) (402,545) ------------ ------------ ------------ $ 1,302,202 $ 1,092,195 $ 810,787 ============ ============ ============
No valuation allowance has been recorded for deferred tax assets for the years ended December 31, 1999, 1998 and 1997, due to the Company's taxable income in 1999 and prior years. 11. Profit Sharing and Pension Plans The Company has five 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 three plans, covering the Company's European and Canadian employees, require the Company to make contributions ranging from three to 15% of the employees' compensation. The total cost for these profit sharing plans for the years ended December 31, 1999, 1998 and 1997, was approximately $3,360,000, $3,078,000 and $2,775,000, 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 $977,000, $809,000 and $708,000 for the years ended December 31, 1999, 1998 and 1997, respectively. 12. Related Party Transactions The Chairman and the President and Chief Executive Officer of the Company, who are directors and significant stockholders of the Company, served as directors and officers of the Simpson PSB Fund (a charitable organization) until October 1997. The Company contributed $75,496 and $207,156 to this organization in 1998 and 1997, respectively. The Chairman and the President and Chief Executive Officer of the Company were again appointed as directors and officers of the Simpson PSB Fund in January 1999. 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 1999, 1998 and 1997 would have been:
Years Ended December 31, -------------------------------------------- 1999 1998 1997 ------------ ------------ ------------ Net income, as reported $ 38,467,392 $ 31,141,523 $ 25,985,779 Pro forma 37,458,366 30,423,968 25,464,303 Diluted earnings per share, as reported 3.14 2.58 2.17 Pro forma 3.06 2.53 2.13
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 1999, 1998 and 1997, respectively: risk-free interest rate of 4.60% for 1999, and 4.63% for 1998 and 5.50% for 1997; no dividend yield for all years; expected lives of 6.3 for all years; and volatility of 30.4% for 1999, and 30.7% for 1998 and 1997. The weighted average fair value per share of options granted during 1999, 1998 and 1997 was $17.49, $15.09 and $14.12, 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 143,250 shares for 1999 and has granted options to purchase 118,750 and 122,750 shares for 1998 and 1997, respectively. These options have an exercise price range of $38.94 to $48.13 per share, $36.63 to $41.18 per share and $33.31 to $37.31 per share for 1999, 1998 and 1997, respectively. The following table summarizes the Company's stock option activity for the years ended December 31, 1999, 1998 and 1997:
1999 1998 1997 ---------------------- ---------------------- ---------------------- Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Non-Qualified Stock Options Shares Price Shares Price Shares Price - -------------------------------- ---------- ---------- ---------- ---------- ---------- ---------- Outstanding at beginning of year 1,033,019 $ 17.05 978,917 $ 14.29 922,734 $ 11.29 Granted 143,250 43.65 118,750 37.44 122,250 33.39 Additional grants - - - - 500 33.31 Exercised (436,279) 10.49 (57,147) 10.09 (61,595) 7.33 Forfeited (1,000) 33.90 (7,501) 31.37 (4,972) 18.66 ---------- ---------- ---------- Outstanding at end of year 738,990 26.08 1,033,019 17.05 978,917 14.29 ========== ========== ==========
The number of stock options exercisable at the end of 1999, 1998 and 1997 was 414,817, 740,638 and 700,497, respectively. The following table summarizes information about the Company's stock options outstanding at December 31, 1999:
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, 1999 Life Price 31, 1999 Price - ---------------------------- ------------ ------------ ------------ ------------ ------------ $3.64 62,377 1.4 years $ 3.64 62,377 $ 3.64 $11.50 92,374 1.4 years 11.50 92,374 11.50 $10.00 to $11.28 53,208 2.1 years 10.23 53,208 10.23 $13.50 61,648 3.0 years 13.50 60,364 13.50 $23.00 to $29.25 97,850 4.0 years 23.08 67,089 23.13 $33.31 to $37.31 111,276 5.0 years 33.36 51,070 33.40 $36.63 to $41.18 117,007 6.0 years 37.45 24,835 37.40 $38.94 to $48.13 143,250 7.0 years 43.65 3,500 38.94 ------------ ------------ $3.64 to $48.13 738,990 4.3 years 26.08 414,817 16.48 ============ ============
The tax benefit to the Company from the exercise of stock options, a reduction of the Company's income tax payable, was $6,303,873, $600,045 and $589,133 for 1999, 1998 and 1997, respectively. 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 one of the Company's stock option plans receives 100 shares of common stock. In 1999, 1998 and 1997, the Company committed to issue 4,500, 3,200 and 5,100 shares, respectively, which resulted in compensation charges of $353,149, $203,500 and $305,038, respectively. The shares are issued in the year following the year in which they are earned. 14. Segment Information The Company is organized into two primary segments. The segments are defined by types of products manufactured, marketed and distributed to the Company's customers. The two product segments are construction connector products and venting products. These segments are differentiated in several ways, including the types of materials used, the production process, the distribution channels used and the applications in which the products are used. Transactions between the two segments were immaterial for each of the years presented. The following table illustrates certain measurements used by management to assess the performance of the segments described above as of December 31, 1999, 1998 and 1997, or for the years then ended:
Connector Venting 1999 Products Products All Other Total - ------------------------------ ------------ ------------ ------------ ------------ Net sales $260,943,000 $ 67,497,000 $ - $328,440,000 Income from operations 51,902,000 10,628,000 21,000 62,551,000 Depreciation and amortization 8,895,000 1,867,000 100,000 10,862,000 Capital expenditures and acquisitions 21,642,000 1,930,000 - 23,572,000 Total assets 148,328,000 38,828,000 60,098,000 247,254,000
Connector Venting 1998 Products Products All Other Total - ------------------------------ ------------ ------------ ------------ ------------ Net sales $220,319,000 $ 58,762,000 $ - $279,081,000 Income from operations 42,674,000 8,709,000 (153,000) 51,230,000 Depreciation and amortization 6,738,000 1,417,000 103,000 8,258,000 Capital expenditures and acquisitions 11,509,000 8,548,000 - 20,057,000 Total assets 115,507,000 35,095,000 40,998,000 191,600,000
Connector Venting 1997 Products Products All Other Total - ------------------------------ ------------ ------------ ------------ ------------ Net sales $190,553,000 $ 55,521,000 $ - $246,074,000 Income from operations 34,344,000 9,187,000 (207,000) 43,324,000 Depreciation and amortization 5,472,000 1,094,000 146,000 6,712,000 Capital expenditures and acquisitions 22,778,000 3,102,000 4,000 25,884,000 Total assets 98,069,000 30,032,000 22,664,000 150,765,000
Cash collected by the Company's subsidiaries is routinely transferred into the Company's cash management accounts, and therefore, has been included in the total assets of the segment entitled "All Other." Cash and short-term investment balances in this segment were approximately $53,682,000, $36,433,000 and $18,096,000 as of December 31, 1999, 1998 and 1997, respectively. The following table illustrates how the Company's net sales and long-lived assets are distributed geographically as of December 31, 1999, 1998 and 1997, or for the years then ended.
1999 1998 1997 ---------------------------- ---------------------------- ---------------------------- Net Long-Lived Net Long-Lived Net Long-Lived Sales Assets Sales Assets Sales Assets ------------ ------------ ------------ ------------ ------------ ------------ United States $310,300,000 $ 55,097,000 $265,201,000 $ 50,753,000 $233,596,000 $ 38,027,000 Other countries 18,140,000 15,105,000 13,880,000 6,891,000 12,478,000 7,639,000 ------------ ------------ ------------ ------------ ------------ ------------ $328,440,000 $ 70,202,000 $279,081,000 $ 57,644,000 $246,074,000 $ 45,666,000 ============ ============ ============ ============ ============ ============
Net sales and long-lived assets are attributable to the country where the operations are located. In 1999, revenues from a single customer exceeded 10% of the Company's total revenues. Revenues from this customer were approximately $35,784,000 and were attributable mostly to the Connector segment.
SCHEDULE II SIMPSON MANUFACTURING CO., INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS for the years ended December 31, 1999, 1998 and 1997 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, 1999 Allowance for doubtful accounts $ 1,173,656 $ 646,236 $ - $ 616,745 $ 1,203,147 Allowance for obsolete inventory 944,331 967,074 - 269,659 1,641,746 YEAR ENDED DECEMBER 31, 1998 Allowance for doubtful accounts 1,539,691 767,339 - 1,133,374 1,173,656 Allowance for obsolete inventory 742,578 212,334 - 10,581 944,331 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
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 stockholders to be held on May 16, 2000, to be filed not later than 120 days following the end of the Registrant's fiscal year ended December 31, 1999, 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 stockholders to be held on May 16, 2000, to be filed not later than 120 days following the end of the Registrant's fiscal year ended December 31, 1999, 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 stockholders to be held on May 16, 2000, to be filed not later than 120 days following the end of the Registrant's fiscal year ended December 31, 1999, 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 stockholders to be held on May 16, 2000, to be filed not later than 120 days following the end of the Registrant's fiscal year ended December 31, 1999, 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 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 28, 2000 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 28, 2000 - ------------------------- Officer and Director (Thomas J Fitzmyers) Chief Financial Officer: /s/ Stephen B. Lamson Chief Financial Officer, March 28, 2000 - ------------------------- Secretary and Director (Stephen B. Lamson) Directors: /s/ Barclay Simpson Chairman of the Board March 28, 2000 - ------------------------- (Barclay Simpson) /s/ Earl F. Cheit Director March 28, 2000 - ------------------------- (Earl F. Cheit) /s/ Peter N. Louras Director March 28, 2000 - ------------------------- (Peter N. Louras) /s/ Sunne Wright McPeak Director March 28, 2000 - ------------------------- (Sunne Wright McPeak) /s/ Barry Lawson Williams Director March 28, 2000 - ------------------------- (Barry Lawson Williams) EX-11 2 COMPUTATION RE EARNINGS PER SHARE
SIMPSON MANUFACTURING CO., INC. AND SUBSIDIARIES Computation of Earnings Per Common Share For the Three Years Ended December 31, 1999, 1998 and 1997 Exhibit 11 Basic Earnings per Share 1999 1998 1997 ------------ ------------ ------------ Weighted average number of common shares outstanding 11,834,915 11,556,629 11,471,217 Shares issuable pursuant to stock bonus plan 2,400 3,825 3,375 ------------ ------------ ------------ Number of shares for computation of basic net income per share 11,837,315 11,560,454 11,474,592 ============ ============ ============ Net income for computation of basic net income per share $ 38,467,392 $ 31,141,523 $ 25,985,779 ============ ============ ============ Basic net income per share $ 3.25 $ 2.69 $ 2.26 ============ ============ ============
SIMPSON MANUFACTURING CO., INC. AND SUBSIDIARIES Computation of Earnings Per Common Share For the Three Years Ended December 31, 1999, 1998 and 1997 Exhibit 11 (continued) Diluted Earnings per Share 1999 1998 1997 ------------ ------------ ------------ Weighted average number of common shares outstanding 11,834,915 11,556,629 11,471,217 Shares issuable pursuant to employee stock option plans, less shares assumed repurchased at the average fair value during the period 392,723 483,361 486,337 Shares issuable pursuant to the independent director stock option plan, less shares assumed repurchased at the average fair value during the period 3,827 4,382 5,021 Shares issuable pursuant to stock bonus plan 2,400 3,825 3,375 ------------ ------------ ------------ Number of shares for computation of diluted net income per share 12,233,865 12,048,197 11,965,950 ============ ============ ============ Net income for computation of diluted net income per share $ 38,467,392 $ 31,141,523 $ 25,985,779 ============ ============ ============ Diluted net income per share $ 3.14 $ 2.58 $ 2.17 ============ ============ ============
EX-21 3 LIST OF SUBSIDIARIES SIMPSON MANUFACTURING CO., INC. AND SUBSIDIARIES List of Subsidiaries of Simpson Manufacturing Co., Inc. At March 15, 2000 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. Simpson Strong-Tie, S.A., a French corporation 8. Simpson Strong-Tie Japan, Inc., a California corporation 9. Simpson Strong-Tie Australia, Inc., a California corporation 10. Simpson Strong-Tie Company Inc. Chile Y Compania Limitada, a Chilean corporation 11. Simpson Manufacturing Co., Inc., a Delaware corporation 12. Keybuilder.com LLC, a California limited liability company EX-23 4 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 Statement on Forms S-8 (File No. 33-85662 and File No. 33-90964) of Simpson Manufacturing Co., Inc. of our report dated February 2, 2000, relating to the financial statements and financial statement schedule, which appears in this Form 10-K. PricewaterhouseCoopers LLP San Francisco, California March 28, 2000 EX-27 5 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the Consolidated Balance Sheet at December 31, 1999, and the Consolidated Statement of Operations for the twelve months ended December 31, 1999, and is qualified in its entirety by reference to such financial statements. 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 54,509,610 0 43,952,137 1,531,914 72,751,245 175,749,827 120,093,432 58,949,908 247,253,993 33,693,482 0 0 0 44,716,488 165,872,678 247,253,993 328,439,897 328,439,897 195,839,260 195,839,260 70,049,488 0 0 64,220,392 25,753,000 38,467,392 0 0 0 38,467,392 3.25 3.14 Interest income for the twelve months ended December 31, 1999, was $1,669,243.
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