-----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, KiJ1O65jFAZva7mOB2v2fby75Cb/oZ8Bmp56MUZmfWrZVJqcz2ArM5h/RyxEC84B 0pksKnnj/wxYlfFtnUgssg== 0000950149-98-000348.txt : 19980226 0000950149-98-000348.hdr.sgml : 19980226 ACCESSION NUMBER: 0000950149-98-000348 CONFORMED SUBMISSION TYPE: 424B4 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19980225 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SIMPSON MANUFACTURING CO INC /CA/ CENTRAL INDEX KEY: 0000920371 STANDARD INDUSTRIAL CLASSIFICATION: CUTLERY, HANDTOOLS & GENERAL HARDWARE [3420] IRS NUMBER: 943196943 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 424B4 SEC ACT: SEC FILE NUMBER: 333-44603 FILM NUMBER: 98548724 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 424B4 1 FINAL PROSPECTUS 1 PROSPECTUS 1,437,500 Shares LOGO Common Stock (without par value) All of the 1,437,500 shares of the Common Stock, without par value (the "Common Stock"), of Simpson Manufacturing Co., Inc., a California corporation (the "Company"), are hereby offered by Simpson PSB Fund (the "Principal Selling Shareholder") and Thomas J Fitzmyers (together, the "Selling Shareholders"). See "Principal and Selling Shareholders." The Company will not receive any of the proceeds from the sale of Common Stock by the Selling Shareholders. See "Use of Proceeds." The Common Stock is traded on the New York Stock Exchange, Inc. (the "NYSE") under the symbol "SSD." On February 24, 1998, the last reported sale price of the Common Stock on the NYSE was $38.0625 per share. See "Price Range of Common Stock." SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR CERTAIN INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - --------------------------------------------------------------------------------------------------- PROCEEDS TO PRICE TO UNDERWRITING SELLING PUBLIC DISCOUNT(1) SHAREHOLDERS(2) - --------------------------------------------------------------------------------------------------- Per Share $38.00 $1.90 $36.10 - --------------------------------------------------------------------------------------------------- Total(3) $54,625,000 $2,731,250 $51,893,750 - ---------------------------------------------------------------------------------------------------
(1) The Company and the Selling Shareholders have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses of the offering payable by the Principal Selling Shareholder, estimated at $330,000. The Company intends to make a charitable donation to the Principal Selling Shareholder in an amount equal to one-half of such expenses that the Principal Selling Shareholder pays. (3) The Principal Selling Shareholder granted the Underwriters an option, which the Underwriters exercised, to purchase up to an additional 187,500 shares of Common Stock, on the same terms as set forth above, solely to cover overallotments, if any. See "Underwriting." The shares of Common Stock offered by this Prospectus are being offered by the Underwriters, subject to prior sale, when, as and if delivered to and accepted by the Underwriters, and subject to approval of certain legal matters by Cahill Gordon & Reindel, counsel for the Underwriters. It is expected that delivery of the shares of Common Stock will be made against payment therefor on or about March 2, 1998, at the offices of J.P. Morgan Securities Inc., 60 Wall Street, New York, New York. J.P. MORGAN & CO. MERRILL LYNCH & CO. BANCAMERICA ROBERTSON STEPHENS February 25, 1998 2 [PHOTOGRAPH] SIMPSON STRONG-TIE connectors have been designed for fast, easy installation that enhances the strength, durability and safety of modern wood-to-wood, wood-to-concrete and wood-to-masonry construction. [PHOTOGRAPH] SIMPSON DURA-VENT venting systems are engineered to achieve a high level of performance with gas and wood-burning appliances, including gas furnaces and water heaters, gas fireplaces and stoves, wood stoves and pellet stoves. [PHOTOGRAPH] SIMPSON STRONG-TIE anchoring systems include epoxy adhesives and mechanical anchors for a variety of structural connections into a number of different materials. CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING, AND MAY BID FOR, AND PURCHASE, SHARES OF THE COMMON STOCK IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." 2 3 No person has been authorized to give any information or make any representations in connection with this offering other than those contained or incorporated by reference in this Prospectus, and, if given or made, such information or representations must not be relied on as having been authorized by the Company, the Selling Shareholders or any of the Underwriters. This Prospectus does not constitute an offer to sell, or a solicitation of an offer to buy, any securities in any jurisdiction to any person to whom it is unlawful to make such offer or solicitation. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the Company or that the information contained herein is correct as of any date subsequent to the date hereof. TABLE OF CONTENTS
PAGE Incorporation of Certain Documents by Reference........................... 4 Additional Information................ 4 Prospectus Summary.................... 5 Risk Factors.......................... 8 Use of Proceeds....................... 13 Dividend Policy....................... 13 Price Range of Common Stock........... 13 Capitalization........................ 14 Selected Consolidated Financial Information......................... 15 PAGE Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 17 Business.............................. 22 Management............................ 33 Principal and Selling Shareholders.... 35 Description of Capital Stock.......... 37 Underwriting.......................... 38 Legal Matters......................... 39 Experts............................... 39 Index to Consolidated Financial Statements.......................... F-1
Strong-Tie(R), Dura-Vent(R), Dura/Connect(R), Dura-Plus(R), Dura/Liner(R), Direct Vent G.S.(R) and There Is No Equal(R) (when used with the registered design) are registered trademarks of the Company's subsidiaries. 3 4 INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents filed or to be filed with the Securities and Exchange Commission (the "Commission") under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), are hereby incorporated by reference into this Prospectus: 1. The Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996; 2. The Company's Proxy Statement dated April 14, 1997; 3. The Company's Quarterly Reports on Form 10-Q dated May 14, August 13 and November 10, 1997; and 4. The Company's Current Reports on Form 8-K dated January 7, March 21 and September 25, 1997. All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Prospectus and prior to the termination of the offering shall be deemed to be incorporated by reference herein and to be a part hereof from the date of filing of such documents. Any statement contained in this Prospectus or in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein or in any subsequently-filed document which also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. The Company will provide without charge to each person, including any beneficial owner, to whom this Prospectus is delivered, on written or oral request of such person, a copy of any and all of the documents that have been incorporated by reference herein (not including exhibits to such documents unless such exhibits are specifically incorporated by reference herein or into such documents). Such request may be directed to Simpson Manufacturing Co., Inc., 4637 Chabot Drive, Suite 200, P.O. Box 10789, Pleasanton, California 94588-0789, telephone (510) 460-9912, Attn: Chief Financial Officer. ADDITIONAL INFORMATION The Company is subject to the reporting requirements of the Exchange Act and, in accordance therewith, files annual and quarterly reports, proxy statements and other information with the Commission. Such reports, proxy statements and other information may be inspected and copied at the Commission's Regional Offices at 7 World Trade Center, 13th Floor, New York, New York 10048, and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such material can be obtained at prescribed rates from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. The Common Stock of the Company is listed on the NYSE. Reports and other information concerning the Company may be inspected at the offices of the NYSE at 20 Broad Street, New York, New York 10005. The Commission also maintains a World Wide Web site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants, including the Company, that file electronically with the Commission. A registration statement on Form S-3 with respect to the Common Stock offered hereby (the "Registration Statement") has been filed with the Commission under the Securities Act of 1933, as amended (the "Securities Act"). This Prospectus does not contain all of the information contained in the Registration Statement and the exhibits and schedules thereto, certain portions of which have been omitted pursuant to the rules and regulations of the Commission. For further information with respect to the Company and the Common Stock offered hereby, reference is made to the Registration Statement and the exhibits and schedules thereto. Statements contained in this Prospectus regarding the contents of any contract or any other document are not necessarily complete and, in each instance, reference is hereby made to the copy of such contract or document filed as an exhibit to the Registration Statement. The Registration Statement, including exhibits thereto, may be inspected without charge at the Commission's principal office in Washington, D.C., and copies of all or any part thereof may be obtained from the Public Reference Section, Securities and Exchange Commission, Washington, D.C. 20549, on payment of the prescribed fees. 4 5 PROSPECTUS SUMMARY The following summary is qualified in its entirety by and should be read in conjunction with the more detailed information, including "Risk Factors" and the Consolidated Financial Statements and Notes thereto, appearing elsewhere or incorporated by reference in this Prospectus. All references to the Company refer to Simpson Manufacturing Co., Inc. and its predecessors unless indicated otherwise. THE COMPANY 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 Simpson Strong-Tie benefits from strong brand name recognition among architects and engineers who frequently specify in building plans the use of SST products, and that Simpson Dura-Vent 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. From 1993 through 1997, the Company's annual net sales grew from $113.9 million to $246.1 million, a compound annual growth rate of 21.2%. In the same period, the Company's annual net income grew from $8.0 million to $26.0 million, a compound annual growth rate of 34.4%. Growth has been derived primarily from frequent new product introductions, expansion into new geographic markets and growth of distribution channels. Connectors produced by Simpson Strong-Tie typically are steel devices that are used to strengthen, support and connect joints in residential and commercial construction and DIY projects. These products enhance the safety and durability of the structures in which they are installed and can save time and labor costs for the contractor. SST's connector products increase structural integrity and improve structural resistance to seismic, wind and other forces. Applications range from building framing to deck construction to DIY projects. SST produces and markets more than 1,300 standard connector products in addition to products that it manufactures to custom specifications requested by architects and engineers. Simpson Dura-Vent's venting systems are used to vent gas furnaces and water heaters, gas fireplaces and stoves, wood burning stoves and pellet stoves. SDV's metal vents, chimneys and chimney liner systems exhaust the products of combustion to the exterior of the building, and some products introduce outside air into the appliance. SDV designs its products for ease of assembly and safe operation and to achieve a high level of performance. SDV produces and markets several hundred different venting products and systems. The Company emphasizes continuous new product development and often obtains patent protection for its new products. The Company's products are marketed in all 50 states of the United States and in England, France, Germany, Canada, Mexico, Japan and Australia. Both Simpson Strong-Tie and Simpson Dura-Vent products are distributed through a contractor and dealer distributor network, home centers and OEMs. The Company has developed and uses automated manufacturing processes. Its innovative manufacturing systems and techniques have allowed it to control manufacturing costs, even while developing both new products and products that meet customized requirements and specifications. The Company's development of specialized manufacturing processes has also permitted increased operating flexibility and enhanced product design innovation. The Company has developed a quality management system that employs numerous quality-control procedures. Since 1996, SST's quality management system has been registered under ISO 9001. The Company has 11 manufacturing locations in the United States, Canada, France and the United Kingdom. The Company is a California corporation and was reorganized in 1994 as a holding company for Simpson Strong-Tie and Simpson Dura-Vent. The Company's principal business offices are located at 4637 Chabot Drive, Suite 200, P.O. Box 10789, Pleasanton, California 94588-0789, telephone (510) 460-9912. 5 6 THE OFFERING COMMON STOCK OFFERED BY THE SELLING SHAREHOLDERS 1,437,500 shares(1) COMMON STOCK OUTSTANDING BEFORE AND AFTER THIS OFFERING 11,517,113 shares(2) USE OF PROCEEDS The net proceeds to Simpson PSB Fund, a California nonprofit public benefit corporation (the "Principal Selling Shareholder"), will be used principally for charitable purposes. See "Use of Proceeds." RISK FACTORS For a discussion of certain considerations relevant to an investment in the Common Stock, see "Risk Factors." NYSE SYMBOL "SSD"
- --------------- (1) Includes 187,500 shares of Common Stock that will be sold pursuant to the Underwriters' exercise of an overallotment option granted by the Principal Selling Shareholder. See "Underwriting." (2) Excludes an aggregate of 978,417 shares of Common Stock issuable on exercise of stock options that were outstanding as of December 31, 1997. See "Business -- Employees and Labor Relations" and "Principal and Selling Shareholders." 6 7 SUMMARY CONSOLIDATED FINANCIAL INFORMATION The following table sets forth summary consolidated financial information with respect to the Company for each of the five years ended December 31, 1993, 1994, 1995, 1996 and 1997, 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 "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere herein.
-------------------------------------------------------------------------- Dollars in thousands, YEARS ENDED DECEMBER 31, except per share data 1993 1994 1995 1996 1997 ---------- ----------- ----------- ----------- ----------- STATEMENT OF OPERATIONS DATA Net sales $ 113,923 $ 151,290 $ 167,958 $ 202,409 $ 246,074 Gross profit 41,536 54,306 58,590 78,015 96,795 Compensation related to stock plans(1)(2) 693 6,909 61 180 305 Income from operations 14,550 14,075 22,907 32,695 43,324 Net income 7,970 5,451 14,122 19,721 25,986 Net income per share Basic $ 1.07 $ .56 $ 1.25 $ 1.73 $ 2.26 Diluted(3) $ .89 $ .51 $ 1.23 $ 1.68 $ 2.17 Weighted average shares outstanding Basic 7,495,894 9,717,004 11,316,673 11,424,945 11,474,592 Diluted(3) 9,051,425 10,561,641 11,460,567 11,755,184 11,965,950
--------------------------- AS OF DECEMBER 31, 1996 1997 ----------- ----------- BALANCE SHEET DATA Working capital $ 70,676 $ 83,297 Property, plant and equipment, net 28,688 42,925 Total assets 122,521 150,765 Total debt -- 30 Total liabilities 20,224 21,814 Total shareholders' equity 102,297 128,951
- --------------- (1) In 1994, a reorganization was effected to consolidate shareholdings in Simpson Strong-Tie and Simpson Dura-Vent (the "1994 Reorganization"). As part of the 1994 Reorganization, the Company recorded a one-time, non-cash, non-deductible compensation charge of approximately $6.4 million in the first quarter of 1994, resulting from an exchange of Company shares for outstanding SST and SDV shares held by employees. After giving effect to all components of the 1994 Reorganization, including this non-cash compensation charge, shareholders' equity increased by $1.1 million. The Company also recorded in the first quarter of 1994 other non-cash compensation charges aggregating approximately $400,000 and a cash compensation charge of approximately $100,000. (2) The year ended December 31, 1993, includes $470,000 in one-time, non-cash expense for options earned by employees pursuant to compensation arrangements with exercise prices less than fair value. The balance for the year 1993 includes dividends paid to and repurchases of shares of common stock from employees, which shares are deemed to be stock options (deemed options) for financial reporting purposes. (3) For purposes of calculating net income per share, common and common equivalent shares issued during the 12-month period prior to the Company's initial public offering in 1994 have been included as if they were outstanding for all periods presented using the treasury stock method. 7 8 RISK FACTORS This Prospectus contains forward-looking statements that involve risks and uncertainties, certain of which are discussed below and in reports filed by the Company with the Securities and Exchange Commission. See "Incorporation of Certain Documents by Reference" and "Additional Information." Actual results might differ materially from results suggested by any forward-looking statements in this Prospectus. In addition to the other information included or incorporated by reference in this Prospectus, the following risk factors should be considered carefully by prospective investors in evaluating the Company and its business before purchasing shares of Common Stock offered hereby. EFFECT OF INCREASED RAW MATERIAL COSTS Steel and other metals are the Company's principal raw materials. The Company purchases steel and other raw materials from various 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 "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Raw Materials." SEASONALITY AND FLUCTUATIONS IN QUARTERLY RESULTS The Company's sales are seasonal, with operating results varying from quarter to quarter. The Company's sales and income have historically been lower in the first and fourth quarters and higher in the second and third quarters of the year as retailers and contractors purchase construction materials in the late spring and summer months for the construction season. In addition, demand for the Company's products and the Company's results of operations are significantly affected by weather conditions, such as unseasonably warm, cold or wet weather, which affect, and sometimes delay or accelerate, installation of certain of the Company's products. Political and economic events can also affect the Company's revenues. The Company has little control over the timing of customer purchases, and sales anticipated in one quarter may occur in another quarter, thereby affecting both quarters' results. In addition, the Company incurs significant expenses as it develops, produces and markets its products in anticipation of future orders. Products typically are shipped as orders are received, and accordingly the Company operates with little backlog. As a result, net sales in any quarter generally depend on orders booked and shipped in that quarter. A significant portion of the Company's operating expenses are fixed, and planned expenditures are based primarily on sales forecasts. If sales fall below the Company's expectations, operating results would be adversely affected for the relevant quarters, as expenses based on those expectations will already have been incurred. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." CONSTRUCTION INDUSTRY CYCLES 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 "Management's Discussion and Analysis of Financial Condition and Results of Operations." DEPENDENCE ON INTELLECTUAL PROPERTY PROTECTION The Company's ability to compete effectively with other companies depends in part on its ability to maintain the proprietary nature of its technology. The Company owns more than 80 patents in the United States and other 8 9 countries and has applied for an additional 39 patents, but there can be no assurance 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. See "Business -- Patents and Proprietary Rights." PRODUCT LIABILITY The Company designs and manufactures most of its standard products and expects that it will continue to do so. The Company employs engineers and designers to design and test its products under development. In addition, the Company maintains a quality control system. The Company has on occasion found manufacturing flaws in its products. In addition, the Company purchases from third party suppliers raw materials, principally steel, and finished goods that are produced and processed by other manufacturers. The Company also has on occasion found flaws in raw materials and finished goods produced by others, some of which flaws have not been apparent until after the products were installed by customers. Many of the Company's products are integral to the structural soundness or fire safety of the buildings in which they are used. As a result, if any flaws exist in the Company's products (as a result of design, raw material or manufacturing flaws) and such flaws are not discovered and corrected before the Company's products are incorporated into structures, the structures could suffer severe damage (such as collapse or fire) and personal injury could result. To the extent that such damage or injury is not covered by the Company's product liability insurance, and if the Company were to be found to have been negligent or otherwise culpable, the Company and its business and financial condition could be materially and adversely affected by the necessity to correct such damage and to compensate persons who might have suffered injury. Furthermore, in the event that a flaw is discovered after installation but before any damage or injury occurs, it may be necessary for the Company to recall products, and the Company may be liable for any costs necessary to retrofit the affected structures. Any such recall or retrofit could entail substantial costs and adversely affect the Company's reputation, sales and financial condition. The Company does not carry insurance against recall costs, and its product liability insurance may not cover retrofit costs. The severe earthquake in Northridge, California, in January 1994, damaged or destroyed numerous structures, and Company products were installed in some of those structures. No assurance can be given that claims will not be made against the Company with regard to damage or destruction of structures incorporating Company products resulting from a natural disaster. Any such claims, if asserted, could materially and adversely affect the Company. REGULATORY MATTERS The design, capacity and quality of most of the Company's products and manufacturing processes are subject to numerous and extensive regulations and standards promulgated by governmental, quasi-governmental and industry organizations. Such regulations and standards are highly technical and complex and are subject to frequent revision. The failure of the Company's products or manufacturing processes to comply with any of such regulations and standards could impair the Company's ability to manufacture and market its products profitably and materially and adversely affect the Company's business and financial condition. In addition, under the National Appliance Energy Conservation Act, the Department of Energy 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 9 10 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. See "Business -- Regulation." 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 "Business -- Regulation." DEPENDENCE ON NEW MARKETS; EXPANSION OUTSIDE THE UNITED STATES The Company's future growth, if any, will depend to some extent on its ability to penetrate new markets, both domestically and internationally. In addition, construction customs, standards, techniques and methods in international markets differ from those in the United States. Laws and regulations applicable in new markets for the Company are likely to be unfamiliar to the Company and compliance may be substantially more costly than the Company anticipates. As a result, it may become necessary for the Company to redesign products or to invent or design new products in order to compete effectively and profitably outside the United States or in markets that are new to the Company in the United States. The Company expects that significant time will be required for it to generate substantial sales or profits in new markets. Other significant challenges to conducting business in foreign countries include, among other factors, local acceptance of the Company's products, political instability, currency controls, changes in import and export regulations, changes in tariff and freight rates, and fluctuations in foreign exchange rates. There can be no assurance that the Company will be able to penetrate these markets or that any such market penetration can be achieved on a timely basis or profitably. If the Company is not successful in penetrating these markets within a reasonable time, it will be unable to recoup part or all of the significant investments it will have made in attempting to do so. See "Business -- Business Strategy" and "Business -- Industry and Market Trends." ABILITY TO ASSIMILATE ACQUISITIONS The Company has recently made several small acquisitions and may in the future pursue additional acquisitions of product lines or businesses. Acquisitions involve numerous risks, including difficulties in the assimilation of the operations and products of the acquired companies, the diversion of management's attention from other business concerns, risks of entering markets in which the Company has little or no direct prior experience, and the potential loss of key employees of the acquired company. In addition, future acquisitions by the Company may result in potentially dilutive issuances of equity securities, the incurring of additional debt, and amortization expenses related to goodwill and intangible assets, which could adversely affect the Company's profitability. If an 10 11 acquisition occurs, no assurance can be given as to its effect on the Company's business or operating results. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Acquisitions and Strategic Investments." LOSS OF MANUFACTURING CAPACITY Each of the Company's current and planned manufacturing facilities is located in a geographic region that has experienced major natural disasters, such as earthquakes, floods and hurricanes. For example, the 1989 Loma Prieta earthquake in Northern California destroyed a freeway and caused other major damage within a few miles of the Company's facilities in San Leandro, California, and the earthquakes in Northridge, California, in January 1994, destroyed several freeways and numerous buildings in the region in which the Company's facilities in Brea are located. The Company does not carry earthquake insurance. Other insurance that it carries is limited and not likely to be adequate to cover all of the Company's resulting costs, business interruption and lost profits in the event of a major natural disaster in the future. If a natural disaster were to render one or more of the Company's manufacturing facilities totally or partially unusable, whether or not covered by insurance, the Company's business and financial condition could be materially and adversely affected. COMPETITION The markets for the Company's products are highly competitive. The Company has different competitors in various markets that it serves. Some of the Company's competitors have significantly greater financial and marketing resources than the Company. In addition, other technologies may be the bases for competitive products that could render the Company's products obsolete or uncompetitive, and other companies may find the Company's markets attractive and enter those markets. Competitive pricing, including price competition or the introduction of new products, could have material adverse effects on the Company's revenues and profit margins. See "Business -- Competition." CONTROL BY PRINCIPAL SHAREHOLDERS Barclay Simpson, the Chairman of the Board of the Company, and his seven adult children collectively own or control approximately 43.3% of the outstanding shares of Common Stock, and Thomas J Fitzmyers, the President and Chief Executive Officer of the Company, owns approximately 3.7% of the outstanding shares of Common Stock. In addition, the Company's profit sharing trusts, of which Messrs. Simpson and Fitzmyers are trustees, own an aggregate of approximately 1.3% of the outstanding shares of Common Stock. Mr. Fitzmyers will sell 50,000 of his shares (approximately 0.4% of the outstanding shares of Common Stock) in this offering. As a result of such share ownership, under California law, which provides for cumulative voting for directors, Mr. Simpson, his children and Mr. Fitzmyers together will continue to have the right to elect at least three of the seven directors; Messrs. Simpson and Fitzmyers will also have substantial influence with respect to the election of the other directors. Messrs. Simpson and Fitzmyers are also expected to continue to exercise substantial control over fundamental changes affecting the Company, such as a merger or sale of assets or amendment of the Company's Articles of Incorporation or Bylaws. Notwithstanding that investors in this offering will have the right to vote their shares of Common Stock, the Company and its management will continue to be controlled by Messrs. Simpson and Fitzmyers. See "Management," "Principal and Selling Shareholders" and "Description of Capital Stock." CONFLICTS OF INTEREST Barclay Simpson, Thomas J Fitzmyers and Stephen B. Lamson, the Company's principal executive officers (see "Management"), have and will continue to have significant conflicts of interest regarding certain properties that the Company leases from partnerships in which those officers participate. Those partnerships were organized principally to purchase, own and lease to the Company manufacturing and warehouse facilities that the Company currently uses. Based on formal and informal third-party appraisals, the Company believes that some of the rent and other terms under these leases are less favorable to the Company than terms that could be obtained from unrelated persons in the current real estate markets. The Company intends to continue to lease and occupy most of these facilities for the foreseeable future, and, subject to the approval of the Company's independent directors, the 11 12 leases may be amended, renewed or replaced at any time or from time to time. In such event, Messrs. Simpson, Fitzmyers and Lamson would be subject to conflicting interests in their capacities as partners in the partnerships and as officers, directors and controlling shareholders of the Company. See "Description of Capital Stock" and Note 9 to the Consolidated Financial Statements. COLLECTIVE BARGAINING AGREEMENTS 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, one of which (covering approximately 125 employees) will expire in July 1998. 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. See "Business -- Employees and Labor Relations." DEPENDENCE ON KEY PERSONNEL The Company is dependent on certain key management and technical personnel, including Barclay Simpson, Thomas J Fitzmyers, Stephen B. Lamson and Donald M. Townsend. The loss of one or more key employees could have a material adverse effect on the Company. The Company's success will also depend on its ability to attract and retain additional highly qualified technical, marketing and management personnel necessary for the maintenance and expansion of the Company's activities. The Company faces strong competition for such personnel and there can be no assurance that the Company will be able to attract or retain such personnel. See "Management." ISSUANCE OF PREFERRED STOCK The Board of Directors of the Company is authorized by the Company's Articles of Incorporation to determine the terms of one or more series of preferred stock and to authorize the issuance of shares of any such series on such terms as the Board of Directors may approve. See "Description of Capital Stock." No plans or proposals currently are pending to issue any preferred stock, but any such issuance in the future could be used to impede an acquisition of the Company that the Board of Directors does not approve, could further dilute the equity investments of purchasers of Common Stock in this offering and could reduce the Company's funds potentially available for the payment of dividends to holders of Common Stock. See "Risk Factors -- Control by Principal Shareholders" and "Dividend Policy." SHARE PRICE VOLATILITY The trading price of the Common Stock could be subject to wide fluctuations in response to quarter to quarter variations in operating results, changes in earnings estimates by analysts, announcements of technological innovations or new products by the Company or its competitors, general conditions in the construction and construction materials industries, relatively low trading volume in the Common Stock and other events or factors. In addition, in recent years the stock market has experienced extreme price fluctuations. This volatility has had a substantial effect on the market prices of securities issued by many companies for reasons unrelated to the operating performance of those companies. These broad market fluctuations may adversely affect the market price of the Common Stock. SHARES ELIGIBLE FOR FUTURE SALE Sales of substantial amounts of Common Stock in the public market after this offering could adversely affect the prevailing market price for the Common Stock. On completion of this offering, all of the outstanding shares of Common Stock will be freely tradeable without restriction under the Securities Act, other than the 4,188,234 outstanding shares that will be held by persons who are "affiliates" of the Company as that term is defined in Rule 144 under the Securities Act. Options to purchase 978,417 shares of Common Stock were outstanding as of December 31, 1997, including options to purchase 700,497 shares that were exercisable. If a substantial number of shares were sold in the public market pursuant to Rule 144 or on exercise of options, the trading price of the Common Stock in the public market could be adversely affected. 12 13 USE OF PROCEEDS The Company will not receive any proceeds from this offering. The net proceeds to the Selling Shareholders (after deducting underwriting discounts and estimated offering expenses) from the sale of 1,437,500 shares of Common Stock offered hereby by the Selling Shareholders are estimated to be $51,563,750. Of that total, the Principal Selling Shareholder will receive approximately $49,758,750, which it will apply principally to its charitable purposes and to its administrative and operating expenses. DIVIDEND POLICY The Company has not paid any dividends since 1993 and currently intends to retain its future earnings, if any, to finance operations and fund its growth. The Company does not anticipate paying cash dividends on the 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, financial condition and other factors deemed relevant by the Board of Directors. PRICE RANGE OF COMMON STOCK The Company's Common Stock has been listed on the NYSE under the symbol "SSD" since October 13, 1997. Prior to that time, the Common Stock was traded on the Nasdaq National Market tier of The Nasdaq Stock Market under the trading symbol "SMCO." The following table shows the range of high and low closing sale prices per share of the Common Stock as reported by The Nasdaq Stock Market or the NYSE, as applicable, for the calendar quarters indicated:
---------------------------------------------------- QUARTER HIGH LOW CLOSE ------------------ ------ ---- ------ 1995 First $11 1/8 $ 9 3/8 $ 9 3/4 Second 12 1/2 9 1/2 12 1/2 Third 12 1/2 11 5/8 12 1/2 Fourth 15 1/4 11 5/8 13 1/2 1996 First 15 3/4 13 15 3/4 Second 20 3/4 15 3/4 20 Third 21 18 1/2 20 Fourth 24 20 23 1997 First 29 1/2 22 25 1/2 Second 27 1/2 21 3/4 26 1/2 Third 41 7/8 26 3/16 41 7/8 Fourth 40 1/4 32 1/4 33 5/16 First (through 1998 2/24) 39 3/8 32 3/4 38 1/16
13 14 CAPITALIZATION The table below sets forth the capitalization of the Company as of December 31, 1997. The information in the table below is qualified in its entirety by, and should be read in conjunction with, the Company's Consolidated Financial Statements and Notes thereto included elsewhere in this Prospectus.
------------ AS OF DECEMBER 31, 1997 ------------ Dollars in thousands Cash and cash equivalents $ 19,419 ======== Notes payable(1) $ 30 -------- Shareholders' equity Common stock, 20,000,000 shares authorized, 11,517,113 shares outstanding(2) 32,378 Retained earnings 96,849 Cumulative translation adjustment (276) -------- Total shareholders' equity 128,951 -------- Total capitalization $ 128,981 ========
- --------------- (1) See Note 8 to Consolidated Financial Statements for a discussion of the Company's outstanding debt. The Company expects to borrow, repay and reborrow from time to time under revolving credit agreements amounts needed for facilities expansion and improvement and general corporate purposes. (2) Excludes an aggregate of 978,417 shares of Common Stock issuable on exercise of stock options that were outstanding as of December 31, 1997. See "Business -- Employees and Labor Relations." 14 15 SELECTED CONSOLIDATED FINANCIAL INFORMATION The following table sets forth selected consolidated financial information with respect to the Company for each of the five years ended December 31, 1993, 1994, 1995, 1996 and 1997, 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 "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere herein.
------------------------------------------------------------------ Dollars in thousands, YEARS ENDED DECEMBER 31, except per share data 1993 1994 1995 1996 1997 ---------- ----------- ----------- ----------- ----------- STATEMENT OF OPERATIONS DATA Net sales $ 113,923 $ 151,290 $ 167,958 $ 202,409 $ 246,074 Cost of sales 72,387 96,984 109,368 124,394 149,279 -------- -------- -------- -------- -------- Gross profit 41,536 54,306 58,590 78,015 96,795 Selling expense 12,137 14,714 17,110 20,104 23,113 General and administrative expense 14,156 18,608 18,512 25,036 30,053 Compensation related to stock plans(1)(2) 693 6,909 61 180 305 -------- -------- -------- -------- -------- Income from operations 14,550 14,075 22,907 32,695 43,324 Interest income (expense), net (997) (559) 142 595 429 -------- -------- -------- -------- -------- Income before income taxes and minority interest 13,553 13,516 23,049 33,290 43,753 Provision for income taxes 5,517 8,098 8,927 13,569 17,767 Minority interest 66 (33) -- -- -- -------- -------- -------- -------- -------- Net income $ 7,970 $ 5,451 $ 14,122 $ 19,721 $ 25,986 ======== ======== ======== ======== ======== Net income per share Basic $ 1.07 $ .56 $ 1.25 $ 1.73 $ 2.26 Diluted(3) $ .89 $ .51 $ 1.23 $ 1.68 $ 2.17 Weighted average shares outstanding Basic 7,495,894 9,717,004 11,316,673 11,424,945 11,474,592 Diluted(3) 9,051,425 10,561,641 11,460,567 11,755,184 11,965,950
------------------------------------------------------------------ AS OF DECEMBER 31, 1993 1994 1995 1996 1997 ---------- ----------- ----------- ----------- ----------- BALANCE SHEET DATA Working capital $ 24,526 $ 44,127 $ 51,984 $ 70,676 $ 83,297 Property, plant and equipment, net 13,551 20,843 26,420 28,688 42,925 Total assets 58,325 80,311 96,642 122,521 150,765 Total debt 14,998 -- 20 -- 30 Total liabilities 25,487 13,789 15,089 20,224 21,814 Total shareholders' equity(1) 32,535 66,522 81,553 102,297 128,951
15 16 (continued from preceding page)
------------------------------------------------------------------ YEARS ENDED DECEMBER 31, 1993 1994 1995 1996 1997 ---------- ----------- ----------- ----------- ----------- OTHER DATA EBITDA(4) $ 17,656 $ 24,820 $ 28,260 $ 39,927 $ 50,140 Net cash provided by operating activities 4,366 9,613 13,398 24,610 21,133 Net cash used in investing activities (4,480) (11,096) (13,109) (12,256) (21,824) Net cash provided by financing activities 1,778 5,484 855 506 294 Capital expenditures 3,656 9,939 10,050 7,364 16,548 Depreciation and amortization 2,636 3,973 5,291 7,198 6,712
- --------------- (1) In 1994, a reorganization was effected to consolidate shareholdings in Simpson Strong-Tie and Simpson Dura-Vent (the "1994 Reorganization"). As part of the 1994 Reorganization, the Company recorded a one-time, non-cash, non-deductible compensation charge of approximately $6.4 million, resulting from an exchange of Company shares for outstanding SST and SDV shares held by employees. After giving affect to all components of the 1994 Reorganization, including this non-cash compensation charge, shareholders' equity increased by $1.1 million. The Company also recorded in 1994 other non-cash compensation charges aggregating approximately $400,000 and a cash compensation charge of approximately $100,000. (2) The year ended December 31, 1993, includes $470,000 in one-time, non-cash expense for options earned by employees pursuant to compensation arrangements with exercise prices less than fair value. The balance for the year 1993 includes dividends paid to and repurchases of shares of common stock from employees, which shares are deemed to be stock options (deemed options) for financial reporting purposes. (3) For purposes of calculating net income per share, common stock and common stock equivalent shares issued during the 12-month period prior to the Company's initial public offering in 1994 have been included as if they were outstanding for all periods presented using the treasury stock method. (4) Represents net income before minority interest, income taxes, interest income (expense), net, depreciation and amortization, and non-cash compensation related to stock plans as described in notes (1) and (2) above. 16 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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, 1995, 1996 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. Certain matters discussed below are forward-looking statements that involve risks and uncertainties, certain of which are discussed in this Prospectus and in reports filed by the Company with the Securities and Exchange Commission. See "Incorporation of Certain Documents by Reference," "Additional Information" and "Risk Factors." Actual results might differ materially from results suggested by any forward-looking statements in this Prospectus. OVERVIEW From 1995 through 1997, annual net sales of the Company increased 46.5% from $168.0 million in 1995 to $246.1 million in 1997. The increase in net sales resulted primarily from increased geographic distribution and a broadening of the Company's customer base and product lines, both internally and through acquisitions. Net sales increased from 1995 to 1997 in all regions of the United States, with above average rates of growth in the Midwestern and Northeastern markets. Expansion into overseas markets also contributed to the net sales growth over the last three years. During the year ended December 31, 1997, gross profit margin increased to 39.3%, from 34.9% in 1995. The increase over the past two years was due primarily to lower material costs as a percentage of net sales, LIFO gains recorded in 1996 and 1997 as compared to a LIFO loss in 1995 and lower overhead costs as a percentage of net sales. Income from operations as a percentage of net sales increased to 17.6% in 1997 from 13.6% in 1995, despite a 0.5% increase in selling, general and administrative costs as a percentage of net sales. RESULTS OF OPERATIONS The following table sets forth, for the years indicated, the percentage of net sales of certain items in the Company's consolidated statements of operations.
----------------------------- YEARS ENDED DECEMBER 31, 1995 1996 1997 ----- ----- ----- Net sales 100.0% 100.0% 100.0% Cost of sales 65.1% 61.5% 60.7% ----- ----- ----- Gross profit 34.9% 38.5% 39.3% Selling expense 10.2% 9.9% 9.4% General and administrative expense 11.0% 12.4% 12.2% Compensation related to stock plans * 0.1% 0.1% ----- ----- ----- Income from operations 13.6% 16.1% 17.6% Interest income, net 0.1% 0.3% 0.2% ----- ----- ----- Income before income taxes 13.7% 16.4% 17.8% Provision for income taxes 5.3% 6.7% 7.2% ----- ----- ----- Net income 8.4% 9.7% 10.6% ===== ===== =====
- --------------- * Less than 0.05% COMPARISON OF THE YEARS ENDED DECEMBER 31, 1997 AND 1996 Net Sales Net sales increased 21.6% to $246.1 million in 1997 from $202.4 million in 1996. Net sales of Simpson Strong-Tie's products increased 25.3% to $190.6 million in 1997, while net sales of Simpson Dura-Vent's products 17 18 increased by 10.3% to $55.5 million in 1997. SDV accounted for approximately 22.6% of the Company's total net sales, a decrease from 24.9% in 1996. The increases in net sales at both SST and SDV were primarily due to volume increases, with relatively small increases in average prices. The increase in net sales reflected sales growth throughout the United States, particularly in California and the Northeastern region of the country. International sales increased at a substantial rate, with a significant portion of this increase resulting from the businesses acquired earlier in the year. Contractor distributors and homecenters were the fastest growing connector sales channels. The growth rate of Simpson Strong-Tie's epoxy, seismic and engineered wood product sales remained strong, and SST's acquisition of the Isometric Group's line of mechanical anchor products also contributed significantly to the increase in net sales. Simpson Dura-Vent's sales of chimney products and Direct-Vent products experienced above-average growth. Gross Profit Gross profit increased 24.1% to $96.8 million in 1997 from $78.0 million in 1996. As a percentage of net sales, gross profit increased to 39.3% in 1997 from 38.5% in 1996. The increase was primarily due to a reduction as a percentage of net sales in the non-material components of cost of sales, including depreciation on factory equipment, research and development costs, labor, factory overhead costs and shipping and freight. These costs decreased as a percentage of net sales primarily due to the improved absorption of fixed components of these costs because of the increased sales volume. Material costs as a percentage of net sales also decreased slightly relative to 1996. These improvements were offset somewhat by a smaller LIFO gain recorded in 1997 as compared to 1996. Selling Expense Selling expense increased 15.0% to $23.1 million in 1997 from $20.1 million in 1996, but decreased as a percentage of net sales. The increase was primarily due to higher personnel costs, including agent commissions, related to the increase in the size of the sales force, which was expanded in 1997 to include manufacturers' representatives who distribute the Company's mechanical anchor product line. This increase was offset slightly by reduced spending on advertising and promotional materials. General and Administrative Expense General and administrative expenses increased 20.0% to $30.1 million in 1997 from $25.0 million in 1996, and increased as a percentage of net sales. The increase was primarily due to increased cash profit sharing, as a result of higher operating profit, as well as higher personnel costs, including those associated with the two acquisitions earlier in the year. Partially offsetting the increase was a decrease in expenses because of the 1996 write-off of intangible assets related to Simpson Strong-Tie's operations in the UK. Acquired European Operations The Company recorded an after-tax net loss in its combined European operations of $2.4 million in 1997, including $1.0 million in intercompany interest charges, compared to after-tax net losses of $2.8 million in 1996. These losses are primarily associated with the Company's UK operations. Depreciation on purchased capital equipment and administrative and other overhead costs incurred related to the growing operations contributed significantly to the losses. The Company expects the losses in the UK to continue through at least 1998. COMPARISON OF THE YEARS ENDED DECEMBER 31, 1996 AND 1995 Net Sales Net sales in 1996 increased 20.5% to $202.4 million from $168.0 million in 1995. Net sales of Simpson Strong-Tie products increased 19.8% to $152.1 million in 1996, while net sales of Simpson Dura-Vent products increased by 22.8% to $50.3 million in 1996. SDV accounted for 24.9% of the Company's total net sales, up from 24.4% in 1995. The increases in net sales at both SST and SDV were primarily due to volume increases, with relatively small increases in average prices. The increase in net sales occurred throughout the United States, but was particularly strong in the Northeastern region of the country, primarily as a result of increased home center and dealer 18 19 distributor business. Sales in California, however, grew at a rate substantially below the overall growth rate. The Company also had above-average growth in export sales, a small but steadily growing part of both the connector and venting businesses. The sales growth rate of DIY, epoxy and seismic products led SST sales, and sales of Direct-Vent products, now sold both to OEMs and through distributors, continued to experience strong growth. Gross Profit Gross profit in 1996 increased 33.2% to $78.0 million from $58.6 million in 1995. Gross profit as a percentage of net sales increased to 38.5% in 1996 from 34.9% in 1995. The increase was primarily due to three factors. The first factor was a substantial benefit attributable to the LIFO gain for the year as compared to a LIFO loss in the prior year. Second, the non-material component of cost of sales, which includes research and development costs, direct and indirect labor, factory costs and shipping and freight, decreased slightly as a percentage of net sales primarily due to the increased absorption of the fixed components of these costs resulting from increased sales volume. Finally, raw material costs decreased somewhat relative to 1995. Labor costs as a percentage of net sales remained relatively flat during 1996. Selling Expense In 1996, selling expense increased 17.5% to $20.1 million from $17.1 million in 1995. The increase was primarily due to higher advertising and sales promotion expenses, a large percentage of which was targeted toward the retail business. The Company also hired several new Retail Specialists to support the increased home center and DIY business and added several sales people. In addition, the increased sales at Simpson Dura-Vent resulted in proportionately higher commissions and other related costs. General and Administrative Expense General and administrative expense increased 35.2% to $25.0 million in 1996 from $18.5 million in 1995. The increase was primarily due to higher cash profit sharing, as a result of higher operating profit, and the write-off of intangible assets related to the Company's UK operations (see "Acquired Operations" below). Also contributing to the increase in general and administrative expense were increased personnel and overhead costs resulting from the addition of administrative staff, including those at the businesses acquired in the second half of 1995. Interest Income (Expense), net The Company had interest income of $595,180 in 1996 as compared to $141,535 in 1995. The increase resulted from the higher cash and short-term investment balances during the year. Provision for Income Taxes The Company's effective tax rate increased to 40.8% in 1996 from 38.7% in 1995. The lower 1995 tax rate was principally a result of the full recognition of California investment tax credits on equipment purchased for manufacturing and research and development. Acquired Operations The Company's United Kingdom operations continue to report losses. While sales there have increased substantially since 1995, largely because of acquisitions, current gross margins are substantially lower than those of the rest of the Company's operations. In December 1996, the Company completed the purchase of the assets, including $675,000 in equipment, of the Builders Products Division of MiTek Industries Ltd. for approximately $1.0 million. As a result of this acquisition, the Company concluded that additional manufacturing space was needed and that the consolidation of its UK facilities into a single location was advisable. In connection with this consolidation, the Company wrote off approximately $1.1 million of intangible assets associated with the separate UK operations. The Company recorded after-tax net losses in its European operations, including intercompany interest charges and the $1.1 million charge discussed above, of approximately $2.8 million in 1996 compared to after-tax net losses of $1.5 million in 1995. 19 20 The losses were primarily due to depreciation on purchased capital equipment and administrative and other overhead costs incurred as a result of the growing operations. The Company expects these losses to continue through at least 1998. QUARTERLY RESULTS The following table sets forth unaudited consolidated statement of income data for each quarter of 1996 and 1997. This quarterly information has been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflects all adjustments, consisting only of normal recurring adjustments, necessary to state fairly the information set forth herein. The operating results for any quarter are not necessarily indicative of results for any future period.
---------------------------------------------------------------------------- 1996 1997 ------------------------------------- ------------------------------------- Dollars in thousands, except per FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH share data QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- ------- ------- ------- ------- Net sales $43,457 $51,760 $57,129 $50,063 $51,927 $65,555 $68,825 $59,767 Cost of sales 28,356 31,509 34,441 30,088 32,609 39,228 40,364 37,079 ------- ------ ------ ------ ------ ------ ------ ------ Gross profit 15,101 20,251 22,688 19,975 19,318 26,327 28,461 22,688 Selling expense 4,510 5,463 4,929 5,202 5,208 6,367 5,893 5,645 General and administrative expense 5,128 6,225 7,034 6,648 6,226 8,078 8,665 7,084 Compensation related to stock -- -- -- 180 -- -- 290 15 ------- ------ ------ ------ ------ ------ ------ ------ Income from operations 5,463 8,563 10,725 7,945 7,884 11,882 13,613 9,944 Interest income (expense), net 54 97 175 269 160 (18) 106 181 ------- ------ ------ ------ ------ ------ ------ ------ Income before income taxes 5,517 8,660 10,900 8,214 8,044 11,864 13,719 10,125 Provision for income taxes 2,254 3,492 4,507 3,316 3,287 4,843 5,531 4,106 ------- ------ ------ ------ ------ ------ ------ ------ Net income $ 3,263 $ 5,168 $ 6,393 $ 4,898 $ 4,757 $ 7,021 $ 8,188 $ 6,019 ======= ====== ====== ====== ====== ====== ====== ======
The Company's results of operations fluctuate from quarter to quarter. The fluctuations are caused by various factors, primarily the increase in construction activity during warmer months of the year. Historically, demand for the Company's products has tended to be somewhat higher in the second and third quarters and somewhat lower in the first and fourth quarters. LIQUIDITY AND SOURCES OF CAPITAL The Company's liquidity needs arise principally from working capital requirements, capital expenditures and asset acquisitions. During the three years ended December 31, 1997, the Company relied primarily on internally generated funds and its credit facilities to finance these needs. The Company's working capital requirements are seasonal with the highest working capital needs typically occurring in the second and third quarters of the year. Cash and cash equivalents were $19.4 million and $19.8 million at December 31, 1997 and 1996, respectively. Working capital was $83.3 million and $70.7 million at December 31, 1997 and 1996, respectively. As of December 31, 1997, the Company had no significant debt and had available to it unused credit facilities of approximately $22.9 million. The Company had cash flows from operating activities of $21.1 million, $24.6 million and $13.4 million for 1997, 1996 and 1995, respectively. In 1997, cash was provided by net income of $26.0 million, noncash expenses (such as depreciation and amortization) of $6.7 million and increases in accrued profit sharing and other accrued liabilities totaling $1.6 million. The Company's primary operating cash flow requirements resulted from increased levels of inventory and accounts receivable that are required as the Company's sales increase. In 1997, 1996 and 1995, the Company used cash of $9.1 million, $7.7 million and $5.6 million, respectively, to fund accounts receivable and inventory requirements. In addition, trade accounts payable balances decreased and the deferred tax asset balance increased in 1997, accounting for an aggregate use of an additional $3.4 million in cash. The balance of the cash used in 1997 resulted from changes in the other current asset and liability accounts. Cash used in investing activities was $21.8 million, $12.3 million and $13.1 million for 1997, 1996 and 1995, respectively. Capital expenditures, related primarily to expanding capacity, increased in 1997 to $16.5 million from 20 21 $7.4 million in 1996. Included in the 1997 investing activities are the Company's two acquisitions for a total of $9.3 million. The first was an equity purchase for $7.6 million plus an earnout based on future sales increases of three Canadian companies and a related U.S. company, the Isometric Group, that manufactures and distributes a line of mechanical anchors and related products. The second was the purchase of the remaining 66% equity in Patrick Bellion, S.A., a French manufacturer of connector products, for $1.7 million. In addition, $7.3 million in cash was used for real estate and related purchases in 1997. Partially offsetting these purchases was the sale of a short-term investment providing nearly $4.0 million in cash. Financing activities provided net cash of $0.3 million, $0.5 million and $0.9 million in 1997, 1996 and 1995, respectively. The cash was provided primarily through the exercise of stock options by current and former employees of the Company. The Company believes that cash generated by operations, borrowings available under its existing credit agreements, the majority of which have been renewed through June 1998, and other available financing will be sufficient for the Company's working capital needs and planned capital expenditures through at least 1998. INFLATION The Company believes that the effect of inflation on the Company has not been material in recent years, as inflation rates have remained low. 21 22 BUSINESS OVERVIEW The Company, through its subsidiary, Simpson Strong-Tie, 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, 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. From 1993 through 1997, the Company's annual net sales grew from $113.9 million to $246.1 million, a compound annual growth rate of 21.2%. During the same period, the Company's annual net income grew from $8.0 million to $26.0 million, a compound annual growth rate of 34.4%. Growth has been derived primarily from frequent new product introductions, expansion into new geographic markets and growth of distribution channels. Connectors produced by Simpson Strong-Tie typically are steel devices that are used to strengthen, support and connect joints in residential and commercial construction and DIY projects. These products enhance the safety and durability of the structures in which they are installed and can save time and labor costs for the contractor. SST's connector products increase structural integrity and improve structural resistance to seismic, wind and other forces. Applications range from building framing to deck construction to DIY projects. SST produces and markets more than 1,300 standard connector products in addition to products that it manufactures to custom specifications requested by architects and engineers. Simpson Dura-Vent's venting systems are used to vent gas furnaces and water heaters, gas fireplaces and stoves, wood burning stoves and pellet stoves. SDV's metal vents, chimneys and chimney liner systems exhaust the products of combustion to the exterior of the building, and some products introduce outside air into the appliance. SDV designs its products for ease of assembly and safe operation and to achieve a high level of performance. SDV produces and markets several hundred different venting products and systems. The Company emphasizes continuous new product development and often obtains patent protection for its new products. The Company's products are marketed in all 50 states of the United States and in England, France, Germany, Canada, Mexico, Japan and Australia. Both Simpson Strong-Tie and Simpson Dura-Vent products are distributed through a contractor and dealer distributor network, home centers and OEMs. The Company has developed and uses automated manufacturing processes. Its innovative manufacturing systems and techniques have allowed it to control manufacturing costs, even while developing both new products and products that meet customized requirements and specifications. The Company's development of specialized manufacturing processes has also permitted increased operating flexibility and enhanced product design innovation. The Company has developed a quality management system that employs numerous quality-control procedures. Since 1996, SST's quality management system has been registered under ISO 9001. The Company has 11 manufacturing locations in the United States, Canada, France and the United Kingdom. The Company is a California corporation and was reorganized in 1994 as a holding company for Simpson Strong-Tie and Simpson Dura-Vent. INDUSTRY AND MARKET TRENDS Based on trade periodicals, participation in trade and professional associations and communications with governmental and quasi-governmental organizations and customers and suppliers, the Company believes that a variety of events and trends have resulted in significant developments in the markets that the Company serves. Some of these events and trends are discussed below. 22 23 Increased Awareness of Need for Building Safety Recent natural disasters throughout the world have focused attention on safety concerns relating to the structural integrity of homes and other buildings. The 1995 earthquake in Kobe, Japan, the 1994 earthquake in Northridge, California, the 1989 Loma Prieta earthquake in Northern California, Hurricanes Hugo in 1989 and Andrew in 1992 in the Southeast, and other less cataclysmic natural disasters damaged and destroyed innumerable homes and other buildings, resulting in heightened consciousness of the fragility of some of those structures. In recent years, architects, engineers, model code agencies, contractors, building inspectors and legislators have continued efforts to improve structural integrity and safety of homes and other buildings in the face of disasters of various types, including seismic events, storms and fires. Based on ongoing participation in trade and professional associations and communications with governmental and quasi-governmental regulatory agencies (see "Business -- Regulation"), the Company believes that building codes are being strengthened and that their enforcement is becoming more rigorous. The Company's products are designed to respond to increasing demand resulting from these trends. Increased Environmental Awareness The requirements of the Endangered Species Act, the Federal Lands Policy Management Act and the National Forest Management Act have resulted in increasingly limited amounts of timber available for harvest from public lands. This has contributed to an increase in lumber prices and a concomitant increase in the use of engineered wood products. Engineered wood products, which substitute for strong, clear-grained lumber historically obtained from logging older, large-diameter trees, have been developed to conserve lumber. Engineered wood products frequently require specialized connectors. Sales of Simpson Strong-Tie's engineered wood connector products increased significantly in 1996 and 1997. Concerns about energy conservation and air quality have led to increasing recognition of the advantages of natural gas as a heating fuel, including its abundance and clean burning characteristics. Use of natural gas for home heating has been increasing in the United States. According to the Census Bureau, the share of new single-family houses in 1996 heated with natural gas was 69%, a slight increase from 67% in 1994. Sales of gas fireplaces have increased in recent years relative to those of traditional wood burning fireplaces. Traditional wood burning fireplaces negatively affect both indoor and outdoor air quality. In contrast, direct vent gas fireplaces draw air for combustion from outdoors (through the double wall venting system) and feature sealed glass doors that reduce indoor air contamination. In the past, Simpson Dura-Vent products have not been sold into the traditional masonry and manufactured fireplace market. The recent trend from wood to gas fireplaces is viewed as a significant opportunity for SDV's gas venting products. Expanding Home Center Markets and DIY Activity The Company has developed its distribution through home centers throughout the United States. The National Retail Hardware Association estimates that there are 44,500 home centers and lumber and building material outlets in the United States. The Company's sales to home centers increased significantly in 1996 and 1997. 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. 23 24 Increase Specification by Architects and Engineers 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. Expand Product and Distribution Coverage 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. Continue Geographic Expansion of Customer Base The Company is expanding its established facilities outside California to increase its presence and sales in markets east of the Rocky Mountains. During the last five years, the Company has expanded or has planned to expand nearly all of its manufacturing and warehouse facilities. Sales in the 37 states east of the Rocky Mountains grew approximately 44% from 1995 to 1997 and represented approximately 48% of the Company's 1997 domestic sales. In the last four years, the Company commenced manufacturing in England, opened a warehouse facility in Western Canada, purchased manufacturers in Eastern Canada and in France, made an equity investment in a product design and distribution company in Germany and entered into a distribution arrangement in Japan. The European investments are intended to establish a presence in the European Community through companies with existing customer bases and through servicing U.S.-based customers operating there. The Company intends to continue to pursue and expand operations outside the United States. Provide Rapid Delivery of High Quality Products to Customers 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 24 25 designed products and services. With respect to the DIY and dealer markets, the Company's strategy is to keep the customer's retail stores continuously stocked with adequate supplies of the full line of the Company's products that those stores carry. The Company manages its inventory to assure continuous product availability. Most customer orders are filled within a few days. High levels of manufacturing automation and flexibility allow the Company to maintain its quality standards while continuing to provide prompt delivery. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Create New Proprietary Products Responsive to Customer Needs The Company's product research and development is based largely on needs that customers communicate to the Company. The Company typically has developed 10 to 15 new products annually (some of which may be produced in a range of sizes). The Company's strategy is to develop new products on a proprietary basis where possible. Of more than 80 patents that the Company owns, 70 cover products that the Company currently manufactures and markets. The Company has filed 39 patent applications that are pending. Acquire Complementary Product Lines The Company's long-term strategy is to develop, acquire or invest in product lines or businesses that (a) complement the Company's existing product lines, (b) can be marketed through its existing distribution channels, (c) might benefit from use of the Simpson Strong-Tie and Simpson Dura-Vent brand names, and (d) are responsive to needs of the Company's customers. SIMPSON STRONG-TIE Overview Connectors produced by Simpson Strong-Tie typically are steel devices that are used to strengthen, support and connect joints in residential and commercial construction and DIY projects. These products enhance the safety and durability of the structures in which they are installed and can save time and labor costs for the contractor. SST's connector products increase structural integrity and improve structural resistance to seismic, wind and other forces. Applications range from building framing to deck construction to DIY projects. SST produces and markets more than 1,300 standard connector products in addition to products that it manufactures to custom specifications requested by architects and engineers. In the United States, connector usage developed faster in the West than elsewhere due to the low cost and abundance of timber and to local construction practices. Increasingly, the market has been influenced both by a growing awareness that the devastation caused by seismic, wind and other disasters can be reduced through improved building codes and construction practices and by environmental concerns that contribute to the increasing cost and reduced availability of wood. Most Simpson Strong-Tie products are listed by recognized building standards agencies as complying with model building codes and are specified by architects and engineers for use in projects they are designing or supervising. The engineered wood products industry is developing in response to concerns about the availability of wood, and the Company believes that SST is the leading supplier of connectors for use with engineered wood products. SST operates manufacturing and warehouse facilities in California, Texas, Ohio, Florida, Illinois, British Columbia, Ontario, England and France. Products Simpson Strong-Tie is a recognized brand name in the markets it serves. Over a quarter of SST's 1997 revenues are derived from products that are protected by patents. SST manufactures and markets three primary categories of connector products: wood-to-wood, wood-to-concrete and wood-to-masonry. SST also markets specialty screws and nails for proper installation of certain of its connector products. For tying wood members to the foundation, SST has designed and currently markets a line of anchor bolts and the associated parts for aligning the anchor bolts, as well as threaded rod, epoxy and mechanical anchors, which have seismic, retrofit and remodeling applications for both new construction and DIY markets. 25 26 Almost all of Simpson Strong-Tie's products are listed by recognized model building code agencies. To achieve such listings, SST conducts extensive product testing, which is witnessed and certified by independent testing engineers. The tests also provide the basis for publication of load ratings for SST structural connectors, and this information is used by architects, engineers, contractors and homeowners. The information is useful across the range of applications of SST's products, from the deck constructed by a homeowner to a multi-story structure designed by an architect or engineer in an earthquake zone. Simpson Strong-Tie also manufactures connector products specifically designed for use with engineered wood products, such as wood I-joists. With increased timber costs and reduced availability of trees suitable for making traditional solid sawn lumber, construction with engineered wood products has increased substantially in the last three years. Over the same period, SST's net sales of engineered wood connectors through dealer and contractor distributors and engineered wood product manufacturers have also increased significantly. New Product Development Simpson Strong-Tie commits substantial resources to engineering and new product development. The majority of SST's products have been developed through SST's internal research and development program. Of the 65 U.S. and 15 foreign patents that SST owns, 67 cover products that SST currently manufactures and markets. SST typically has developed 10 to 15 new products each year. SST's research and development expense for the three years ended December 31, 1995, 1996 and 1997, was $922,000, $1,025,000 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 line of powder-coat painted shelf brackets primarily for the DIY market, high-strength chemical epoxy anchor systems, and reduced deflection hold-downs and associated fasteners. The Company believes that existing distribution channels are receptive to product line extensions, thereby enhancing SST's ability to enter new markets. Sales and Marketing Sales Organization. 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. Distribution Channels. Simpson Strong-Tie sells its products through an extensive distribution system comprising dealer distributors supplying thousands of retail locations nationwide, contractor distributors (primarily on the West Coast), home centers (including more than 1,800 stores across the United States), manufacturers of engineered wood products, and specialized contractors such as roof framers. SST's DIY and dealer products are used to build projects such as decks, patio covers and shelf and bench systems. In 1996, SST completed an agreement with a Japanese trading partner to distribute its products in Japan. SST has also received C-Mark equivalency clearance from the Japanese building code authorities, which is expected to facilitate acceptance of its products into that market. The Company believes that SST's increasing diversification into new and growing markets has reduced its vulnerability to construction industry cycles. In addition to its branches, SST operates manufacturing and/or warehouse facilities in Florida, Illinois and Canada. Customer Service. 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 26 27 products and provide load and installation information. SST publishes a newsletter, Connector Update, providing technical, installation and other information, as well as publications addressing seismic and hurricane conditions and the DIY market. To serve users in the U.S. and elsewhere who do not speak English, SST employs bilingual sales people and prints some of its publications in other languages. Simpson Strong-Tie's engineers not only design and test products, but also provide engineering support for customers. This support might range from the discussion of a load value in a catalog to testing a unique application for an existing product. SST's sales force communicates with customers in each of its marketing channels, through its publications, through seminars and through frequent calls. Prompt Delivery of Products. 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. Keeping the Racks Full. Simpson Strong-Tie believes that dealer and home center sales of SST products are significantly greater when the bins and racks at large dealer and home center locations are adequately stocked with appropriate products. Various retailers carry varying numbers of different SST products and SST's Retail Specialists are engaged in ongoing efforts to inform retailers about other SST products that can be used in their specific markets and to encourage them to add these products to better meet their customers' needs. Achieving these objectives requires teamwork and significant inventory commitments between SST and the distributors and retailers. Retail Specialists are playing a significant role in keeping the racks full and extending the product lines at the large dealer and home center level. They help retailers order product, set up merchandising systems, stock shelves, hold product seminars and provide SST with daily information that is used to improve service and product mix. SIMPSON DURA-VENT Overview Simpson Dura-Vent's venting systems are used to vent gas furnaces and water heaters, gas fireplaces and stoves, wood burning stoves and pellet stoves. SDV's metal vents, chimneys and chimney liner systems exhaust the products of combustion to the exterior of the building and have been designed for ease of assembly and safe operation and to achieve a high level of performance. SDV produces and markets several hundred different venting products and systems. In recent years, the abundant supply and clean burning characteristics of natural gas have gained public recognition, resulting in increased market share for gas appliances in the new construction and the appliance replacement markets. In addition, concern over energy conservation and environmental air quality has resulted in increased use of gas stoves and fireplaces rather than the traditional wood burning stoves and fireplaces. As a result, new venting systems, such as Direct-Vent, have been developed to address changes in appliance technology. Simpson Dura-Vent's objective is to expand market share in all of its distribution channels, by entering expanding markets that address energy and environmental concerns. SDV's strategy is to capitalize on its strengths in new product development and its established distribution network and to continue its commitment to superior quality and service. SDV operates manufacturing and warehouse facilities in California and Mississippi. Products Simpson Dura-Vent is a leading supplier of double-wall Type B Gas Vent systems, used for venting gas furnaces, water heaters, boilers and decorative gas fireplaces. According to the Gas Appliance Manufacturers' Association ("GAMA"), approximately 4.9 million gas water heaters and approximately 2.9 million gas furnaces were sold in 1996. SDV believes that there is significant potential in the gas fireplace market, because of the large number of 27 28 fireplaces sold in the new construction market, the relative ease of installing side-wall vented gas fireplaces for the remodeling market and the trend from wood to gas as a result of environmental concerns and ease of operation. Simpson Dura-Vent's Type B Gas Vent product line features heavy-duty quality construction and a twist-lock design that provides for fast and easy job-site assembly compared to conventional snap together designs. The twist-lock design has broader applications and has been incorporated into SDV's gas, pellet and direct vent product lines. Simpson Dura-Vent has introduced a patented flexible vent connector, Dura/Connect, for use between the gas appliance flue outlet and the connection to the Type B Gas Vent installed in the ceiling. Dura/Connect eliminates the difficult and time consuming process of cutting, crimping and fitting galvanized steel vent connectors. Marketed to home centers and hardware stores, Dura/Connect offers a simple twist, bend and connect installation for water heaters and gas furnaces. The wood stove industry has responded to air quality concerns with substantial reductions in wood stove particulate emissions. In 1985, Simpson Dura-Vent introduced Dura-Plus, a patented chimney system for use with wood burning stoves. The Dura-Plus chimney is used with Environmental Protection Agency ("EPA") approved wood stoves. The Dura-Plus safety valve design provides enhanced fire safety in the event of a creosote chimney fire. The Dura-Plus chimney is available in kits, and is sold through retail fireplace specialty shops and home centers. The growing gas fireplace market has evolved into two basic types of fireplace: top-vent fireplaces that are vented with the standard Type B Gas Vent and direct-vent fireplaces that use a special double-wall venting system. Since 1993, SDV has provided direct-vent gas fireplace venting systems under OEM contracts with several major fireplace manufacturers in the United States. SDV's direct-vent system is designed not only to exhaust the flue products, but also to draw in outside air for combustion, an important feature in modern energy-efficient home construction. The direct-vent gas fireplace systems provide ease of installation, permitting horizontal through-the-wall venting or standard vertical through-the-roof venting. Sales of Direct-Vent have been robust. In 1996, SDV expanded its Direct-Vent product line to include both co-axial and co-linear direct vent systems for venting gas stoves and gas inserts into existing masonry chimneys or existing factory-built metal chimneys. Since early 1995, nearly all wood stove manufacturers have introduced direct vent gas stoves. Simpson Dura-Vent has entered into OEM and distribution relationships with several of these manufacturers to supply Direct Vent venting products. In 1994, SDV introduced Direct Vent G.S., a decorative direct vent system for venting free standing gas stoves. The recent trend from wood to gas stoves, while increasing competition for wood and pellet appliance venting products, is viewed as a significant opportunity for SDV's gas venting products. New Product Development Simpson Dura-Vent has gained industry recognition by offering innovative new products that meet changing needs of customers. SDV representatives serve on industry committees concerned with issues such as new appliance standards and government regulations. SDV also maintains working relationships with research and development departments of major appliance manufacturers, providing prototypes for field testing and conducting tests in SDV's testing laboratory. SDV believes that such relationships provide competitive advantages. For example, several years ago, SDV introduced the first special vent for the newly invented pellet stoves, and more recently, SDV introduced the first direct vent system for the increasingly popular direct vent gas appliances. Sales and Marketing Simpson Dura-Vent's sales organization consists of a director of sales and marketing, a marketing communications manager, regional sales managers, and independent representative agencies. SDV markets venting systems for both gas and wood burning appliances through wholesale distributors in the United States, Canada and Australia to the HVAC (heating, ventilating and air conditioning) and PHC (plumbing, heating and cooling) contractor markets, and to fireplace specialty shop distributors. These customers sell to contractor and DIY markets. SDV also markets venting products to home center and hardware store chains. SDV has entered into OEM relationships with several major gas fireplace and gas stove manufacturers, which SDV believes are leaders in the direct-vent gas appliance market. 28 29 Simpson Dura-Vent responds to technological changes occurring in the industry through new product development and has developed a reputation for quality and service to its customers. To reinforce the image of quality, SDV produces extensive sales support literature and advertising materials. Recognizing the difficulty that customers and users may have in understanding new, complex venting requirements, SDV publishes a venting handbook to assist contractors, building officials and retail outlets with the science of proper venting. Advertising and promotional literature has been designed to be used by distributors and their customers, as well as home centers and hardware chains. MANUFACTURING PROCESS The Company has concentrated on making its manufacturing processes as efficient as possible without sacrificing the flexibility necessary to service the needs of its customers. The Company has developed and uses automated manufacturing processes. The Company's innovative manufacturing systems and techniques have allowed it to control manufacturing costs, even while developing both new products and products that meet customized requirements and specifications. The Company's development of specialized manufacturing processes also has permitted increased operating flexibility and enhanced product design innovation. The Company is committed to helping people build safer structures economically through the design, engineering and manufacturing of structural connector and related products. To this end, the Company has developed a quality management system that employs numerous quality-control procedures, such as computer-generated work orders, constant review of parts as they are produced and frequent quality testing. Since 1996, Simpson Strong-Tie's quality management system has been registered under ISO 9001, an internationally recognized set of quality-assurance standards. The Company believes that ISO registration is a significant asset in doing business with European companies and is becoming increasingly important to U.S. companies. Most of Simpson Strong-Tie's products are produced with a high level of automation, using progressive dies run in automatic presses making parts from coiled sheet steel often in excess of 100 strokes per minute. SST produces 500 million product pieces per year. Over half of SST's products are individually bar coded, particularly the products which are sold to home centers. SST has significant press capacity and has some multiple dies for its high volume products because of the need to produce the product close to the customer and to provide backup capacity. The balance of production is accomplished through a combination of manual, blanking and numerically controlled (NC) processes which include robotic welders, lasers and turret punches. SST believes it is the only manufacturer in the connector industry using NC turret punches to manufacture a large variety of standard and special products. This capability allows SST to produce products with little redesign or set-up time, facilitating rapid turnaround for customers. New tooling is also highly automated. Dies are designed and produced using computer aided design (CAD) and computer aided machinery (CAM) systems. CAD/CAM capability enables SST to create multiple dies rapidly and design them to high standards. The Company is constantly reviewing its product line to reduce manufacturing costs and increase automation. Simpson Dura-Vent 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. REGULATION 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 29 30 Architecture. These and other code agencies adopt various testing and design standards and incorporate them into their related building codes. For example, ICBO requirements are codified in the Uniform Building Code. The Uniform Building Code generally applies to construction in the Western United States. To be recognized by ICBO, SST products must conform to Uniform Building Code requirements. SST considers this recognition to be a significant marketing tool and devotes considerable effort to obtaining appropriate approvals for its products. SST believes that architects, engineers, contractors and other customers are less likely to purchase structural products that lack the appropriate code approval or acceptance, at least if code-accepted competitive products are available. SST's management actively participates in industry related professional associations to keep abreast of regulatory changes and to provide information to regulatory agencies. Simpson Dura-Vent operates under a complex regulatory environment that includes appliance and venting performance standards related to safety, energy efficiency and air quality. Gas venting regulations are contained in the National Fuel Gas Code ("NFGC"), while safety and performance regulations for wood burning appliances and chimney systems are contained in a National Fire Protection Association standard ("NFPA 211"). Standards for testing gas vents and chimneys are developed by testing laboratories such as Underwriter's Laboratories ("UL") in compliance with the American National Standards Institute. Clean air standards for both gas and wood burning appliances are regulated by the EPA. Energy efficiency standards are regulated by the Department of Energy ("DOE") under the authority of the National Appliance Energy Conservation Act. See "Risk Factors -- Regulatory Matters." The standards and regulations contained in the NFGC and NFPA 211 are ultimately adopted by national building code organizations such as ICBO, BOCA and SBCCI. In turn, the various building codes are adopted by local municipalities, resulting in enforcement through the building permit process. Safety, air quality and energy efficiency requirements are enforced by local air quality districts and municipalities by requiring proper UL, EPA and DOE labels on appliances and venting systems. COMPETITION The Company faces a variety of competition in all of the markets in which it participates. This competition ranges from subsidiaries of large national or international corporations to small regional manufacturers. While price is an important factor, the Company competes primarily on the basis of quality, breadth of product line, technical support, service, field support and product innovation. Simpson Strong-Tie competes with numerous companies and its competitors generally are privately held businesses. Most of the competitors tend to be more regional than SST, but one distributes its products nationally. The venting industry is highly competitive. Many of Simpson Dura-Vent's competitors have greater financial and other resources than SDV. SDV's principal competitors include the Selkirk Metalbestos Division of Eljer Industries Inc. (a subsidiary of Zurn Industries), 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. See "Risk Factors -- Competition." 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. See "Risk Factors -- Effect of Increased Raw Materials Costs" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." PATENTS AND PROPRIETARY RIGHTS The Company's subsidiaries own more than 80 U.S. and foreign patents, of which 70 cover products that they currently manufacture and market. Its subsidiaries have filed 14 U.S. and 25 foreign patent applications that are currently pending. These patents and patent applications cover various design aspects of the subsidiaries' products 30 31 as well as processes used in their manufacture. The Company's subsidiaries are continuing to develop new potentially patentable products, product enhancements and product designs. Although the Company's subsidiaries do not intend to apply for additional foreign patents covering existing products, the Company is developing an international patent program to protect new products that its subsidiaries may develop. See "Risk Factors -- Dependence on Intellectual Property Protection." The Company's subsidiaries hold 99 trademark registrations in the U.S. and foreign countries covering 48 trademarks, have 40 trademark registration applications pending in the U.S. and foreign countries covering seven trademarks, and use several other trademarks that they have not yet attempted to register. ACQUISITIONS AND STRATEGIC INVESTMENTS The Company's future growth, if any, may depend to some extent on its ability to penetrate new markets, both domestically and internationally. See "Business -- Business Strategy" and "Business -- Industry and Market Trends." Therefore, the Company may in the future pursue acquisitions of product lines or businesses. See "Risk Factors -- Dependence on New Markets; Expansion Outside the United States" and "Risk Factors -- Ability to Assimilate Acquisitions." In 1996, the Company purchased for approximately $1.0 million the assets of the Builders Products Division of MiTek Industries Ltd. ("MiTek") and entered into an agreement to supply MiTek with connector products in the UK. In addition, during the first quarter of 1997, the Company purchased three Canadian companies and a related U.S. company, the Isometric Group, which manufacture and distribute a line of mechanical anchors and related products, for approximately $7.6 million plus an earnout based on future sales increases. Also during the first quarter of 1997, the Company purchased, for approximately $1.7 million, the remaining 66% equity in Patrick Bellion, S.A., a French manufacturer of connector products. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Sources of Capital." EMPLOYEES AND LABOR RELATIONS As of December 31, 1997, the Company had 1,272 full-time employees, of whom 885 were hourly employees and 387 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. A significant number of the Company's employees at two of the Company's major manufacturing facilities are represented by labor unions and are covered by collective bargaining agreements. Three of the Company's collective bargaining agreements at two of its California facilities were renegotiated in 1995. These agreements cover sheetmetal workers in Brea, California, and the Company's tool and die craftsmen in both Brea and San Leandro, California. These three contracts were extended into 1998 and 1999. A fourth contract, covering sheetmetal workers in San Leandro, expires in July 2000. The Company maintains several profit sharing, stock option and bonus plans to provide incentives to its employees. The Company's cash profit sharing bonus plan gives participating employees the opportunity to benefit from the Company's operating profits above certain minimum levels established by the Board of Directors. The Company's subsidiaries maintain defined contribution profit sharing plans for their U.S.-based salaried employees and nonunion hourly employees, and the Company contributes annually to these plans from 10% to 15% of eligible earnings, as defined in the plans. The Company's 1994 Stock Option Plan provides for the grant of options to employees, directors and consultants of the Company and currently authorizes the grant of stock options to purchase up to an aggregate of 1,500,000 shares of Common Stock; options to purchase an aggregate of 970,417 shares were outstanding under this Option Plan as of December 31, 1997. In addition, employees who have been employed by the Company for more than ten years and who the Company determines are not eligible to participate in the 1994 Stock Option Plan may be awarded stock and cash bonuses under the Company's 1994 Employee Stock Bonus Plan, based on their years of service with the Company. 31 32 PROPERTIES The Company maintains its home office in Pleasanton, California, and other offices, manufacturing and warehouse facilities elsewhere in California and in Texas, Ohio, Florida, Mississippi, Illinois, British Columbia, Ontario, England and France. As of December 31, 1997, the Company owned or leased office, manufacturing and warehouse facilities occupying an aggregate of approximately 1,840,000 square feet. See Note 9 to the Consolidated Financial Statements. The Company's manufacturing facilities are equipped with specialized equipment and use extensive automation. The Company considers its existing and planned facilities to be suitable and adequate for its operations as currently conducted and as planned through 1998. The manufacturing facilities currently are being operated with two shifts at most plants. The Company anticipates that it may require additional facilities to accommodate its growth in later years. 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. 32 33 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY AND ITS SUBSIDIARIES The name, age, and current position(s) of each director and executive officer of the Company are as follows:
- ---------------------------------------------------------------------------------------------- PRESENT PRINCIPAL POSITION AND OFFICES WITH THE COMPANY NAME AGE AND ITS SUBSIDIARIES - ----------------------------------- ---- --------------------------------------------------- Barclay Simpson(1)(4) 76 Chairman of the Board and Director of the Company, SST and SDV Thomas J Fitzmyers 57 President, Chief Executive Officer and Director of the Company and SST; Director of SDV Stephen B. Lamson 45 Chief Financial Officer, Treasurer, Secretary and Director of the Company, SST and SDV Donald M. Townsend 51 President, Chief Executive Officer and Director of SDV Earl F. Cheit(2)(4) 71 Director of the Company Alan R. McKay(2)(4) 72 Director of the Company Sunne Wright McPeak(1)(3)(4) 49 Director of the Company Barry Lawson Williams(1)(2)(3)(4) 53 Director of the Company
- --------------- (1) Member of the Compensation Committee (2) Member of the Audit Committee (3) Member of 1994 Stock Option Plan Committee (4) Member of the Growth Committee The Board of Directors has not established a nominating committee. The Board of Directors currently comprises seven members. All directors hold office until the next annual meeting of the shareholders or until their successors are elected. BARCLAY SIMPSON has been the Chairman of the Board of Directors and a director of the Company since 1956. Since 1982, Mr. Simpson and his wife have owned Barclay Simpson Fine Arts Gallery, a commercial art gallery in Lafayette, California. Mr. Simpson is also a member of the Boards of Directors of Civic Bancorp, Calender Robinson Insurance, the University Art Museum of the University of California at Berkeley, the California College of Arts and Crafts and other charitable and educational institutions. THOMAS J FITZMYERS has served as President and a director of the Company since 1978, as the President and a director of Simpson Strong-Tie since 1983 and as a director of Simpson Dura-Vent since 1982. He was appointed as the Company's Chief Executive Officer in 1994. Mr. Fitzmyers was employed by Union Bank from 1971 to 1978. He was a Regional Vice President when he left Union Bank to join the Company in 1978. STEPHEN B. LAMSON has served as the Company's, Simpson Strong-Tie's and Simpson Dura-Vent's Chief Financial Officer and Treasurer since 1989, as the Company's and SDV's Secretary since 1989, as SST's Secretary since 1992, as a director of the Company since 1990, as a director of SST since 1992 and as a director of SDV since 1989. From 1980 to 1989, Mr. Lamson was with Coopers & Lybrand. He was an audit manager when he left that firm to join the Company in 1989. EARL F. CHEIT has been a Senior Advisor to the Asia Foundation on Asia-Pacific Economic Affairs since 1984 and became Dean Emeritus of the Haas School of Business at the University of California, Berkeley, in 1992. He is currently a director of The Shaklee Corporation and CNF Transportation, Inc. and a Trustee of Mills College. ALAN R. MCKAY has been the President of Alan R. McKay & Associates, an engineering consulting firm based in Lafayette, California, since 1959. He is a registered civil, structural and geotechnical engineer in the State of California with extensive experience in connector applications. SUNNE WRIGHT MCPEAK is the President and Chief Executive Officer of the Bay Area Council, a business sponsored organization founded in 1945 that promotes economic activity and environmental quality in the region. 33 34 Prior to this position, she was the President and Chief Executive Officer of the Bay Area Economic Forum, a partnership of government, business, academic and foundation sectors of the nine San Francisco Bay Area counties. From 1979 through 1994, she served on the Board of Supervisors of Contra Costa County, California, including several terms as Chair. Her most recent term as Chair concluded in 1992. In addition, Ms. McPeak served as President of the California State Association of Counties and has been a member of the advisory boards of the Urban Land Institute and California State University, Hayward. She is currently a director of the California Foundation for the Environment and the Economy. BARRY LAWSON WILLIAMS has been President of Williams Pacific Ventures Inc., a venture capital and real estate consulting firm, since 1987. From 1989 until its sale in 1992, he was also Chief Executive Officer and owner of C.N. Flagg Power Inc. He is a director of PG&E Corporation, CH2M HILL Companies, Ltd., The U.S.A. Group, Inc., Newhall Land and Farming Co. Inc., Northwestern Mutual Life Insurance Co. and CompUSA, Inc. DONALD M. TOWNSEND has been employed by the Company since 1981 and has served as a director of Simpson Dura-Vent since 1984 and as its President and Chief Operating Officer since 1991. He was appointed as SDV's Chief Executive Officer in 1994. From 1984 to 1991, he was the Vice President and General Manager of SDV. 34 35 PRINCIPAL AND SELLING SHAREHOLDERS The following table sets forth certain information, as of December 31, 1997, and as adjusted to reflect the sale of shares offered hereby, with respect to the beneficial ownership of the Company's Common Stock by (1) each Selling Shareholder and each shareholder known by the Company to be the beneficial owner of more than 5% of the Company's Common Stock, (2) each director of the Company, (3) each person currently serving as an executive officer of the Company, and (4) all current executive officers and directors of the Company as a group. - --------------------------------------------------------------------------------
SHARES BENEFICIALLY OWNED --------------------------------------------- NUMBER OF PERCENT SHARES TO PRIOR BE PERCENT NAME AND, FOR EACH 5% PRIOR TO TO SOLD IN AFTER BENEFICIAL OWNER, ADDRESS OFFERING(1) OFFERING OFFERING OFFERING - ------------------------------------------------- --------- ------ --------- ------ Barclay Simpson(2) 3,700,872 32.1% -- 32.1% 4637 Chabot Drive, Suite 200 Pleasanton, CA 94588 Simpson PSB Fund 1,400,000 12.2% 1,387,500(3) * 3669 Mount Diablo Blvd. Lafayette, CA 94549 Thomas J Fitzmyers(4) 783,242 6.7% 50,000 6.3% 4637 Chabot Drive, Suite 200 Pleasanton, CA 94588 Scudder Kemper Investments, Inc.(5) 695,100 6.0% -- 6.0% Two International Place Boston, MA 02110-4103 Royce & Associates, Inc. and Royce Management Company(6) 641,800 5.6% -- 5.6% 1414 Avenue of the Americas New York, NY 10019 Stephen B. Lamson(7) 251,000 2.2% -- 2.2% Donald M. Townsend(8) 118,947 1.0% -- 1.0% Alan R. McKay(9) 4,500 * -- * Earl F. Cheit(9) 2,500 * -- * Sunne Wright McPeak(9) 2,500 * -- * Barry Lawson Williams(10) 500 * -- * All current executive officers and directors as a group(11) 4,564,061 38.5% 50,000 38.2%
- --------------- * Less than one percent (1) The information in this table is based on information supplied by the Selling Shareholders and officers and directors, and, with respect to other principal shareholders, statements on Schedule 13D or 13G filed with the Securities and Exchange Commission. Unless otherwise indicated below, the persons named in the table had sole voting and sole investment power with respect to all shares beneficially owned, subject to community property laws where applicable. (2) Includes 150,000 shares owned by the Company's profit sharing trusts, of which Messrs. Simpson, Fitzmyers and Lamson are the trustees and share voting and dispositive power, as to which shares such trustees disclaim beneficial ownership except to the extent of their participation as beneficiaries of one of such trusts. Includes 500 shares subject to options granted under the 1994 Stock Option Plan that are exercisable within 60 days. (3) The Underwriters exercised their overallotment option. See "Underwriting." (4) Includes 211,610 shares subject to options granted under the 1994 Stock Option Plan that are exercisable within 60 days. Includes 150,000 shares owned by the Company's profit sharing trusts, of which Messrs. Simpson, Fitzmyers and Lamson are the trustees and share voting and dispositive power, as to which shares such trustees disclaim beneficial ownership except to the extent of their participation as beneficiaries of one of such trusts. (5) Based on filings by Scudder Kemper Investments, Inc. ("Scudder") with the Commission under section 13(d) of the Exchange Act. Scudder beneficially owned 695,100 shares of the Company's Common Stock. Scudder also 35 36 reported that it had investment power with respect to all 695,100 shares, sole power to vote or to direct the vote of 217,900 shares and shared power to vote or direct the vote of 323,200 shares. (6) Based on filings by Royce & Associates, Inc. ("RAI"), Royce Management Company ("RMC") and Charles M. Royce with the Commission under section 13(d) of the Exchange Act, RAI and RMC beneficially owned an aggregate of 641,800 shares, of which RAI had sole power to vote or direct the vote and to dispose or direct the disposition of 611,800 shares and RMC had sole power to vote or direct the vote and to dispose or direct the disposition of 30,000 shares. Those filings also state that Charles M. Royce may be deemed to be a controlling person of RAI and RMC. Mr. Royce disclaimed beneficial ownership of the shares beneficially owned by RAI and RMC. (7) Includes 54,548 shares subject to options granted under the 1994 Stock Option Plan that are exercisable within 60 days. Includes 150,000 shares owned by the Company's profit sharing trusts, of which Messrs. Simpson, Fitzmyers and Lamson are the trustees and share voting and dispositive power, as to which shares such trustees disclaim beneficial ownership except to the extent of their participation as beneficiaries of one of such trusts. (8) Includes 51,169 shares subject to options granted under the 1994 Stock Option Plan that are exercisable within 60 days. (9) Includes 2,500 shares subject to options granted under the Company's 1995 Independent Director Stock Option Plan that are exercisable within 60 days. (10) Includes 500 shares subject to options granted under the Company's 1995 Independent Director Stock Option Plan that are exercisable within 60 days. (11) Includes 325,827 shares subject to options exercisable within 60 days, including the options described in the above notes, and 150,000 shares owned by the Company's profit sharing trusts as described in notes 3, 4 and 6 above. Of the shares offered hereby, 1,387,500 shares are being offered by Simpson PSB Fund, a California nonprofit public benefit corporation, which is the Principal Selling Shareholder. The Board of Directors of the Principal Selling Shareholder comprises Charles A. Lee and Jules F. Bonjour, Jr. The Principal Selling Shareholder is qualified as an organization exempt from federal and California income taxation under section 501(c)(3) of the Internal Revenue Code of 1986, as amended. In September 1997, Barclay Simpson donated 1,400,000 shares of Common Stock to the Principal Selling Shareholder. 36 37 DESCRIPTION OF CAPITAL STOCK The total number of shares of capital stock that the Company is authorized to issue is 25,000,000 shares, consisting of 20,000,000 shares of Common Stock without par value, of which 11,517,113 shares were issued and outstanding as of December 31, 1997, and 5,000,000 shares of Preferred Stock without par value, none of which is outstanding. The Company had approximately 248 shareholders of record as of that date. 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 out of funds legally available therefor (see "Dividend Policy") 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 holders of any Preferred Stock that may be issued in the future, the holders of Common Stock are entitled to one vote per share on any matter submitted to a vote of the shareholders, except that, on giving notice as required by law and subject to compliance with other statutory conditions, shareholders may cumulate their votes in an election of directors, and each shareholder may give one candidate a number of votes equal to the number of directors to be elected multiplied by the number of shares held by such shareholder or may distribute such shareholder's votes on the same principle among as many candidates as such shareholder thinks fit. All shares of Common Stock offered hereby are outstanding and fully paid and are not subject to further calls or assessments by the Company. There are no redemption or sinking fund provisions applicable to the Common Stock. PREFERRED STOCK The Board of Directors 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 of Directors. Accordingly, the Board of Directors is empowered, without shareholder approval, to issue Preferred Stock with dividend, liquidation, conversion, voting or other rights that could adversely affect the voting power or other rights of the holders of the Company's Common Stock. In the event of issuance, the Preferred Stock could be used under certain circumstances, as a method of discouraging, delaying or preventing an acquisition or change in control of the Company. The Company does not currently have any plan to issue any shares of its Preferred Stock. LIMITATIONS ON DIRECTORS' LIABILITIES AND INDEMNIFICATION As authorized by the California General Corporation Law ("GCL"), the Company's Articles of Incorporation include provisions limiting the liability of directors of the Company for monetary damages. The effect of these provisions is to eliminate the rights of the Company and its shareholders (through shareholders' derivative suits on behalf of the Company) to recover monetary damages against a director for breach of the fiduciary duty of care as a director (including breaches resulting from negligence) except in certain limited situations. This provision does not limit or eliminate the rights of the Company or any shareholder to seek nonmonetary relief such as an injunction or rescission in the event of a breach of a director's duty of care. The Company's Bylaws require that the Company indemnify its directors and officers, and any employee who serves as a director or officer of any corporation at the Company's request, to the fullest extent permitted under and in accordance with the GCL. The Company has entered into agreements to indemnify the directors and officers of the Company, Simpson Strong-Tie and Simpson Dura-Vent, in addition to indemnification provided in the Company's and its subsidiaries' Bylaws. These agreements, among other things, require that the Company indemnify the directors and officers for certain expenses, including attorneys' fees, judgments, fines and settlement amounts incurred by any such person in any action or proceeding or any threatened action or proceeding, whether civil or criminal, arising out of such person's actions as a director or officer of the Company or any of its subsidiaries or as a trustee of a Company profit-sharing plan. The Company believes that these provisions and agreements will assist the Company in attracting and retaining qualified individuals to serve as directors and officers. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Common Stock is BankBoston, N.A., c/o Boston EquiServe, L.P. 37 38 UNDERWRITING Under the terms and subject to the conditions of an Underwriting Agreement dated February 24, 1998 (the "Underwriting Agreement"), the Selling Shareholders have agreed to sell to the Underwriters named below, and each of such Underwriters, for whom J.P. Morgan Securities Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and BancAmerica Robertson Stephens are acting as representatives, has severally agreed to purchase from the Selling Shareholders, the respective number of shares of Common Stock set forth opposite its name below:
--------- NUMBER UNDERWRITERS OF SHARES --------- J.P. Morgan Securities Inc. 483,000 Merrill Lynch, Pierce, Fenner & Smith 483,000 Incorporated BancAmerica Robertson Stephens 241,500 CIBC Oppenheimer Corp. 46,000 Donaldson, Lufkin & Jenrette Securities Corporation 46,000 Morgan Stanley & Co. Incorporated 46,000 Charles Schwab & Co., Inc. 46,000 Hoefer & Arnett Inc. 46,000 --------- Total 1,437,500 =========
The Underwriting Agreement provides that the obligations of the several Underwriters to purchase shares of Common Stock are subject to the approval of certain legal matters by counsel and certain other conditions. Under the terms and conditions of the Underwriting Agreement, the Underwriters are obligated to take and pay for all such shares, if any are taken. The Underwriters propose initially to offer the shares of Common Stock directly to the public at the price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession not in excess of $1.14 per share. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $0.10 per share to certain other dealers. After the initial public offering of the Common Stock, the public offering price and such concession may be changed. The Principal Selling Shareholder granted to the Underwriters an option, expiring at the close of business on the 30th day after the date of this Prospectus, to purchase up to an additional 187,500 shares of Common Stock from the Principal Selling Shareholder, at the initial public offering price, less the underwriting discount. The Underwriters exercised such option in full for the purpose of covering overallotments. The Company and each of the Selling Shareholders have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act. The Company and certain of its shareholders, including the Selling Shareholders, have agreed that they will not, without the prior written consent of J.P. Morgan Securities Inc., issue, sell, offer, agree to sell or otherwise dispose of, directly or indirectly, any shares of Common Stock, any options, rights or warrants to purchase Common Stock or any securities convertible into or exchangeable or exercisable for Common Stock until the 90th day after the date of this Prospectus, except for stock options issued under the 1994 Stock Option Plan or the 1995 Independent Director Stock Option Plan, and issuances of shares of Common Stock pursuant to the exercise of stock options 38 39 granted under the 1994 Stock Option Plan or the 1995 Independent Director Stock Option Plan or pursuant to the Company's 1994 Employee Stock Bonus Plan. J.P. Morgan Securities Inc. may in its exclusive discretion and at any time without notice, release all or a portion of the securities subject to these restrictions. In connection with the offering, the Underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the Common Stock. Specifically, the Underwriters may overallot the offering, creating a syndicate short position. In addition, the Underwriters may bid for, and purchase, shares of Common Stock in the open market to cover syndicate shorts or to stabilize the price of the Common Stock. Finally, the underwriting syndicate may reclaim selling concessions allowed for distributing the Common Stock in the offering, if the syndicate repurchases previously distributed Common Stock in syndicate covering transactions, in stabilizing transactions or otherwise. Any of these activities may stabilize or maintain the market price of the Common Stock above independent market levels. The Underwriters are not required to engage in these activities, and may end any of these activities at any time. LEGAL MATTERS The validity of the shares of Common Stock offered by the Selling Shareholders hereby will be passed on for the Selling Shareholders by Shartsis, Friese & Ginsburg LLP, San Francisco, California. Partners and associates of Shartsis, Friese & Ginsburg LLP and members of their immediate families own an aggregate of 6,041 shares of Common Stock. Certain legal matters will be passed on for the Underwriters by Cahill Gordon & Reindel (a partnership including a professional corporation), New York, New York. EXPERTS The consolidated balance sheets as of December 31, 1996 and 1997, and the consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997, included in this Prospectus, have been audited by Coopers & Lybrand L.L.P., independent accountants. These consolidated financial statements audited by Coopers & Lybrand L.L.P. have been included herein in reliance on the reports given on the authority of that firm as experts in accounting and auditing. 39 40 SIMPSON MANUFACTURING CO., INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE Financial Statements Report of Independent Accountants F-2 Consolidated Balance Sheets at December 31, 1996 and 1997 F-3 Consolidated Statements of Operations for the years ended December 31, 1995, 1996 and 1997 F-4 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1995, 1996 and 1997 F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997 F-6 Notes to the Consolidated Financial Statements F-7
F-1 41 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Simpson Manufacturing Co., Inc.: We have audited the consolidated balance sheets of Simpson Manufacturing Co., Inc. as of December 31, 1996 and 1997, and the consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Simpson Manufacturing Co., Inc. and subsidiaries as of December 31, 1996 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. San Francisco, California January 29, 1998 F-2 42 SIMPSON MANUFACTURING CO., INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
----------------------------- DECEMBER 31, 1996 1997 ------------ ------------ ASSETS Current assets Cash and cash equivalents $ 19,815,297 $ 19,418,689 Short-term investments 3,896,428 -- Trade accounts receivable, net 20,930,490 24,625,568 Inventories 42,247,777 54,982,945 Deferred income taxes 2,919,455 3,536,750 Other current assets 956,565 1,723,586 ------------ ------------ Total current assets 90,766,012 104,287,538 Property, plant and equipment, net 28,687,635 42,925,088 Investments 1,382,578 559,200 Other noncurrent assets 1,684,548 2,993,114 ------------ ------------ Total assets $122,520,773 $150,764,940 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Notes payable $ -- $ 29,605 Trade accounts payable 10,063,828 8,813,196 Accrued liabilities 4,137,648 5,506,903 Accrued profit sharing trust contributions 2,446,001 2,886,875 Accrued cash profit sharing and commissions 2,292,057 3,094,834 Accrued workers' compensation 809,272 659,272 Income taxes payable 341,626 -- ------------ ------------ Total current liabilities 20,090,432 20,990,685 Long-term liabilities 133,333 823,732 ------------ ------------ Total liabilities 20,223,765 21,814,417 ------------ ------------ Commitments and contingencies (Note 9) Shareholders' equity Preferred Stock, without par value; authorized shares, 5,000,000; issued and outstanding shares, none -- -- Common Stock, without par value; authorized shares, 20,000,000; issued and outstanding shares, 11,451,018, and 11,517,113 at December 31, 1996 and 1997 31,233,648 32,377,563 Retained earnings 70,862,906 96,848,685 Cumulative translation adjustment 200,454 (275,725) ------------ ------------ Total shareholders' equity 102,297,008 128,950,523 ------------ ------------ Total liabilities and shareholders' equity $122,520,773 $150,764,940 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-3 43 SIMPSON MANUFACTURING CO., INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
---------------------------------------------- YEARS ENDED DECEMBER 31, 1995 1996 1997 ------------ ------------ ------------ Net sales $167,957,955 $202,408,917 $246,074,446 Cost of sales 109,368,027 124,394,086 149,279,718 ------------ ------------ ------------ Gross profit 58,589,928 78,014,831 96,794,728 ------------ ------------ ------------ Operating expenses Selling 17,109,325 20,104,344 23,113,344 General and administrative 18,512,003 25,035,874 30,052,669 Compensation related to stock plans (Note 13) 61,250 180,155 305,038 ------------ ------------ ------------ 35,682,578 45,320,373 53,471,051 ------------ ------------ ------------ Income from operations 22,907,350 32,694,458 43,323,677 Interest income, net 141,535 595,180 429,102 ------------ ------------ ------------ Income before income taxes 23,048,885 33,289,638 43,752,779 Provision for income taxes 8,927,000 13,569,000 17,767,000 ------------ ------------ ------------ Net income $ 14,121,885 $ 19,720,638 $ 25,985,779 ============ ============ ============ Net income per common share Basic $ 1.25 $ 1.73 $ 2.26 Diluted $ 1.23 $ 1.68 $ 2.17 Number of shares outstanding Basic 11,316,673 11,424,945 11,474,592 Diluted 11,460,567 11,755,184 11,965,950
The accompanying notes are an integral part of these consolidated financial statements. F-4 44 SIMPSON MANUFACTURING CO., INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
------------------------------------------------------------------ COMMON STOCK CUMULATIVE ------------------------ RETAINED TRANSLATION SHARES AMOUNT EARNINGS ADJUSTMENT TOTAL ---------- ----------- ----------- ---------- ------------ Balance, January 1, 1995 11,275,196 $29,580,365 $37,020,383 $ (78,715) $ 66,522,033 Options exercised 82,231 749,156 -- -- 749,156 Tax benefit of options exercised -- 78,395 -- -- 78,395 Common stock issued at $9.75 per share 800 7,800 -- -- 7,800 Translation adjustment -- -- -- 73,421 73,421 Net income -- -- 14,121,885 -- 14,121,885 ---------- ----------- ----------- --------- ------------ Balance, December 31, 1995 11,358,227 30,415,716 51,142,268 (5,294) 81,552,690 Options exercised 90,191 526,415 -- -- 526,415 Tax benefit of options exercised -- 256,417 -- -- 256,417 Common stock issued at $13.50 per share 2,600 35,100 -- -- 35,100 Translation adjustment -- -- -- 205,748 205,748 Net income -- -- 19,720,638 -- 19,720,638 ---------- ----------- ----------- --------- ------------ Balance, December 31, 1996 11,451,018 31,233,648 70,862,906 200,454 102,297,008 Options exercised 61,595 451,282 -- -- 451,282 Tax benefit of options exercised -- 589,133 -- -- 589,133 Common stock issued at $23.00 per share 4,500 103,500 -- -- 103,500 Translation adjustment -- -- -- (476,179) (476,179) Net income -- -- 25,985,779 -- 25,985,779 ---------- ----------- ----------- --------- ------------ Balance, December 31, 1997 11,517,113 $32,377,563 $96,848,685 $(275,725) $128,950,523 ========== =========== =========== ========= ============
The accompanying notes are an integral part of these consolidated financial statements. F-5 45 SIMPSON MANUFACTURING CO., INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------------- YEARS ENDED DECEMBER 31, 1995 1996 1997 ------------ ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 14,121,885 $19,720,638 $25,985,779 ------------ ----------- ----------- Adjustments to reconcile net income to net cash provided by operating activities: Loss (gain) on sale of capital equipment 11,558 (16,262) (11,194) Depreciation and amortization 5,291,466 7,197,718 6,712,157 Deferred income taxes and other long-term liabilities 65,000 (212,450) (946,542) Equity in income of affiliates (24,554) (107,000) (142,500) Noncash compensation related to stock plans 61,250 35,100 103,500 Changes in operating assets and liabilities, net of effects of acquisitions: Trade accounts receivable, net (2,916,665) (190,608) (2,277,797) Inventories (2,655,355) (7,500,960) (6,867,089) Other current assets (951,314) 278,047 (700,537) Other noncurrent assets (256,380) (800,840) (14,450) Trade accounts payable 665,976 2,688,814 (2,429,650) Accrued liabilities 307,968 751,120 379,910 Accrued profit sharing trust contributions 279,135 446,262 440,874 Accrued cash profit sharing and commissions (45,982) 1,002,913 802,777 Accrued workers' compensation (55,000) (32,853) (150,000) Income taxes payable (500,661) 1,349,876 247,507 ------------ ----------- ----------- Total adjustments (723,558) 4,888,877 (4,853,034) ------------ ----------- ----------- Net cash provided by operating activities 13,398,327 24,609,515 21,132,745 ------------ ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (10,049,629) (7,364,326) (16,548,350) Proceeds from sale of equipment 22,225 57,787 65,327 Asset acquisitions, net of cash acquired and equity interest already owned (2,414,114) (1,041,780) (9,336,142) Purchase of short-term investment -- (3,896,428) -- Proceeds from sale of short-term investments -- -- 3,995,333 Equity investments (667,002) (11,637) -- ------------ ----------- ----------- Net cash used in investing activities (13,108,520) (12,256,384) (21,823,832) ------------ ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Issuance of debt 20,037 -- -- Repayment of debt -- (20,037) (260,304) Issuance of Company's common stock 835,351 526,415 554,783 ------------ ----------- ----------- Net cash provided by financing activities 855,388 506,378 294,479 ------------ ----------- ----------- Net increase (decrease) in cash and cash equivalents 1,145,195 12,859,509 (396,608) Cash and cash equivalents at beginning of period 5,810,593 6,955,788 19,815,297 ------------ ----------- ----------- Cash and cash equivalents at end of period $ 6,955,788 $19,815,297 $19,418,689 ============ =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION CASH PAID DURING THE YEAR FOR Interest $ 35,045 $ 31,311 $ 80,071 ============ =========== =========== Income taxes $ 8,961,714 $13,036,713 $19,564,663 ============ =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-6 46 SIMPSON MANUFACTURING CO., INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations Simpson Manufacturing Co., Inc., through its subsidiaries Simpson Strong-Tie Company Inc. and Simpson Dura-Vent Company, Inc. and its other subsidiaries (collectively, the "Company"), designs, engineers and manufactures wood-to-wood, wood-to-concrete and wood-to-masonry connectors and venting systems for gas and wood burning appliances and markets its products to the residential construction, light industrial and commercial construction, remodeling and do-it-yourself markets. The Company operates exclusively in the building products industry segment. The Company's products are sold primarily throughout the United States of America. Revenues have some geographic market concentration on the west coast. A portion of the Company's business is therefore dependent upon economic activity within this region and market. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Principles of Consolidation The consolidated financial statements include the accounts of Simpson Manufacturing Co., Inc. and its subsidiaries. Investments in less than 50%-owned affiliates are accounted for using the equity method. All significant intercompany transactions have been eliminated. Cash Equivalents The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Short-term Investments The Company considers investments with an original maturity of more than three months but less than one year to be short-term investments, which are categorized as "held-to-maturity" and carried at amortized cost, which approximates market value. Inventory Valuation Inventories are valued at the lower of cost or market, with cost determined under the last-in, first-out (LIFO) method, except in Europe and Canada, where inventories of approximately $1,483,000 and $4,782,000 at December 31, 1996 and 1997, 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. F-7 47 SIMPSON MANUFACTURING CO., INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 $1,180,000, $1,312,000 and $1,280,000 in 1995, 1996 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 shareholders' equity. Foreign currency transaction gains or losses are included in the determination of net income. Common Stock Subject to the rights of holders of any Preferred Stock that may be issued in the future, holders of Common Stock are entitled to receive such dividends, if any, as may be declared from time to time by the Board of Directors (the "Board") out of funds legally available therefor and in the event of liquidation, dissolution or winding-up of the Company, to share ratably in all assets available for distribution. The holders of Common Stock have no preemptive or conversion rights. Subject to the rights of any Preferred Stock that may be issued in the future, the holders of Common Stock are entitled to one vote per share on any matter submitted to a vote of the shareholders, except that, on giving notice as required by law and subject to compliance with other statutory conditions, shareholders may cumulate their votes in an election of directors, and each shareholder may give one candidate a number of votes equal to the number of directors to be elected multiplied by the number of shares held by such shareholder or may distribute such shareholder's votes on the same principle among as many candidates as such shareholder thinks fit. There are no redemption or sinking fund provisions applicable to the Common Stock. Preferred Stock The Board has the authority to issue the authorized and unissued Preferred Stock in one or more series with such designations, rights and preferences as may be determined from time to time by the Board. Accordingly, the Board F-8 48 SIMPSON MANUFACTURING CO., INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) is empowered, without shareholder approval, to issue Preferred Stock with dividend, liquidation, conversion, voting or other rights that could adversely affect the voting power or other rights of the holders of the Company's Common Stock. Net Income per Common Share Basic net income per common share is computed based upon the weighted average number of common shares outstanding. Common equivalent shares, using the treasury stock method, are included in the diluted per-share calculations for all periods when the effect of their inclusion is dilutive. The following is a reconciliation of basic earnings per share ("EPS") to diluted EPS:
------------------------------------------------------------------------------------------ 1995 1996 1997 --------------------------------- --------------------------------- --------------------------------- PER PER PER INCOME SHARES SHARE INCOME SHARES SHARE INCOME SHARES SHARE ----------- ---------- ------ ----------- ---------- ------ ----------- ---------- ------ BASIC EPS Income available to common shareholders $14,121,885 11,316,673 $ 1.25 $19,720,638 11,424,945 $ 1.73 $25,985,779 11,474,592 $ 2.26 EFFECT OF DILUTIVE SECURITIES Stock options -- 143,894 (0.02) -- 330,239 (0.05) -- 491,358 (0.09) ----------- ---------- ----- ----------- ---------- ----- ----------- ---------- ----- DILUTED EPS Income available to common shareholders $14,121,885 11,460,567 $ 1.23 $19,720,638 11,755,184 $ 1.68 $25,985,779 11,965,950 $ 2.17 =========== ========== ===== =========== ========== ===== =========== ========== =====
Concentration of Credit Risk Financial instruments which potentially subject the Company to concentrations of credit risk consist of cash in banks, short-term investments in U.S. Treasury instruments and trade accounts receivable. The Company maintains its cash in demand deposit and money market accounts held primarily by two banks. Adoption of Statements of Financial Accounting Standards In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income", and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components. SFAS No. 131 specifies revised guidelines for determining an entity's operating segments and the type and level of financial information to be disclosed. SFAS Nos. 130 and 131 are effective for financial statements issued for periods beginning after December 15, 1997, and accordingly, management has not determined the effect, if any, on the Company's financial statements for its fiscal year ended December 31, 1997. Reclassifications Certain prior year amounts have been reclassified to conform to the 1997 presentation with no effect on net income as previously reported. 2. ACQUISITIONS In March 1997, the Company and its subsidiaries completed two acquisitions. The first was a purchase of three Canadian companies and a related U.S. company, the Isometric Group, which manufacture and distribute a line of mechanical anchors and related products. The acquisition price was approximately $7.6 million plus an earnout based on future sales increases. The second was the purchase, for approximately $1.7 million, of the remaining 66% equity in Patrick Bellion, S.A., a French manufacturer of connector products (see Note 6). F-9 49 SIMPSON MANUFACTURING CO., INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) In December 1996, Simpson Strong-Tie International, Inc. ("SSTI"), a subsidiary of the Company, purchased the assets, including $675,000 in equipment, of the Builders Products Division of MiTek Industries Ltd. ("MiTek") for approximately $1,040,000. The remaining $365,000 of the purchase price represents the excess of the purchase price over the fair value of the assets acquired. In conjunction with the purchase of the assets, SSTI also agreed to supply MiTek and its customers with connector products. As a result of this acquisition, the Company determined that additional manufacturing space was needed and began the consolidation of its UK facilities into a single location. In connection with this consolidation, the intangible assets associated with the MiTek acquisition, the Truline Group Ltd. ("Truline") acquisition in 1995, and the Stokes of Cannock Ltd. acquisition in 1994, were written off during 1996. In September 1995, the Company acquired the remaining 75% of the equity of a U.S. company, Ackerman Johnson Fastening Systems, Inc., for $800,000 in cash and $200,000 for an agreement not to compete for three years (see Note 6). In addition, in October 1995, the Company purchased for approximately $1,450,000 in cash the assets of Truline, a manufacturer and distributor of wall starter systems located in Chelmsford, England. Approximately $1,100,000, $725,000 of which was written off during 1996, of the costs of these two acquisitions represents the excess of the purchase price over the fair value of the assets acquired and is being amortized over ten years using the straight-line method. These acquisitions have been accounted for under the purchase method of accounting. The pro forma effect on the Company's consolidated revenue, net income and net income per share, as if these acquisitions occurred at the beginning of the period, is immaterial in all years presented. 3. TRADE ACCOUNTS RECEIVABLE Trade accounts receivable consist of the following:
--------------------------- DECEMBER 31, 1996 1997 ----------- ----------- Trade accounts receivable $22,242,827 $26,398,046 Allowance for doubtful accounts (1,108,950) (1,539,691) Allowance for sales discounts (203,387) (232,787) ----------- ----------- $20,930,490 $24,625,568 =========== ===========
The Company sells product on credit and generally does not require collateral. 4. INVENTORIES The components of inventories consist of the following:
--------------------------- DECEMBER 31, 1996 1997 ----------- ----------- Raw materials $15,107,660 $17,882,930 In-process products 3,763,634 5,384,709 Finished products 23,376,483 31,715,306 ----------- ----------- $42,247,777 $54,982,945 =========== ===========
At December 31, 1996 and 1997, the replacement value of LIFO inventories exceeded LIFO cost by approximately $1,186,000 and $852,000, respectively. F-10 50 SIMPSON MANUFACTURING CO., INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. PROPERTY, PLANT AND EQUIPMENT, NET Property, plant and equipment consists of the following:
----------------------------- DECEMBER 31, 1996 1997 ------------ ------------ Land $ 2,065,682 $ 3,366,519 Buildings and site improvements 10,379,901 17,165,509 Leasehold improvements 2,869,612 3,474,278 Machinery and equipment 46,311,624 55,400,034 ------------ ------------ 61,626,819 79,406,340 Less accumulated depreciation and amortization (35,916,354) (41,986,005) ------------ ------------ 25,710,465 37,420,335 Capital projects in progress 2,977,170 5,504,753 ------------ ------------ $ 28,687,635 $ 42,925,088 ============ ============
Included in property, plant and equipment at December 31, 1996 and 1997, are fully depreciated assets with an original cost of approximately $17,181,665 and $20,104,000, respectively. These fully depreciated assets are still in use in the Company's operations. 6. INVESTMENTS In 1995, Simpson Strong-Tie Company Inc. acquired a 34% interest in Patrick Bellion S.A., a French manufacturer and distributor of connector products, for approximately $850,000 in cash. The Company exercised its option to purchase the remaining 66% in March 1997 and no longer accounts for this investment under the equity method (see Note 2). The Company's 49% investment in Bulldog-Simpson GmbH is accounted for using the equity method. The Company's equity in the earnings or losses of its equity investments was not material in any of the three years in the period ended December 31, 1997. In 1995, Simpson Strong-Tie Company Inc. acquired the remaining 75% interest in Ackerman-Johnson Fastening Systems Inc. (see Note 2) and no longer accounts for this investment under the equity method. 7. ACCRUED LIABILITIES Accrued liabilities consist of the following:
------------------------- DECEMBER 31, 1996 1997 ---------- ---------- Sales incentive and advertising allowances $1,470,656 $2,686,390 Vacation liability 1,062,569 1,091,718 Other 1,604,423 1,728,795 ---------- ---------- $4,137,648 $5,506,903 ========== ==========
F-11 51 SIMPSON MANUFACTURING CO., INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. DEBT The outstanding debt at December 31, 1996 and 1997, and the available credit at December 31, 1997, consisted of the following:
--------------------------------------- AVAILABLE ON DEBT OUTSTANDING CREDIT FACILITY AT DECEMBER 31, AT DECEMBER 31, ------------------- 1997 1996 1997 --------------- ------- ------- Revolving line of credit, interest at bank's reference rate (at December 31, 1997, the bank's reference rate was 8.50%), matures June 1998, commitment fees are paid at the annual rate of 0.125% on the unused portion of the facility $13,537,127 $ -- $ -- Revolving line of credit, interest at bank's prime rate (at December 31, 1997, the bank's prime rate was 8.50%), matures June 1998, commitment fees are paid at the annual rate of 0.125% on the unused portion of the facility 4,937,129 -- -- Revolving term commitment, interest at bank's prime rate (at December 31, 1997, the bank's prime rate was 8.50%), matures June 1998, commitment fees are paid at the annual rate of 0.125% on the unused portion of the facility 4,000,000 -- -- Revolving line of credit, interest rate at the bank's base rate of interest plus 2% (at December 31, 1997, this rate was 9.25%), matures June 1998, has an annual commission charge of 0.45% 411,000 -- -- Standby letter of credit facilities 525,744 -- -- Other notes payable -- -- 29,605 ----------- ------- ------- 23,411,000 $ -- $29,605 ======= ======= Less standby letters of credit issued and outstanding (525,744) ----------- Net credit available $22,885,256 ===========
The revolving lines of credit are guaranteed by the Company and its subsidiaries. At December 31, 1997, the Company has two outstanding standby letters of credit. These letters of credit, in the aggregate amount of $525,744, are used to support the Company's self-insured workers' compensation insurance requirements. These letters of credit mature in June 1998. Other notes payable represent debt associated with foreign businesses acquired in March 1997. 9. COMMITMENTS AND CONTINGENCIES Leases Certain properties occupied by the Company are leased. The leases expire at various dates through 2012 and generally require the Company to assume the obligations for insurance, property taxes, and maintenance of the facilities. F-12 52 SIMPSON MANUFACTURING CO., INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Some of the properties are leased from partnerships formed by certain current and former Company shareholders, directors, officers and employees. Rental expenses under these related party leases are as follows:
---------------------------------------- YEARS ENDED DECEMBER 31, 1995 1996 1997 ---------- ---------- ---------- Simpson Investment Company $ 185,100 $ 185,100 $ 185,100 Doolittle Investors 230,438 231,096 239,400 Vacaville Investors 437,640 437,640 437,640 Vicksburg Investors 322,289 329,017 334,279 Columbus Westbelt Investment Co. 418,525 581,064 581,064 McKinney Investors 70,620 -- -- ---------- ---------- ---------- $1,664,612 $1,763,917 $1,777,483 ========== ========== ==========
Rental expense for 1995, 1996 and 1997 with respect to all other leased property was approximately $1,120,000, $1,170,000 and $2,128,000, respectively. At December 31, 1997, minimum rental commitments under all noncancelable leases are as follows: 1998 $ 4,567,098 1999 4,106,596 2000 4,012,430 2001 3,511,765 2002 2,752,470 Thereafter 10,161,126 ----------- $29,111,485 ===========
Some of these minimum rental commitments involve the related parties described above, contain renewal options, and provide for periodic rental adjustments based on changes in the consumer price index or current market rental rates. In January 1998, Simpson Strong-Tie International, Inc. ("SSTI") signed the lease, to which it was previously committed, for its recently completed facility in the United Kingdom. The facility is approximately 78,000 square feet and will be used for SSTI's UK operations. The nominal term of the lease is 25 years but includes an option to terminate without penalty in either the fifteenth or twentieth year upon one year written notice by SSTI. As such, future minimum rental payments associated with the first 15 years of this lease are included in minimum rental commitments in the table above. Also in January 1998, the Company issued a letter of credit in the amount of approximately $773,000 to guarantee performance with regard to this lease. The Company has a commitment to purchase a 48,000 square foot building which it currently leases in San Leandro, California, for approximately $1,975,000. This purchase is expected to close in the third quarter of 1998 and future minimum rental payments associated with this property have been excluded from the minimum rental commitments in the above table after the expected purchase date. In addition, the Company has commenced the construction of a new manufacturing and distribution facility for Simpson Dura-Vent Company, Inc. in Ceres, Mississippi, to replace its existing facility in Vicksburg, Mississippi. The facility is expected to be 302,000 square feet and is expected to cost approximately $5.9 million. The Company plans to complete and occupy this facility in mid 1998. F-13 53 SIMPSON MANUFACTURING CO., INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Environmental At two of the Company's operating facilities, evidence of contamination resulting from activities of prior occupants was discovered. The Company took certain remedial actions at one facility in 1990 and is considering what additional action, if any, may be required. The Company has been informed by the lessor of the other facility, Vicksburg Investors, that appropriate remedial action has been taken. The Company does not believe that either of these matters will have a material adverse effect on its financial position or results of operations. Litigation From time to time, the Company is involved in various legal proceedings and other matters arising in the normal course of business. 10. INCOME TAXES The provision for income taxes consists of the following:
------------------------------------------ YEARS ENDED DECEMBER 31, 1995 1996 1997 ---------- ----------- ----------- Current Federal $7,536,000 $11,989,000 $15,546,000 State 1,526,000 2,353,000 3,115,000 Foreign -- -- 145,000 Deferred (135,000) (773,000) (1,039,000) ---------- ----------- ----------- $8,927,000 $13,569,000 $17,767,000 ========= ========== ==========
Reconciliations between the statutory federal income tax rates and the Company's effective income tax rates as percentages of income before income taxes are as follows:
-------------------------- YEARS ENDED DECEMBER 31, 1995 1996 1997 ---- ---- ---- Federal tax rate 35.0% 35.0% 35.0% State taxes, net of federal benefit 5.0% 4.7% 4.2% Other (1.3)% 1.1% 1.4% ---- ---- ---- Effective income tax rate 38.7% 40.8% 40.6% ==== ==== ====
F-14 54 SIMPSON MANUFACTURING CO., INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The tax effects of the significant temporary differences that constitute the deferred tax assets and liabilities at December 31, 1995, 1996 and 1997, are as follows:
---------------------------------------- YEARS ENDED DECEMBER 31, 1995 1996 1997 ---------- ---------- ---------- Current deferred tax assets State tax $ 533,943 $ 795,671 $1,037,753 Compensation related to stock plans 246,514 165,967 140,579 Workers' compensation 101,815 89,657 155,416 Health claims 198,333 213,476 272,393 Vacation 367,379 422,392 416,268 Accounts receivable allowance 456,977 464,681 602,802 Inventory allowance 235,923 359,646 477,304 Sales incentive and advertising allowances 508,457 237,050 206,210 Other 101,114 170,915 228,025 ---------- ---------- ---------- $2,750,455 $2,919,455 $3,536,750 ========== ========== ========== Long-term deferred tax assets (liabilities) Depreciation $ 222,355 $ 255,683 $ 639,063 Goodwill amortization (6,866) 545,068 574,269 Other (238,706) (174,255) (402,545) ---------- ---------- ---------- $ (23,217) $ 626,496 $ 810,787 ========== ========== ==========
No valuation allowance has been recorded for deferred tax assets for the years ended December 31, 1995, 1996 and 1997, due to the Company's taxable income in 1997 and prior years. 11. PROFIT SHARING AND PENSION PLANS The Company has four profit sharing plans covering substantially all salaried employees and nonunion hourly employees. Two of the plans, covering U.S. employees, provide for annual contributions in amounts the Board of Directors may authorize, subject to certain limitations, but in no event more than the amount permitted under the Internal Revenue Code as deductible expense. The other two plans, covering the Company's European employees, require the Company to make contributions ranging from three to ten percent of the employee's compensation. The total cost for these four profit sharing plans for the years ended December 31, 1995, 1996 and 1997, was approximately $2,036,000, $2,469,000 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 $486,000, $667,000 and $708,000 for the years ended December 31, 1995, 1996 and 1997, respectively. 12. RELATED PARTY TRANSACTIONS The Chairman and the President and Chief Executive Officer of the Company, who are directors and principal shareholders of the Company, served as directors and officers of the Simpson PSB Fund (a charitable organization) until October 1997. The Company contributed $50,000 and $207,156 to this organization in 1996 and 1997, respectively. Refer to Note 9 regarding related party transactions involving Company leases. F-15 55 SIMPSON MANUFACTURING CO., INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 1995, 1996 and 1997 would have been:
------------------------------------------- YEARS ENDED DECEMBER 31, 1995 1996 1997 ----------- ----------- ----------- Net income as reported $14,121,885 $19,720,638 $25,985,779 Pro forma 14,006,182 19,442,196 25,479,439 Diluted earnings per share, as reported 1.23 1.68 2.17 Pro forma 1.22 1.65 2.13
The fair value of each option granted in 1995, 1996 and 1997 was estimated on the date of grant using the Black-Sholes option-pricing model with the following assumptions for 1995, 1996 and 1997, respectively: risk-free interest rate of 5.5% for all years; no dividend yield for all years; expected lives of 6.0, 6.0 and 6.1 years; and volatility of 27.5% for all years. The weighted average fair value per share of options granted during 1995, 1996 and 1997 was $5.29, $9.07 and $13.17, 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 granted options to purchase 92,250 and 119,750 shares for 1995 and 1996, and has committed to granting options to purchase 122,250 shares for 1997. These options have an exercise price of $13.50 per share for 1995, a range of $23.00 to $29.25 per share for 1996 and a range of $33.31 to $36.64 per share for 1997. The following table summarizes the Company's stock option activity for the years ended December 31, 1995, 1996 and 1997:
------------------------------------------------------------------------- 1995 1996 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 895,429 $ 8.77 904,114 $ 9.22 922,734 $11.29 Granted 92,250 13.50 110,750 23.12 122,250 33.32 Additional grants -- -- 9,000 23.00 -- -- Exercised (82,231) 9.11 (90,191) 5.84 (61,595) 7.33 Forfeited (1,334) 10.25 (10,939) 13.30 (4,972) 18.66 ------- ------- ------- Outstanding at end of year 904,114 9.22 922,734 11.29 978,417 14.27 ======= ======= =======
The number of stock options exercisable at the end of 1995, 1996 and 1997 was 736,740, 694,779 and 700,497, respectively. F-16 56 SIMPSON MANUFACTURING CO., INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following table summarizes information about the Company's stock options outstanding at December 31, 1997:
------------------------------------------------------------- OPTIONS OUTSTANDING ------------------------------------- OPTIONS EXERCISABLE WEIGHTED- ----------------------- NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED- OUTSTANDING REMAINING AVERAGE OUTSTANDING AVERAGE AT DECEMBER CONTRACTUAL EXERCISE AT DECEMBER EXERCISE RANGE OF EXERCISE PRICES 31, 1997 LIFE PRICE 31, 1997 PRICE ------------------------ ----------- ----------- --------- ----------- --------- $3.64 170,028 3.3 years $ 3.64 170,028 $ 3.64 $11.50 401,974 3.4 years 11.50 401,974 11.50 $10.00 to $11.28 93,248 4.1 years 10.24 66,181 10.23 $13.50 75,209 5.0 years 13.50 36,038 13.50 $23.00 to $29.25 115,708 6.0 years 23.12 24,276 23.51 $33.31 to $36.64 122,250 7.0 years 33.32 2,000 33.00 ----------- ----------- $3.64 to $36.64 978,417 4.3 years 14.27 700,497 9.96 ========== ==========
The Company also maintains a Stock Bonus Plan whereby for each ten years of continuous employment with the Company each employee who does not participate in the Company's stock option plans receives 100 shares of common stock. In 1995, 1996 and 1997, the Company committed to issue 2,600, 4,500 and 5,300 shares, resulting in compensation charges of $61,250, $180,155 and $305,038, respectively. The shares are issued in the year following the year in which they are earned. F-17 57 Simpson Manufacturing Co. Logo -----END PRIVACY-ENHANCED MESSAGE-----