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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________.
COMMISSION FILE NUMBER: 0-23804
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SIMPSON MANUFACTURING CO., INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3196943
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4120 DUBLIN BOULEVARD, SUITE 400, DUBLIN, CA 94568
(Address of principal executive offices)
Registrant's telephone number, including area code: (925)560-9000
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Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK, PAR VALUE $0.01 NEW YORK STOCK EXCHANGE, INC.
(Title of each class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
NONE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 1, 2001, there were outstanding 12,077,206 shares of the
registrant's common stock, par value $0.01, which is the only outstanding class
of common or voting stock of the registrant. The aggregate market value of the
shares of common stock held by nonaffiliates of the registrant (based on the
closing price for the common stock on the New York Stock Exchange on March 1,
2001) was approximately $417,453,576.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III is incorporated by reference to the
definitive Proxy Statement for the Annual Meeting of Stockholders of the Company
to be held May 18, 2001, which will be filed with the Securities and Exchange
Commission not later than 120 days after December 31, 2000.
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Certain matters discussed below are forward-looking statements that involve
risks and uncertainties, certain of which are discussed in this and in other
reports filed by the Company with the Securities and Exchange Commission. Actual
results might differ materially from results suggested by any forward-looking
statements in this report.
PART I
ITEM 1. BUSINESS.
BACKGROUND
Simpson Manufacturing Co., Inc. (the "Company"), through its subsidiary, Simpson
Strong-Tie Company Inc. ("Simpson Strong-Tie" or "SST"), designs, engineers and
is a leading manufacturer of wood-to-wood, wood-to-concrete and wood-to-masonry
connectors and shearwalls. SST also offers a full line of adhesives, mechanical
anchors and powder actuated tools for concrete, masonry and steel. The Company's
subsidiary, Simpson Dura-Vent Company, Inc. ("Simpson Dura-Vent" or "SDV"),
designs, engineers and manufactures venting systems for gas and wood burning
appliances. The Company markets its products to the residential construction,
light industrial and commercial construction, remodeling and do-it-yourself
("DIY") markets. The Company believes that SST benefits from strong brand name
recognition among architects and engineers who frequently specify in building
plans the use of SST products, and that SDV benefits from strong brand name
recognition among contractors, dealers, distributors and original equipment
manufacturers ("OEMs") to which SDV markets its products. The Company has
continuously manufactured structural connectors since 1956. See Note 14 to the
Company's consolidated financial statements for information regarding the net
sales, income from operations, depreciation and amortization, capital
expenditures and acquisitions and total assets for the Company's two primary
segments.
Connectors produced by Simpson Strong-Tie typically are steel devices that are
used to strengthen, support and connect joints in residential and commercial
construction and DIY projects. SST's Anchor Systems product line is included in
the connector product segment. These products enhance the safety and durability
of the structures in which they are installed and can save time and labor costs
for the contractor. SST's connector products increase structural integrity and
improve structural resistance to seismic, wind and other forces. Applications
range from building framing to deck construction to DIY projects. SST produces
and markets over 5,000 standard and custom products.
Simpson Dura-Vent's venting systems are used to vent gas furnaces and water
heaters, gas fireplaces and stoves, wood burning stoves and pellet stoves. SDV's
metal vents, chimneys and chimney liner systems exhaust the products of
combustion to the exterior of the building, and some products introduce outside
air into the appliance for more efficient combustion. SDV designs its products
for ease of assembly and safe operation and to achieve a high level of
performance. SDV produces and markets approximately 2,400 different venting
products.
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 Europe, Canada, Japan, Australia, New
Zealand and several countries in Central and South America. Both Simpson
Strong-Tie and Simpson Dura-Vent products are distributed through a contractor
and dealer distributor network, home centers and OEMs.
The Company has developed and uses automated manufacturing processes. Its
innovative manufacturing systems and techniques have allowed it to control
manufacturing costs, even while developing both new products and products that
meet customized requirements and specifications. The Company's development of
specialized manufacturing processes has also permitted increased operating
flexibility and enhanced product design innovation. The Company has developed a
quality management system that employs numerous quality-control procedures.
Since 1996, SST's quality management system has been registered under ISO 9001.
The Company has 14 manufacturing locations in the United States, Canada, France,
Denmark and England.
The Company is a Delaware corporation organized and merged with its predecessor
company in 1999. The Company serves as a holding company for Simpson Strong-Tie,
and its subsidiaries, and for Simpson Dura-Vent.
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INDUSTRY AND MARKET TRENDS
Based on trade periodicals, participation in trade and professional associations
and communications with governmental and quasi-governmental organizations and
with 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. The Company's products are designed to respond to increasing demand
resulting from these trends. Some of these events and trends are discussed
below.
Natural disasters throughout the world have focused attention on safety concerns
relating to the structural integrity of homes and other buildings. The 1995
earthquake in Kobe, Japan, the 1994 earthquake in Northridge, California, the
1989 Loma Prieta earthquake in Northern California, Hurricanes Hugo in 1989 and
Andrew in 1992 in the Southeast, and other less cataclysmic natural disasters
damaged and destroyed innumerable homes and other buildings, resulting in
heightened consciousness of the fragility of some of those structures.
In recent years, architects, engineers, model code agencies, contractors,
building inspectors and legislators have continued efforts to improve structural
integrity and safety of homes and other buildings in the face of disasters of
various types, including seismic events, storms and fires. Based on ongoing
participation in trade and professional associations and communications with
governmental and quasi-governmental regulatory agencies, the Company believes
that building codes, such as the 1997 Uniform Building Code, have been
strengthened and that their enforcement is becoming more rigorous. Recently,
there has been consolidation among several of the Company's customer groups. The
industry is also experiencing increased complexity in home design and builders
are more aggressively trying to reduce their costs. The Company is responding to
these trends by marketing its products as systems solutions rather than as
individual parts. In some cases, systems marketing is facilitated by the use of
sophisticated design and specification software.
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.
Over the past several years, this and other factors, have led to the increased
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 over the
past several years.
Concerns about energy conservation and air quality have led to increasing
recognition of the advantages of natural gas as a heating fuel, including its
clean burning characteristics. Use of natural gas for home heating has been
increasing in the United States over a number of years, until recently.
According to the U.S. Census Bureau, the share of residential space heating in
1997 heated with natural gas was 70%, an increase from 61% in 1978. In the
hearth appliance market, sales of gas stoves and gas fireplaces have increased
in recent years relative to those of traditional wood burning appliances.
According to the Hearth Products Association, the share of hearth appliances
fired with natural gas in 1999 was 55%, an increase from 43% in 1994, but a
decrease from 58% in 1998. Consistent with this trend, sales of Simpson
Dura-Vent's direct vent products decreased in 2000. Conversely, in 1999 and
2000, sales of wood burning stoves and fireplaces increased significantly.
According to the Hearth Products Association sales of these appliances increased
22% in 1999 compared to 1998. In the year 2000, increases in the cost of home
heating oil, natural gas, and electricity resulted in a further increase in
demand for wood burning appliances and pellet stoves. According to Hearth & Home
Magazine (March 2001), sales of wood stoves in 2000 increased 4% over 1999
sales, while sales of pellet stoves in 2000 increased 32% over 1999. SDV's
DuraTech chimney system and its pellet vent products are intended to capitalize
on this trend towards wood burning and pellet stoves.
The Company has developed its distribution through home centers throughout the
United States. The Company's sales to home centers increased significantly in
1999 and 2000. See "Item 7 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations."
BUSINESS STRATEGY
The Company designs, manufactures and sells products that are of high quality
and performance, easy to use and cost-effective for customers. The Company
provides rapid delivery of its products and prompt engineering and sales
support. Based on its communications with customers, engineers, architects,
contractors and other industry
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participants, the Company believes that its products have strong brand name
recognition, and the Company seeks to continue to develop the value of its brand
names through a variety of customer-driven strategies. Information provided by
customers has led to the development of many of the Company's products, and the
Company expects that customer needs will continue to shape the Company's product
development, marketing and services.
Specification in architects' and engineers' plans and drawings influences which
products will be used for particular purposes and therefore is key to the use of
the Company's products in construction projects. The Company encourages
architects and engineers to specify the installation of the Company's products
in projects they design and supervise, and encourages acceptance of the
Company's products by construction contractors. The Company maintains frequent
contacts with architects, engineers and contractors, as well as private
organizations that provide information to building code officials, both to
inform them regarding the quality, proper installation, capabilities and value
of the Company's products and to update them about product modifications and new
products that may be useful or needed. The Company sponsors seminars to inform
architects, engineers and building officials on appropriate use and proper
installation of the Company's products.
The Company seeks to expand its product and distribution coverage through
several channels:
Distributors. The Company regularly evaluates its distribution coverage and
service levels provided by its distributors and from time to time modifies its
distribution strategy and implements changes to address weaknesses and
opportunities. The Company has various programs to evaluate distributor product
mix and conducts promotions to encourage distributors to add Company products
that complement their mix of product offerings in their markets.
Through its efforts to increase specifications by architects and engineers, and
through increasing the number of products sold to particular contractors, the
Company seeks to increase sales to channels 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 on the development of DIY products.
OEM Relationships. The Company works closely with manufacturers of engineered
wood products and OEMs in developing and expanding the application and sales of
Simpson Strong-Tie's engineered wood connector products and Simpson Dura-Vent's
gas, wood and pellet stove venting products. SST has relationships with several
of the largest manufacturers of engineered wood products, and SDV has OEM
relationships with several major gas fireplace and gas stove manufacturers.
The Company is expanding its established facilities outside California to
increase its presence and sales in markets east of the Rocky Mountains. During
the last five years, the Company has expanded or has plans to expand nearly all
of its manufacturing and warehouse facilities. As a result of the high sales
growth in California in 1999 and 2000, sales in the 37 states east of the Rocky
Mountains, while continuing to grow, have declined as a percentage of domestic
sales from approximately 48% in 1998 to approximately 44% in 2000. Since 1993,
the Company commenced manufacturing in England, opened warehouse and
distribution facilities in Western Canada and the Northeastern United States,
purchased anchor products manufacturers in Illinois and Eastern Canada and a
connector product manufacturer in France, established distribution operations in
Chile and Argentina, made an equity investment in a product design and
distribution company in Germany and entered into distribution arrangements in
Japan and Australia. More recently, the Company acquired a connector
manufacturer in Denmark with distribution in northern, central and eastern
Europe. The European investments are intended to establish a presence in the
European Community through companies with existing customer bases and through
servicing U.S.-based customers operating there. The Company intends to continue
to pursue and expand operations outside the United States.
The Company's goal is to manufacture and warehouse its products in geographic
proximity to its markets to provide availability and rapid delivery of products
to customers and prompt response to customer requests for specially designed
products and services. With respect to the DIY and dealer markets, the Company's
strategy is to keep the customer's retail stores continuously stocked with
adequate supplies of the full line of the Company's products that
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those stores carry. The Company manages its inventory to assure continuous
product availability. Most customer orders are filled within a few days. High
levels of manufacturing automation and flexibility allow the Company to maintain
its quality standards while continuing to provide prompt delivery.
The Company's product research and development is based largely on needs that
customers communicate to the Company. The Company typically has developed 10 to
20 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 112 patents that the Company owns, 82 cover products that the
Company currently manufactures and markets. The Company has filed 60 patent
applications that are pending. Some of these applications cover the same product
in more than one jurisdiction.
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,
(d) are responsive to needs of the Company's customers and (e) expand its
markets geographically.
SIMPSON STRONG-TIE
Overview
Connectors produced by Simpson Strong-Tie typically are steel devices that are
used to strengthen, support and connect joints in residential and commercial
construction and DIY projects. These products enhance the safety and durability
of the structures in which they are installed and can save time and labor costs
for the contractor. SST's connector products increase structural integrity and
improve structural resistance to seismic, wind and other forces. Applications
range from building framing to deck construction to DIY projects. SST produces
and markets over 5,000 standard and custom products.
In the United States, connector usage developed faster in the West than
elsewhere due to the low cost and abundance of timber and to local construction
practices. Increasingly, the market has been influenced both by a growing
awareness that the devastation caused by seismic, wind and other disasters can
be reduced through improved building codes and construction practices and by
environmental concerns that contribute to the increasing cost and reduced
availability of wood. Most Simpson Strong-Tie products are listed by recognized
building standards agencies as complying with model building codes and are
specified by architects and engineers for use in projects they are designing or
supervising. The engineered wood products industry is developing in response to
concerns about the availability of wood, and the Company believes that SST is
the leading supplier of connectors for use with engineered wood products.
Products
Simpson Strong-Tie is a recognized brand name in the markets it serves. SST
manufactures and markets products that strengthen the three types of connections
found in light construction: wood-to-wood, wood-to-concrete and wood-to-masonry.
The Company's products are installed on the continuous load path from the
foundation to the roof system. SST also markets specialty screws and nails for
proper installation of certain of its connector products. These products have
seismic, retrofit and remodeling applications for both new construction and DIY
markets. SST also offers a full line of adhesives, mechanical anchors and powder
actuated tools for numerous anchoring applications in concrete, masonry and
steel.
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 several 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.
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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 71 U.S. and 28 foreign patents
that SST owns, 79 cover products that SST currently manufactures and markets.
Over a quarter of SST's 2000 revenues were derived from products that are
protected by patents. SST typically has developed 10 to 20 new products each
year. SST's research and development expense for the three years ended December
31, 2000, 1999 and 1998, was $1,771,000, $1,376,000 and $1,087,000,
respectively. As part of the new product development process, SST engineers, in
cooperation with sales and marketing staff, meet regularly with architects,
engineers, building inspectors, code officials and customers. Several new
products derived from existing product lines are developed annually. SST
recently developed and introduced a pre-fabricated shear-wall product for the
new construction market and has expanded its line of chemical and mechanical
Anchor products. The Company believes that existing distribution channels are
receptive to product line extensions, thereby enhancing SST's ability to enter
new markets.
Sales and Marketing
Simpson Strong-Tie's sales and marketing programs are implemented through SST's
branch system. SST currently maintains branches in Northern and Southern
California, Texas, Ohio, Canada, England, France and Denmark. 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 in managing their operations. Each is
responsible for setting and executing sales and marketing strategies that are
consistent with the markets that the branch serves and the goals of the Company.
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 Dublin, California. The sales force maintains
close working relationships with customers, develops new business, calls on
architects, engineers and building officials and participates in a range of
educational seminars.
Simpson Strong-Tie sells its products through an extensive distribution system
comprising dealer distributors supplying thousands of retail locations
nationwide, contractor distributors, home centers, manufacturers of engineered
wood products, and specialized contractors such as roof framers. In 2000, sales
to The Home Depot were more than 10% of the Company's consolidated net sales
(see Note 14 to the Company's consolidated financial statements). SST's DIY and
dealer products are used to build projects such as decks, patio covers and shelf
and bench systems. SST received C-Mark equivalency clearance from the Japanese
building code authorities, which is expected to facilitate acceptance of its
products in the Japanese market, and has increased the distribution of its
products in Australia, Chile and Argentina. The Company believes that SST's
increasing diversification into new and growing markets has reduced its
vulnerability to construction industry cycles.
Simpson Strong-Tie dedicates substantial resources to customer service. SST
produces numerous publications and point-of-sale marketing aids to serve
specifiers, distributors, retailers and users for the various markets that it
serves. These publications include general catalogs, as well as various specific
catalogs, such as those for its Anchor System products and the engineered wood
and plated truss industries. The catalogs and publications describe the products
and provide load and installation information. SST also maintains several
websites, all of which are linked to www.strongtie.com, and include catalogs,
product and technical information, code reports and other general information
related to SST's product lines and promotional programs.
Simpson Strong-Tie's engineers not only design and test products, but also
provide engineering support for customers. This support might range from the
discussion of a load value in a catalog to testing a unique application for an
existing product. SST's sales force communicates with customers in each of its
marketing channels, through its publications, seminars and frequent calls.
Based on its communications with customers, Simpson Strong-Tie believes that its
products are essential to its customers' businesses, and it is SST's policy to
ship products ordered within a few days of receiving the order. Many of SST's
customers serve 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. SST also maintains computer sales and inventory control and forecasting
capability throughout its nationwide
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network of factories and warehouses. SST also has special programs for
contractors intended to ensure the prompt and reliable manufacture and delivery
of custom products.
Simpson Strong-Tie believes that dealer and home center sales of SST products
are significantly greater when the bins and racks at large dealer and home
center locations are adequately stocked with appropriate products. Various
retailers carry varying numbers of different SST products, and SST's Retail
Specialists are engaged in ongoing efforts to inform retailers about other SST
products that can be used in their specific markets and to encourage them to add
these products to better meet their customers' needs. Achieving these objectives
requires teamwork and significant inventory commitments between SST and the
distributors and retailers. Retail Specialists are playing a significant role in
keeping the racks full and extending the product lines at the large dealer and
home center level. They help retailers order product, set up merchandising
systems, stock shelves, hold product seminars and provide SST with daily
information that is used to improve service and product mix.
SIMPSON DURA-VENT
Overview
Simpson Dura-Vent's venting systems are used to vent gas furnaces and water
heaters, gas fireplaces and stoves, wood burning stoves and pellet stoves. SDV's
metal vents, chimneys and chimney liner systems exhaust the products of
combustion to the exterior of the building and have been designed for ease of
assembly and safe operation and to achieve a high level of performance. SDV
produces and markets nearly 2,400 different venting products.
The 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. As a result, Simpson Dura-Vent has
developed venting systems, such as Direct-Vent, to address changes in appliance
technology. Recently, increases in the cost of natural gas have affected demand
for gas appliances and have increased demand for alternative energy sources.
Historically, sales of wood burning stoves, considered an alternative energy
source, have increased during these periods of high oil prices and energy
shortages. SDV manufactures venting systems for use with wood burning stoves as
well as other types of appliances.
Simpson Dura-Vent's objective is to expand market share in all of its
distribution channels, by entering expanding markets that address energy and
environmental concerns. SDV's strategy is to capitalize on its strengths in new
product development and its established distribution network and to continue its
commitment to high quality and service. SDV operates manufacturing and warehouse
facilities in California and Mississippi.
Products
Simpson Dura-Vent is a leading supplier of double-wall Type B Gas Vent systems,
used for venting gas furnaces, water heaters, boilers and decorative gas
fireplaces. SDV'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. SDV also markets a patented flexible vent connector,
Dura/Connect, for use between the gas appliance flue outlet and the connection
to the Type B Gas Vent installed in the ceiling. Dura/Connect offers a simple
twist, bend and connect installation for water heaters and gas furnaces.
Recent increases in the price of natural gas, home heating oil, and electricity
have resulted in increases in sales of wood burning appliances. Simpson
Dura-Vent's DuraTech and Dura/Plus chimney systems are intended to capitalize on
these recent energy trends. In addition, due in part to increases in the cost of
energy, sales of pellet stoves in 2000 increased 32% over 1999. SDV experienced
a substantial increase in demand for its pellet vent products in 2000. The
growing gas fireplace market has evolved into two basic types of fireplace:
top-vent fireplaces that are vented with the standard Type B Gas Vent and
direct-vent fireplaces that use a special double-wall venting system. SDV's
direct-vent system is designed not only to exhaust the flue products, but also
to draw in outside air for combustion, an important feature in modern
energy-efficient home construction. The direct-vent gas fireplace systems
provide ease of installation, permitting horizontal through-the-wall venting or
standard vertical through-the-roof venting. SDV has established relationships
with several large manufacturers of gas stoves and gas fireplaces to supply
direct-vent venting products. 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.
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New Product Development
Simpson Dura-Vent has gained industry recognition by offering innovative new
products that meet changing needs of customers. SDV representatives serve on
industry committees concerned with issues such as new appliance standards and
government regulations. SDV's research and development expense for the three
years ended December 31, 2000, 1999 and 1998, was $455,000, $433,000 and
$431,000, respectively. SDV also maintains working relationships with research
and development departments of major appliance manufacturers, providing
prototypes for field testing and conducting tests in SDV's testing laboratory.
SDV believes that such relationships provide competitive advantages. For
example, SDV introduced the first direct vent system for direct vent gas
appliances. In 1999, SDV introduced DuraTech, a twin-walled insulated chimney
system for use on wood burning stoves, fireplaces and oil fired appliances. This
product line has been designed and manufactured to a new standard of excellence.
It is constructed from stainless steel and incorporates blanket insulation for
enhanced safety and efficiency.
Sales and Marketing
Simpson Dura-Vent's sales organization consists of a director of sales and
marketing, a marketing communications manager, regional sales managers, and
independent representative agencies. SDV markets venting systems for both gas
and wood burning appliances through wholesale distributors in the United States,
Canada and Australia to the HVAC (heating, ventilating and air conditioning) and
PHC (plumbing, heating and cooling) contractor markets, and to fireplace
specialty shop distributors. These customers sell to contractor and DIY markets.
SDV also markets venting products to home center and hardware store chains. SDV
has established OEM relationships with several major gas fireplace and gas stove
manufacturers, which SDV believes are leaders in the direct-vent gas appliance
market.
Simpson Dura-Vent responds to technological changes occurring in the industry
through new product development and has developed a reputation for quality and
service to its customers. To reinforce the image of quality, SDV produces
extensive sales support literature and advertising materials. Recognizing the
difficulty that customers and users may have in understanding new, complex
venting requirements, SDV publishes a venting handbook to assist contractors,
building officials and retail outlets with the science of proper venting.
Advertising and promotional literature has been designed to be used by
distributors and their customers, as well as home centers and hardware chains.
To enhance its marketing effort, SDV has developed a website (www.duravent.com)
that includes product descriptions, catalogs and installation instructions, as
well as a direct link to SDV's customer service and engineering departments.
MANUFACTURING PROCESS
The Company has concentrated on making its manufacturing processes as efficient
as possible without compromising quality or flexibility necessary to serve the
needs of its customers. The Company has developed and uses automated
manufacturing processes. The Company's innovative manufacturing systems and
techniques have allowed it to control manufacturing costs, even while developing
both new products and products that meet customized requirements and
specifications. The Company's development of specialized manufacturing processes
also has permitted increased operating flexibility and enhanced product design
innovation.
The Company is committed to helping people build safer structures economically
through the design, engineering and manufacturing of structural connector and
related products. To this end, the Company has developed a quality management
system that employs numerous quality-control procedures, such as
computer-generated work orders, constant review of parts as they are produced
and frequent quality testing. Since 1996, Simpson Strong-Tie's quality
management system has been registered under ISO 9001, an internationally
recognized set of quality-assurance standards. The Company believes that ISO
registration is becoming increasingly important to U.S. companies.
Simpson Strong-Tie operates manufacturing and warehouse facilities in
California, Texas, Ohio, Florida, Connecticut, Illinois, Washington, Indiana,
British Columbia, Ontario, England, France, Denmark and Poland. SST
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also stocks products in Chile and Argentina. Most of SST's products are produced
with a high level of automation, using progressive dies run in automatic presses
making parts from coiled sheet steel often in excess of 100 strokes per minute.
SST produces over 500 million product pieces per year. Over half of SST's
products (SKUs) are bar coded with a UPC number for easy identification, and
nearly all of the products sold to home centers are labeled with bar codes. SST
has significant press capacity and has some multiple dies for its high volume
products because of the need to produce the product close to the customer and to
provide backup capacity. The balance of production is accomplished through a
combination of manual, blanking and numerically controlled (NC) processes which
include robotic welders, lasers and turret punches. This capability allows SST
to produce products with little redesign or set-up time, facilitating rapid
turnaround for customers. New tooling is also highly automated. Dies are
designed and produced using computer aided design (CAD) and computer aided
machining (CAM) systems. CAD/CAM capability enables SST to create multiple dies
rapidly and design them to high standards. The Company is constantly reviewing
its product line to reduce manufacturing costs, increase automation, and take
advantage of new types of materials. For example, SST recently introduced two
new products made from an engineered composite plastic, the AnchorMate and the
StrapMate.
Simpson Dura-Vent operates manufacturing and warehouse facilities in California
and Mississippi. SDV produces component parts for venting systems using
NC-controlled punch presses equipped with high-speed progressive and compound
tooling. SDV's vent pipe and elbow assembly lines are automated, to produce
finished products efficiently from large coils of steel and aluminum. UPC bar
coding and computer tracking systems provide SDV's industrial engineers and
production supervisors with real-time productivity tools to measure and evaluate
current production rates, methods and equipment.
Most of the Company's current and planned manufacturing facilities are located
in geographic regions that have experienced major natural disasters, such as
earthquakes, floods and hurricanes. For example, the 1989 Loma Prieta earthquake
in Northern California destroyed a freeway and caused other major damage within
a few miles of the Company's facilities in San Leandro, California, and the
earthquakes in Northridge, California, in January 1994, destroyed several
freeways and numerous buildings in the region in which the Company's facilities
in Brea are located. The Company has developed a disaster recovery plan, but it
does not carry earthquake insurance. Other insurance that it carries is limited
and not likely to be adequate to cover all of the Company's resulting costs,
business interruption and lost profits in the event of a major natural disaster
in the future. If a natural disaster were to render one or more of the Company's
manufacturing facilities totally or partially unusable, whether or not covered
by insurance, the Company's business and financial condition could be materially
and adversely affected.
REGULATION
The design, capacity and quality of most of the Company's products and
manufacturing processes are subject to numerous and extensive regulations and
standards promulgated by governmental, quasi-governmental and industry
organizations. Such regulations and standards are highly technical and complex
and are subject to frequent revision. The failure of the Company's products or
manufacturing processes to comply with any of such regulations and standards
could impair the Company's ability to manufacture and market its products
profitably and could materially and adversely affect the Company's business and
financial condition.
Simpson Strong-Tie's product lines are subject to Federal, state, county,
municipal and other governmental and quasi-governmental regulations that affect
product design, development, testing, applications, marketing, sales,
installation and use. Most SST products are recognized by building code and
standards agencies. Agencies that recognize Company products include the
International Conference of Building Officials ("ICBO"), Building Officials and
Code Administrators International ("BOCA"), Southern Building Code Congress
International ("SBCCI"), The National Evaluation Service, the City of Los
Angeles, Dade County, Florida, and the California Division of Architecture.
These and other code agencies adopt various testing and design standards and
incorporate them into their related building codes. For example, ICBO
requirements are codified in the Uniform Building Code. The Uniform Building
Code generally applies to construction in the Western United States. To be
recognized by ICBO, SST products must conform to Uniform Building Code
requirements. SST considers this recognition to be a significant marketing tool
and devotes considerable effort to obtaining and maintaining appropriate
approvals for its products. SST believes that architects, engineers, contractors
and other customers are less likely to purchase structural products that lack
the appropriate code approval or acceptance 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.
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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
Environmental Protection Agency ("EPA"). Energy efficiency standards are
regulated by the Department of Energy ("DOE") under the authority of the
National Appliance Energy Conservation Act. Under this act, the DOE periodically
reviews the necessity for increased efficiency standards with respect to gas
furnaces and gas water heaters. A substantial percentage of SDV's Type B Gas
Vent sales are for gas furnaces and gas water heaters. Minimum appliance
efficiency standards might be adopted that could negatively affect sales of Type
B Gas Vents, which could materially and adversely affect the Company's operating
results and financial condition. The standards and regulations contained in the
NFGC and NFPA 211 are ultimately adopted by national building code organizations
such as ICBO, BOCA and SBCCI. In turn, the various building codes are adopted by
local municipalities, resulting in enforcement through the building permit
process. Safety, air quality and energy efficiency requirements are enforced by
local air quality districts and municipalities by requiring proper UL, EPA and
DOE labels on appliances and venting systems.
COMPETITION
The Company faces a variety of competition in all of the markets in which it
participates. This competition ranges from subsidiaries of large national or
international corporations to small regional manufacturers. While price is an
important factor, the Company competes primarily on the basis of quality,
breadth of product line, technical support, service, field support and product
innovation. As a result of differences in structural design and building
practices and codes, Simpson Strong-Tie's markets tend to differ by region.
Within these regions, SST competes with companies of varying size, several of
which also distribute their products nationally.
The venting industry is highly competitive. Many of Simpson Dura-Vent's
competitors have greater financial and other resources than SDV. SDV's principal
competitors include the Selkirk Metalbestos Division of Eljer Industries Inc. (a
subsidiary of U.S. Industries, Inc.), American Metal Products Co. (a subsidiary
of Masco Corp.), Metal-Fab, Inc., Hart & Cooley, Inc. and the Air Jet Division
of General Products Co. The Company believes that Metal-Fab, Inc., Hart &
Cooley, Inc. and Air Jet tend to be more regional than SDV, and that they have
smaller shares of the national market than SDV.
RAW MATERIALS
The principal raw material used by the Company is steel, including stainless
steel, and is generally ordered to specific American Society of Testing and
Materials ("ASTM") standards. Other raw materials include aluminum, aluminum
alloys and ceramic and other insulation materials, which are used by Simpson
Dura-Vent, and cartons, which are used by both SST and SDV. The Company
purchases raw materials from a variety of commercial sources. The Company's
practice is to seek cost savings and enhanced quality by purchasing from a
limited number of suppliers.
The steel industry is highly cyclical and prices for the Company's raw materials
are influenced by numerous factors beyond the Company's control, including
general economic conditions, competition, labor costs, import duties and other
trade restrictions. The Company historically has not attempted to hedge against
changes in prices of steel or other raw materials. The Company might not be able
to increase its product prices in amounts that correspond to increases in raw
materials prices without materially and adversely affecting its sales and
profits. See "Item 7 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations."
PATENTS AND PROPRIETARY RIGHTS
The Company's subsidiaries own 112 U.S. and foreign patents, of which 82 cover
products that they currently manufacture and market. Its subsidiaries have filed
21 U.S. and 39 foreign patent applications that are currently pending. These
patents and patent applications cover various design aspects of the
subsidiaries' products, as well as processes used in their manufacture. The
Company's subsidiaries are continuing to develop new potentially patentable
products, product enhancements and product designs. Although the Company's
subsidiaries do not intend
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11
to apply for additional foreign patents covering existing products, the Company
has developed an international patent program to protect new products that its
subsidiaries may develop.
The Company's subsidiaries hold 165 trademark registrations in the U.S. and
foreign countries covering 51 trademarks, have 59 trademark registration
applications pending in the U.S. and foreign countries covering 20 trademarks,
and use several other trademarks that they have not yet attempted to register.
The Company's ability to compete effectively with other companies depends in
part on its ability to maintain the proprietary nature of its technology. There
can be no assurance, however, as to the degree of protection afforded by these
patents or the likelihood that patents will issue pursuant to pending patent
applications. Furthermore, there can be no assurance that others will not
independently develop the same or similar technology, develop around the
patented aspects of any of the Company's products or proposed products, or
otherwise obtain access to the Company's proprietary technology.
In addition to seeking patent protection, the Company also relies on unpatented
proprietary technology to maintain its competitive position. Nevertheless, there
can be no assurance that the Company will be able to protect its know-how or
other proprietary information.
In attempting to protect its proprietary information, the Company expects that
it may sometimes be necessary to initiate lawsuits against competitors and
others that the Company believes have infringed or are infringing the Company's
rights. In such an event, the defendant may assert counterclaims to complicate
or delay the litigation or for other reasons. If the Company were to be unable
to maintain the proprietary nature of its significant products, the Company's
business and financial condition could be materially and adversely affected.
ACQUISITIONS AND EXPANSION INTO NEW MARKETS
The Company's future growth, if any, may depend to some extent on its ability to
penetrate new markets, both domestically and internationally. See "Industry and
Market Trends" and "Business Strategy." Therefore, the Company may in the future
pursue acquisitions of product lines or businesses. Acquisitions involve
numerous risks, including difficulties in the assimilation of the operations and
products of the acquired companies, the diversion of management's attention from
other business concerns, risks of entering markets in which the Company has
little or no direct prior experience, and the potential loss of key employees of
the acquired company. In addition, future acquisitions by the Company may result
in potentially dilutive issuances of equity securities, the incurring of
additional debt, and amortization expenses related to goodwill and intangible
assets, all of which could adversely affect the Company's profitability. If an
acquisition occurs, no assurance can be given as to its effect on the Company's
business or operating results. See "Item 7 -Management's Discussion and Analysis
of Financial Condition and Results of Operations."
Construction customs, standards, techniques and methods in international markets
differ from those in the United States. Laws and regulations applicable in new
markets for the Company are likely to be unfamiliar to the Company and
compliance may be substantially more costly than the Company anticipates. As a
result, it may become necessary for the Company to redesign products or to
invent or design new products in order to compete effectively and profitably
outside the United States or in markets that are new to the Company in the
United States. The Company expects that significant time will be required for it
to generate substantial sales or profits in new markets.
Other significant challenges to conducting business in foreign countries
include, among other factors, local acceptance of the Company's products,
political instability, currency controls, changes in import and export
regulations, changes in tariff and freight rates, and fluctuations in foreign
exchange rates. There can be no assurance that the Company will be able to
penetrate these markets or that any such market penetration can be achieved on a
timely basis or profitably. If the Company is not successful in penetrating
these markets within a reasonable time, it will be unable to recoup part or all
of the significant investments it will have made in attempting to do so. See
"Business Strategy" and "Industry and Market Trends."
In July 2000, Simpson Strong-Tie purchased the assets of Anchor Tiedown Systems,
Inc. ("ATS"). ATS manufactures and distributes the MBR product line used to
anchor multi-story buildings with a threaded rod hold down system. The purchase
price was approximately $4.6 million in cash. In December 2000, SST purchased
the assets of Masterset Fastening Systems, Inc. ("Masterset") for approximately
$2.3 million in cash plus an earnout of up to $0.3 million. Masterset sells a
system of specially designed powder actuated fasteners and installation tools.
In
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January 2001, Simpson Strong-Tie International, Inc. ("SSTI"), a subsidiary of
the Company, acquired 100% of the shares of BMF Bygningsbeslag A/S ("BMF") of
Denmark for $12.8 million in cash with an additional amount of approximately
$2.6 million possible based on operating performance. BMF manufactures and
distributes connector products in northern and central Europe. In the third
quarter of 1999, SSTI purchased the assets of Furfix Products Limited and Easy
Arches Limited (together, "Furfix"), which manufacture a line of structural
connectors for the wood and masonry construction markets in the United Kingdom
and Europe. The purchase price was approximately $7.8 million in cash plus an
earnout based on future operating performance. Included in the purchase price
were costs associated with the closure of Furfix's existing facility and
integration into SSTI's facility in Tamworth, England. See "Item 7 --
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Sources of Capital."
SEASONALITY AND CYCLICALITY
The Company's sales are seasonal, with operating results varying from quarter to
quarter. With some exceptions, the Company's sales and income have historically
been lower in the first and fourth quarters and higher in the second and third
quarters of the year, as retailers and contractors purchase construction
materials in the late spring and summer months for the construction season. In
addition, demand for the Company's products and the Company's results of
operations are significantly affected by weather conditions, such as
unseasonably warm, cold or wet weather, which affect, and sometimes delay or
accelerate, installation of certain of the Company's products. Political and
economic events can also affect the Company's revenues. The Company has little
control over the timing of customer purchases, and sales anticipated in one
quarter may occur in another quarter, thereby affecting both quarters' results.
In addition, the Company incurs significant expenses as it develops, produces
and markets its products in anticipation of future orders. Products typically
are shipped as orders are received, and accordingly the Company operates with
little backlog. As a result, net sales in any quarter generally depend on orders
booked and shipped in that quarter. A significant portion of the Company's
operating expenses are fixed, and planned expenditures are based primarily on
sales forecasts. If sales fall below the Company's expectations, operating
results would be adversely affected for the relevant quarters, as expenses based
on those expectations will already have been incurred. See "Item 7 --
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Company's principal markets are in the building construction industry. That
industry is subject to significant volatility as a result of fluctuations in
interest rates, the availability of credit to builders and developers, inflation
rates, weather and other factors and trends, none of which is within the
Company's control. Declines in commercial and residential construction may be
expected to reduce the demand for the Company's products. The Company cannot
provide any assurance that its business will not be adversely affected by future
negative economic or construction industry performance or that future declines
in construction activity or the demand for the Company's products will not have
material adverse effects on the Company and its business and financial
condition. See "Item 7 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations."
PRODUCT LIABILITY
The Company designs and manufactures most of its standard products and expects
that it will continue to do so. The Company employs engineers and designers to
design and test its products under development. In addition, the Company
maintains a quality control system. The Company has on occasion found
manufacturing flaws in its products. In addition, the Company purchases from
third party suppliers raw materials, principally steel, and finished goods that
are produced and processed by other manufacturers. The Company also has on
occasion found flaws in raw materials and finished goods produced by others,
some of which flaws have not been apparent until after the products were
installed by customers. Many of the Company's products are integral to the
structural soundness or fire safety of the buildings in which they are used. As
a result, if any flaws exist in the Company's products (as a result of design,
raw material or manufacturing flaws) and such flaws are not discovered and
corrected before the Company's products are incorporated into structures, the
structures could suffer severe damage (such as collapse or fire) and personal
injury could result. To the extent that such damage or injury is not covered by
the Company's product liability insurance, and if the Company were to be found
to have been negligent or otherwise culpable, the Company and its business and
financial condition could be materially and adversely affected by the necessity
to correct such damage and to compensate persons who might have suffered injury.
Furthermore, in the event that a flaw is discovered after installation but
before any damage or injury occurs, it may be necessary for the Company to
recall products, and the Company may be liable for any costs necessary to
retrofit the affected structures. Any such recall or retrofit could entail
substantial costs and adversely affect the Company's reputation, sales and
financial condition. The Company does not carry insurance against recall costs,
and its product liability insurance may not cover retrofit costs.
No assurance can be given that claims will not be made against the Company with
regard to damage or destruction of structures incorporating Company products
resulting from a natural disaster. Any such claims, if asserted, could
materially and adversely affect the Company.
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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) or explosive (such as the powder used in its powder actuated tools).
The Company believes that it has obtained all material licenses and permits
required by environmental, health and safety laws and regulations in connection
with the Company's operations and that its policies and procedures comply in all
material respects with existing environmental, health and safety laws and
regulations. It is possible that additional licenses or permits may be required,
that the Company's policies and procedures might not comply in all respects with
all such laws and regulations or, even if they do, that employees might fail or
neglect to follow them in all respects, and that the Company's generation,
handling, use, storage, transportation, treatment or disposal of hazardous or
toxic materials, machinery and equipment might cause injury to persons or to the
environment. In addition, properties occupied by the Company may be contaminated
by hazardous or toxic substances and remedial action may be required at some
time in the future. It is also possible that materials in certain of the
Company's products could cause injury or sickness. Relevant laws and regulations
could also be changed or new ones could be adopted that require the Company to
obtain additional licenses and permits and cause the Company to incur
substantial expense. Any such event or contamination could have a material
adverse effect on the Company and its liquidity, results of operations and
financial condition. See "Regulation."
EMPLOYEES AND LABOR RELATIONS
As of March 1, 2001, the Company had 1,892 full-time employees, of whom 1,276
were hourly employees and 616 were salaried employees. The Company believes that
its overall compensation and benefits for the most part exceed industry averages
and that its relations with its employees are good.
The Company is dependent on certain key management and technical personnel,
including Thomas J Fitzmyers, Michael J. Herbert, Stephen B. Lamson, Barclay
Simpson and Donald M. Townsend. The loss of one or more key employees could have
a material adverse effect on the Company. The Company's success will also depend
on its ability to attract and retain additional highly qualified technical,
marketing and management personnel necessary for the maintenance and expansion
of the Company's activities. The Company faces strong competition for such
personnel and there can be no assurance that the Company will be able to attract
or retain such personnel.
A significant number of the Company's employees at two of the Company's major
manufacturing facilities are represented by labor unions and are covered by
collective bargaining agreements. Two of the Company's collective bargaining
agreements cover the Company's sheetmetal workers and its tool and die craftsmen
in Brea. These two contracts expire in June 2001 and February 2002,
respectively. Two other contracts, covering tool and die personnel and
sheetmetal workers in San Leandro, expire in June 2003 and July 2003,
respectively. A work stoppage or interruption by a significant number of the
Company's employees could have a material and adverse effect on the Company and
its business and financial condition.
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ITEM 2. PROPERTIES.
Properties
The Company maintains its home office in Dublin, California, and other offices,
manufacturing and warehouse facilities elsewhere in California and in Texas,
Ohio, Florida, Mississippi, Illinois, Connecticut, Indianapolis, Washington,
British Columbia, Ontario, England, France, Denmark and Poland. As of March 15,
2001, the Company's facilities were as follows:
APPROXIMATE
SQUARE OWNED OR LEASE
LOCATION FOOTAGE LEASED LESSEE EXPIRES FUNCTION
-------- ------------ -------- ------- ------- --------
Dublin, California 35,400 Leased Company 2007 Office
San Leandro, California 47,100 Leased (1) SST 2001 Office, Manufacturing and
Warehouse
San Leandro, California 71,000 Owned Office, Manufacturing and
Warehouse
San Leandro, California 57,000 Leased (2) SST 2009 Manufacturing and
Warehouse
San Leandro, California 48,000 Owned Office and Warehouse
San Leandro, California 27,000 Owned Manufacturing and
Warehouse
San Leandro, California 61,800 Leased SST 2002 Warehouse
Brea, California 50,700 Owned Office, Manufacturing and
Warehouse
Brea, California 78,000 Owned Office and Warehouse
Brea, California 30,500 Owned Office, Manufacturing and
Warehouse
Brea, California 42,900 Owned Warehouse
Brea, California 19,200 Owned Warehouse
McKinney, Texas 84,300 Owned Office, Manufacturing and
Warehouse
McKinney, Texas 117,100 Owned Office and Warehouse
Columbus, Ohio 153,500 Leased (3) SST 2005 Office, Manufacturing and
Warehouse
Jacksonville, Florida 74,600 Leased SST 2001 Office and Warehouse
Addison, Illinois 52,400 Leased SST 2003 Office, Manufacturing and
Warehouse
Enfield, Connecticut 55,100 Leased SST 2003 Office and Warehouse
Kent, Washington 24,000 Leased SST 2004 Office, Manufacturing and
Warehouse
Manteca, California 135,700 Leased SST 2005 Office, Manufacturing and
Warehouse
Visalia, California 50,000 Owned Warehouse
Indianapolis, Indiana 19,000 Leased SST 2005 Office, Manufacturing and
Warehouse
Tamworth, England 78,100 Leased SST (4) 2012 Office, Manufacturing and
Warehouse
Vacaville, California 125,000 Leased (5) SDV 2007 Office, Manufacturing and
Warehouse
Vacaville, California 120,300 Owned Office, Manufacturing and
Warehouse
Vacaville, California 40,200 Leased SDV 2001 Warehouse
Fontana, California 17,900 Leased SDV 2001 Warehouse
Vicksburg, Mississippi 302,000 Owned Office, Manufacturing and
Warehouse
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APPROXIMATE
SQUARE OWNED OR LEASE
LOCATION FOOTAGE LEASED LESSEE EXPIRES FUNCTION
-------- ------------ -------- ------- ------- --------
Langley, British Columbia 19,700 Leased SST 2010 Warehouse
Toronto, Ontario 104,000 Leased SST (6) 2009 Office, Manufacturing and
Warehouse
Odder, Denmark 162,500 Owned Office, Manufacturing and
Warehouse
Warsaw, Poland 5,100 Leased SST (7) 2001 Office and Warehouse
St. Hermine, France 11,300 Leased SST (8) 2002 Office, Manufacturing and
Warehouse
St. Hermine, France 20,900 Leased SST (8) 2001 Office, Manufacturing and
Warehouse
St. Hermine, France 15,900 Owned Office, Manufacturing and
Warehouse
St. Gemme La Plaine, France 99,000 Owned (9) Office, Manufacturing and
Warehouse
- -------------------
(1) Lessor is Simpson Investment Company, a related party. In February 2001,
the Company exercised its option to purchase this property for
approximately $1.7 million. The purchase is expected to close in the second
quarter of 2001. See Notes 9 and 15 to the Consolidated Financial
Statements contained elsewhere herein.
(2) Lessor is Doolittle Investors, a related party. In January 2001, the
Company amended the lease to extend it to 2009. See Notes 9 and 15 to the
Consolidated Financial Statements contained elsewhere herein.
(3) Lessor is Columbus Westbelt Investment Company, a related party. See Note 9
to the Consolidated Financial Statements contained elsewhere herein.
(4) Lessee is Simpson Strong-Tie International, Inc., a wholly-owned subsidiary
of SST.
(5) Lessor is Vacaville Investors, a related party. See Note 9 to the
Consolidated Financial Statements contained elsewhere herein.
(6) Lessee is Simpson Strong-Tie Canada, Ltd., a wholly-owned subsidiary of
SST.
(7) Lessee is BMF Bygningsbeslag A/S, a wholly-owned subsidiary of SST.
(8) Lessee is Simpson Strong-Tie, S.A., a wholly-owned subsidiary of SST.
(9) Simpson Strong-Tie, S.A. has commenced construction of a new manufacturing
and distribution facility in St. Gemme La Plaine, France, to replace its
existing facilities in St. Hermine. The new facility is expected to be
completed and occupied in 2001.
The Company also owns 63 acres of undeveloped land in McKinney, Texas. The
Company has vacated facilities that it leased in Vicksburg, Mississippi, and
Vancouver, British Columbia, and is attempting to sublease these facilities. The
Lessor of this Vicksburg facility is Vicksburg Investors, a related party. See
Note 9 to the Consolidated Financial Statements contained elsewhere herein.
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 2001. The manufacturing facilities currently are being
operated with one full shift and at most plants with at least a partial second
or third shift. The Company anticipates that it may require additional
facilities to accommodate possible future growth.
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ITEM 3. LEGAL PROCEEDINGS.
From time to time, the Company is involved in litigation that it considers to be
in the normal course of its business. No such litigation within the last five
years resulted in any material loss. The Company is not engaged in any legal
proceedings as of the date hereof, which the Company expects individually or in
the aggregate to have a material adverse effect on the Company's financial
condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is listed on the New York Stock Exchange ("NYSE")
under the symbol "SSD." The following table shows the range of high and low
closing sale prices per share of the Common Stock as reported by the NYSE for
the calendar quarters indicated:
MARKET PRICE
--------------------------
QUARTER HIGH LOW
---------- ----------
2000
Fourth ....................... $ 51.0000 $ 41.7500
Third ........................ 50.8750 44.5625
Second ....................... 53.0000 39.3125
First ........................ 45.6250 38.8750
1999
Fourth ....................... $ 46.8125 $ 39.1875
Third ........................ 54.3750 45.3125
Second ....................... 49.1875 39.1875
First ........................ 40.2500 32.8750
The Company estimates that as of March 1, 2001, 3,158 persons owned shares of
the Company's Common Stock either directly or through nominees.
The Company currently intends to retain its future earnings, if any, to finance
operations and fund internal growth and does not anticipate paying cash
dividends on the Company's Common Stock for the foreseeable future. Future
dividends, if any, will be determined by the Company's Board of Directors, based
on the Company's earnings, cash flow, financial condition and other factors
deemed relevant by the Board of Directors. In addition, existing loan agreements
require the Company to maintain Tangible Net Worth of $145.1 million plus 50% of
net profit after taxes for each fiscal year ending after June 30, 2000. This
requirement may limit the amount that the Company may pay out as dividends on
the common stock. As of December 31, 2000, the Company had a Tangible Net Worth
of $231.1 million.
In October 2000, the Board of Directors authorized the Company, for a period of
one year, to buy back up to $35 million of the Company's common stock. This
replaced the authorization from 1999 when the Board of Directors authorized a
buy back of up to $10 million. In the second half of 2000, the Company
repurchased 134,280 shares of its common stock at an average price of
approximately $43.95 per share.
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ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected consolidated financial information with
respect to the Company for each of the five years ended December 31, 2000, 1999,
1998, 1997 and 1996, derived from the audited Consolidated Financial Statements
of the Company, the most recent three years of which appear elsewhere herein.
The data presented below should be read in conjunction with the Consolidated
Financial Statements and related Notes thereto and "Item 7 -- Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere herein.
(Dollars in thousands, except YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
per share data) 2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- -----------
STATEMENT OF OPERATIONS DATA:
Net sales $ 369,087 $ 328,440 $ 279,081 $ 246,074 $ 202,409
Cost of sales 227,306 195,839 170,045 149,279 124,394
----------- ----------- ----------- ----------- -----------
Gross profit 141,781 132,601 109,036 96,795 78,015
Selling expense 37,410 32,204 24,706 23,113 20,104
General and administrative expense 44,634 37,846 33,100 30,358 25,216
----------- ----------- ----------- ----------- -----------
Income from operations 59,737 62,551 51,230 43,324 32,695
Interest income, net 3,010 1,669 940 429 595
----------- ----------- ----------- ----------- -----------
Income before income taxes 62,747 64,220 52,170 43,753 33,290
Provision for income taxes 25,639 25,753 21,028 17,767 13,569
Minority interest (1,246) -- -- -- --
------------ ----------- ----------- ----------- -----------
Net income $ 38,354 $ 38,467 $ 31,142 $ 25,986 $ 19,721
=========== =========== =========== =========== ===========
Diluted net income per share of common stock $ 3.12 $ 3.14 $ 2.58 $ 2.17 $ 1.68
=========== =========== =========== =========== ===========
AS OF DECEMBER 31,
----------------------------------------------------------------
(Dollars in thousands) 2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- -----------
BALANCE SHEET DATA:
Working capital $ 167,918 $ 142,056 $ 105,643 $ 83,297 $ 70,676
Property, plant and equipment, net 63,823 61,144 54,965 42,925 28,688
Total assets 279,480 247,254 191,600 150,765 122,521
Total debt 2,405 2,764 2,896 30 --
Total liabilities 35,134 36,665 30,317 21,814 20,224
Total stockholders' equity 243,591 210,589 161,282 128,951 102,297
-18-
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SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
2000 1999
------------------------------------------ ------------------------------------------
(Dollars in thousands, FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
except per share data) QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- --------- --------- --------- --------- ---------
Net sales $ 85,599 $ 101,048 $ 97,826 $ 84,615 $ 81,218 $ 88,808 $ 83,753 $ 74,661
Cost of sales 57,478 60,370 58,658 50,800 48,179 52,359 49,089 46,212
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit 28,121 40,678 39,168 33,815 33,039 36,449 34,664 28,449
Selling expense 9,323 9,806 9,729 8,553 8,141 8,123 8,042 7,898
General and
administrative expense 9,683 12,656 11,647 10,648 9,446 10,278 9,999 8,122
--------- --------- --------- --------- --------- --------- --------- ---------
Income from operations 9,115 18,216 17,792 14,614 15,452 18,048 16,623 12,429
Interest income, net 916 827 623 644 589 477 255 348
--------- --------- --------- --------- --------- --------- --------- ---------
Income before income taxes 10,031 19,043 18,415 15,258 16,041 18,525 16,878 12,777
Provision for income taxes 4,023 7,852 7,586 6,178 6,411 7,408 6,805 5,129
Minority interest (281) (274) (495) (196) -- -- -- --
---------- ---------- ---------- ---------- --------- --------- --------- ---------
Net income $ 6,289 $ 11,465 $ 11,324 $ 9,276 $ 9,630 $ 11,117 $ 10,073 $ 7,648
========= ========= ========= ========= ========= ========= ========= =========
Diluted net income per share
of common stock $ 0.51 $ 0.93 $ 0.92 $ 0.76 $ 0.78 $ 0.90 $ 0.82 $ 0.63
========= ========= ========= ========= ========= ========= ========= =========
The Company's results of operations fluctuate from quarter to quarter. The
fluctuations are caused by various factors, primarily the increase in
construction activity during warmer months of the year.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Certain matters discussed below are forward-looking statements that involve
risks and uncertainties, certain of which are discussed in this and in other
reports filed by the Company with the Securities and Exchange Commission. Actual
results might differ materially from results suggested by any forward-looking
statements in this report.
The following is a discussion and analysis of the consolidated financial
condition and results of operations for the Company for the years ended December
31, 2000, 1999 and 1998, and of certain factors that may affect the Company's
prospective financial condition and results of operations. The following should
be read in conjunction with the Consolidated Financial Statements and related
Notes appearing elsewhere herein.
OVERVIEW
Annual net sales of the Company increased 32.3% to $369.1 million in 2000 from
$279.1 million in 1998. 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 in 2000 from 1998 in all regions of the United States, with above
average rates of growth in California. Expansion into overseas markets also
contributed to the net sales growth over the last three years. For the year
ended December 31, 2000, gross profit margin decreased to 38.4%, from 40.4% in
1999 and 39.1% in 1998. The decrease was primarily due to LIFO charges in 2000
as well as increased costs related to slow moving inventory reserves. Income
from operations as a percentage of net sales decreased to 16.2% in 2000 from
19.1% in 1999 and 18.4% in 1998.
-19-
20
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,
--------------------------------------------
2000 1999 1998
--------- -------- ---------
Net sales 100.0% 100.0% 100.0%
Cost of sales 61.6% 59.6% 60.9%
--------- -------- ---------
Gross profit 38.4% 40.4% 39.1%
Selling expense 10.1% 9.8% 8.9%
General and administrative expense 12.1% 11.5% 11.9%
--------- -------- ---------
Income from operations 16.2% 19.1% 18.4%
Interest income, net 0.8% 0.5% 0.3%
--------- -------- ---------
Income before income taxes 17.0% 19.6% 18.7%
Provision for income taxes 6.9% 7.9% 7.5%
Minority interest (0.3%) -- --
---------- -------- ---------
Net income 10.4% 11.7% 11.2%
========= ======== =========
COMPARISON OF THE YEARS ENDED DECEMBER 31, 2000 AND 1999
Net Sales
Net sales increased 12.4% to $369.1 million in 2000 from $328.4 million in 1999.
Net sales of Simpson Strong-Tie's products increased 16.4% to $303.8 million in
2000 from $260.9 million in 1999, while net sales of Simpson Dura-Vent's
products decreased by 3.2% to $65.3 million in 2000 from $67.5 million in 1999.
SDV accounted for approximately 17.7% of the Company's total net sales in 2000,
a decrease from 20.6% in 1999. The increase in net sales at SST resulted from an
increase in sales volume and a small increase in average prices, while the
decrease in net sales at SDV resulted from a decrease in sales volume, offset
slightly by an increase in average prices. Most of the Company's sales growth
occurred domestically, particularly in California. International sales
contributed to the annual increase, due in part to the acquisition of Furfix in
the third quarter of 1999. See "Item 1. Business. Acquisitions and Expansion
into New Markets." Contractor distributors and home centers were the fastest
growing connector sales channels. The sales increase was broad based across most
of SST's major product lines. SST's Strong-Wall and Anchor Systems product lines
had the highest growth rates. With the exception of pellet vent products, sales
in 2000 of all of SDV's major product lines declined compared to sales in 1999.
Gross Profit
Gross profit increased 6.9% to $141.8 million in 2000 from $132.6 million in
1999. As a percentage of net sales, gross profit decreased to 38.4% in 2000 from
40.4% in 1999. This decrease was primarily due to a LIFO charge of approximately
$1.7 million in 2000, compared to a LIFO gain of approximately $1.9 million in
1999, as well as increased costs related to slow moving inventory reserves.
Selling Expense
Selling expense increased 16.2% to $37.4 million in 2000 from $32.2 million in
1999. The increase was primarily due to higher personnel costs related to the
increase in the number of sales and merchandising personnel, particularly those
associated with selling the Anchor Systems product line, as well as increased
promotional expenses.
General and Administrative Expense
General and administrative expenses increased 17.9% to $44.6 million in 2000
from $37.8 million in 1999, and increased as a percentage of net sales to 12.1%
in 2000 from 11.5% in 1999. The increase was primarily due to higher personnel
and other administrative overhead costs, including costs associated with the
operation of Keybuilder.com and the acquisitions of Furfix in 1999 and ATS and
Masterset in 2000. See "Item 1. Business.
Acquisitions and Expansion into New Markets." Cash profit sharing expenses also
increased relative to 1999 as a result of higher operating income through the
first nine months of 2000.
-20-
21
European Operations
For its combined European operations, the Company recorded an after-tax net loss
of $2.3 million in 2000, including $2.1 million in intercompany interest
charges, compared to after-tax net losses of $2.4 million in 1999. These losses
are primarily associated with the Company's UK operations. Amortization of the
intangible assets associated with the acquisition of Furfix as well as
depreciation on capital equipment and other administrative 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
2002.
In January 2001, Simpson Strong-Tie International, Inc. ("SSTI"), a subsidiary
of the Company, purchased 100% of the shares of BMF Bygningsbeslag A/S ("BMF")
of Denmark. The purchase price was approximately $12.8 million in cash with an
additional amount of approximately $2.6 million possible based on operating
performance. See "Item 1. Business. Acquisitions and Expansion into New
Markets." BMF is a leading connector manufacturer in northern and central
Europe.
Other Information
In July 2000, Simpson Strong-Tie purchased the assets of Anchor Tiedown Systems,
Inc. ("ATS"). ATS manufactures and distributes the MBR product line used to
anchor multi-story buildings with a threaded rod hold down system. The purchase
price was approximately $4.6 million in cash. In December 2000, SST purchased
the assets of Masterset Fastening Systems, Inc. ("Masterset") for approximately
$2.3 million in cash plus an earnout of up to $0.3 million. Masterset sells a
quality system of specially designed powder actuated fasteners and installation
tools.
In the first quarter of 2000, Simpson Strong-Tie and Keymark Enterprises, Inc.,
("Keymark") formed Keybuilder.com, LLC to develop software and services that can
link designers, engineers and building material suppliers and assist engineers
in the design and construction of residential structures. Effective January 1,
2001, the Company, through the exercise of an option, acquired 30% of Keymark
Enterprises, LLC, a successor to a portion of the business of Keymark. Neither
Keybuilder.com, LLC nor Keymark Enterprises, LLC has or in the foreseeable
future is expected to generate significant revenues or profits. The Company
hopes that the software that is developed by Keymark Enterprises, LLC will also
benefit SST's future connector sales through continued specification of its
products. The Company has not committed to investing additional money on this
project.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1999 AND 1998
Net Sales
Net sales increased 17.7% to $328.4 million in 1999 from $279.1 million in 1998.
Net sales of Simpson Strong-Tie's products increased 18.4% to $260.9 million in
1999 from $220.3 million in 1998, while net sales of Simpson Dura-Vent's
products increased by 14.9% to $67.5 million in 1999 from $58.8 million in 1998.
SDV accounted for approximately 20.6% of the Company's total net sales in 1999,
a decrease from 21.1% in 1998. The increases in net sales at both SST and SDV
resulted from increases in sales volume, with an overall decrease in average
prices. Most of the sales growth occurred domestically, particularly in
California and the midwestern and southeastern regions of the country.
International sales grew at approximately the same rate as the rest of the
Company, partially due to the acquisition of Furfix Products Limited and Easy
Arches Limited (together, "Furfix"), in the third quarter of 1999. See "Item 1.
Business. Acquisitions and Expansion into New Markets." Home centers were the
fastest growing connector sales channel. The sales increase was broad based
across most of SST's major product lines. Anchor Systems products had the
highest growth rate in sales and SST's new Strong-Wall product line also
experienced strong sales growth. Sales of most of SDV's major product lines
increased in 1999 compared to 1998, led by above average growth rates for its
chimney products and Direct-Vent product lines.
Gross Profit
Gross profit increased 21.6% to $132.6 million in 1999 from $109.0 million in
1998. As a percentage of net sales, gross profit increased to 40.4% in 1999 from
39.1% in 1998. This increase resulted from an increase in the LIFO gain to $1.9
in 1999 from $0.5 million in 1998, as well as lower overall product costs.
-21-
22
Selling Expense
Selling expense increased 30.3% to $32.2 million in 1999 from $24.7 million in
1998. The increase was primarily due to higher promotional expenses, as well as
to higher personnel costs, including those associated with the increase in the
number of sales and merchandising personnel.
General and Administrative Expense
General and administrative expenses increased 14.0% to $37.8 million in 1999
from $33.1 million in 1998, but decreased as a percentage of net sales to 11.5%
in 1999 from 11.9% in 1998. The increase in these expenses was primarily due to
increased cash profit sharing, which resulted from higher operating profit, and
other administrative overhead costs.
European Operations
In August 1999, Simpson Strong-Tie International, Inc. ("SSTI"), a subsidiary of
the Company, purchased the assets of Furfix which manufactures a line of
structural connectors for the wood and masonry construction markets in the
United Kingdom and Europe. The purchase price was approximately $7.8 million in
cash plus an earnout based on future operating performance. Included in the
purchase price were costs associated with the closure of Furfix's existing
facility and integration into SSTI's facility in Tamworth, England.
For its combined European operations, including the operations of Furfix, the
Company recorded an after-tax net loss of $2.4 million in 1999, including $1.9
million in intercompany interest charges, compared to after-tax net losses of
$2.3 million in 1998. These losses are primarily associated with the Company's
UK operations. Depreciation on purchased capital equipment and administrative
and other overhead costs incurred related to the growing operations contributed
significantly to the losses.
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, 2000, the Company has relied primarily on internally
generated funds to finance these needs. The Company's working capital
requirements are seasonal with the highest working capital needs typically
occurring in the second and third quarters of the year. Cash and cash
equivalents were $59.4 million and $54.5 million at December 31, 2000 and 1999,
respectively. Working capital was $167.9 million and $142.1 million at December
31, 2000 and 1999, respectively. As of December 31, 2000, the Company had
approximately $2.4 million in debt outstanding and had available to it unused
credit facilities of approximately $21.0 million.
The Company had cash flows from operating activities of $30.9 million, $36.0
million and $34.7 million for 2000, 1999 and 1998, respectively. In 2000, cash
was provided by net income, before removing Keymark's share of the loss related
to the Keybuilder.com, LLC joint venture, of $37.1 million and noncash expenses,
such as depreciation and amortization, of $13.1 million. Operating cash flows
were also increased by increases in trade accounts payable and accrued
liabilities, totaling approximately $3.6 million. The Company's primary
operating cash flow requirements resulted from increased levels of inventory and
accounts receivable that were required as the Company's sales increased. In
2000, 1999 and 1998, the Company used cash of $14.1 million, $23.9 million and
$10.8 million, respectively, to fund inventory and accounts receivable
requirements. Prepayment of income taxes payable, increased deferred taxes and a
decreased amount due for accrued cash profit sharing and commissions in the
fourth quarter of 2000 also accounted for approximately $7.6 million cash used.
The balance of the cash used in 2000 resulted from changes in the other current
asset and liability accounts.
Cash used in investing activities was $20.5 million, $23.3 million and $20.0
million for 2000, 1999 and 1998, respectively. Asset acquisitions, primarily
related to the purchase of ATS and Masterset, and capital expenditures related
primarily to expanding capacity, decreased to $20.7 million in 2000 from $23.6
million in 1999. In 2000, approximately $2.5 million of such capital
expenditures was used for real estate and related purchases.
Financing activities used net cash of $5.3 million in 2000 and provided $4.4
million and $3.4 million in 1999 and 1998, respectively. In 2000, cash was used
primarily to repurchase the Company's Common Stock on the open
-22-
23
market. Offsetting the buyback, approximately $0.9 million in cash was provided
by the issuance of Common Stock through the exercise of stock options by
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 at least November 2001, and other available financing will be sufficient
for the Company's working capital needs and planned capital expenditures through
at least 2001.
INFLATION
The Company believes that the effect of inflation on the Company has not been
material in recent years, as inflation rates have remained low.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
-23-
24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
SIMPSON MANUFACTURING CO., INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Statements
Report of Independent Accountants..................................... 25
Consolidated Balance Sheets at December 31, 2000 and 1999............. 26
Consolidated Statements of Operations for the years ended
December 31, 2000, 1999 and 1998.................................... 27
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1998, 1999 and 2000.................................... 28
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998.................................... 29
Notes to the Consolidated Financial Statements........................ 30
Financial Statement Schedule
Schedule II -- Valuation and Qualifying Accounts...................... 43
-24-
25
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Simpson Manufacturing Co., Inc.:
In our opinion, the accompanying consolidated financial statements listed in the
index on page 24 of this Form 10-K present fairly, in all material respects, the
financial position of Simpson Manufacturing Co., Inc. and its subsidiaries at
December 31, 2000 and 1999, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2000, in
conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement schedule listed in
the accompanying index presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and the financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and the
financial statement schedule based on our audits. We conducted our audits of
these financial statements in accordance with auditing standards generally
accepted in the United States of America which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
/s/PricewaterhouseCoopers LLP
San Francisco, California
February 9, 2001, except for Note 15
for which the date is March 9, 2001
-25-
26
SIMPSON MANUFACTURING CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
---------------------------------
2000 1999
------------- -------------
ASSETS
Current assets
Cash and cash equivalents $ 59,417,658 $ 54,509,610
Trade accounts receivable, net 45,584,186 42,420,223
Inventories 85,112,695 72,751,245
Deferred income taxes 5,487,254 4,745,534
Other current assets 5,040,017 1,323,215
------------- -------------
Total current assets 200,641,810 175,749,827
Property, plant and equipment, net 63,822,513 61,143,524
Investments 354,414 374,455
Other noncurrent assets 14,660,979 9,986,187
------------- -------------
Total assets $ 279,479,716 $ 247,253,993
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable and current portion of long-term debt $ 335,754 $ 349,541
Trade accounts payable 14,630,941 12,780,621
Accrued liabilities 9,373,007 7,819,155
Accrued profit sharing trust contributions 3,929,043 3,504,286
Accrued cash profit sharing and commissions 2,979,060 4,531,861
Accrued workers' compensation 1,475,764 1,345,764
Income taxes payable -- 3,362,254
------------- -------------
Total current liabilities 32,723,569 33,693,482
Long-term debt, net of current portion 2,069,028 2,414,562
Long-term liabilities 341,600 556,783
------------- -------------
Total liabilities 35,134,197 36,664,827
------------- -------------
Minority interest in consolidated subsidiaries 754,278 --
------------- -------------
Commitments and contingencies (Note 9)
Stockholders' equity
Preferred Stock, par value $0.01; authorized
shares, 5,000,000; issued and outstanding
shares, none -- --
Common Stock, par value $0.01; authorized
shares, 20,000,000; issued and
outstanding shares, 11,966,732 and 12,018,839 at
December 31, 2000 and 1999, respectively 40,968,501 44,716,488
Retained earnings 204,811,703 166,457,600
Accumulated other comprehensive income (2,188,963) (584,922)
------------- -------------
Total stockholders' equity 243,591,241 210,589,166
------------- -------------
Total liabilities and stockholders' equity $ 279,479,716 $ 247,253,993
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
-26-
27
SIMPSON MANUFACTURING CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
----------------------------------------------------
2000 1999 1998
------------- ------------- -------------
Net sales $ 369,087,813 $ 328,439,897 $ 279,081,489
Cost of sales 227,306,484 195,839,260 170,044,933
------------- ------------- -------------
Gross profit 141,781,329 132,600,637 109,036,556
------------- ------------- -------------
Operating expenses
Selling 37,409,957 32,204,008 24,706,371
General and administrative 44,633,965 37,845,480 33,100,454
------------- ------------- -------------
82,043,922 70,049,488 57,806,825
------------- ------------- -------------
Income from operations 59,737,407 62,551,149 51,229,731
Interest income, net 3,009,974 1,669,243 939,792
------------- ------------- -------------
Income before income taxes 62,747,381 64,220,392 52,169,523
Provision for income taxes 25,639,000 25,753,000 21,028,000
Minority interest (1,245,722) -- --
------------- ------------- -------------
Net income $ 38,354,103 $ 38,467,392 $ 31,141,523
============= ============= =============
Net income per common share
Basic $ 3.19 $ 3.25 $ 2.69
Diluted $ 3.12 $ 3.14 $ 2.58
Weighted average number of shares outstanding
Basic 12,022,704 11,837,315 11,560,454
Diluted 12,294,922 12,233,865 12,048,197
The accompanying notes are an integral part of these consolidated financial
statements.
-27-
28
SIMPSON MANUFACTURING CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
ACCUMULATED
OTHER
COMMON STOCK RETAINED COMPREHENSIVE
SHARES AMOUNT EARNINGS INCOME TOTAL
----------- ----------- ------------ ----------- -----------
Balance, January 1, 1998 11,517,113 $32,377,563 $ 96,848,685 $ (275,725) $128,950,523
Comprehensive income:
Net income -- -- 31,141,523 -- 31,141,523
Other comprehensive income:
Translation adjustment -- -- -- (155,965) (155,965)
------------
Comprehensive income 30,985,558
Options exercised 57,147 576,343 -- -- 576,343
Tax benefit of options exercised -- 600,045 -- -- 600,045
Common stock issued at
$33.3125 per share 5,100 169,894 -- -- 169,894
----------- ----------- ------------ ----------- -----------
Balance, December 31, 1998 11,579,360 33,723,845 127,990,208 (431,690) 161,282,363
Comprehensive income:
Net income -- -- 38,467,392 -- 38,467,392
Other comprehensive income:
Translation adjustment -- -- -- (153,232) (153,232)
------------
Comprehensive income 38,314,160
Options exercised 436,279 4,568,970 -- -- 4,568,970
Tax benefit of options exercised -- 6,303,873 -- -- 6,303,873
Common stock issued at
$37.4375 per share 3,200 119,800 -- -- 119,800
----------- ----------- ------------ ----------- ------------
Balance, December 31, 1999 12,018,839 44,716,488 166,457,600 (584,922) 210,589,166
Comprehensive income:
Net income -- -- 38,354,103 -- 38,354,103
Other comprehensive income:
Translation adjustment -- -- -- (1,604,041) (1,604,041)
------------
Comprehensive income 36,750,062
Options exercised 77,673 902,898 -- -- 902,898
Tax benefit of options exercised -- 1,054,238 -- -- 1,054,238
Buyback of common stock (134,280) (5,901,998) -- -- (5,901,998)
Common stock issued at
$43.75 per share 4,500 196,875 -- -- 196,875
----------- ----------- ------------ ----------- ------------
Balance, December 31, 2000 11,966,732 $40,968,501 $204,811,703 $(2,188,963) $243,591,241
=========== =========== ============ =========== ============
The accompanying notes are an integral part of these consolidated financial
statements.
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29
SIMPSON MANUFACTURING CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
--------------------------------------------------
2000 1999 1998
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 38,354,103 $ 38,467,392 $ 31,141,523
------------ ------------ ------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Loss (gain) on sale of capital equipment (55,969) (44,649) 24,226
Depreciation and amortization 13,135,982 10,861,925 8,257,937
Minority interest (1,245,722) -- --
Deferred income taxes and other long-term liabilities (1,362,889) (970,301) (505,434)
Equity in loss (income) of affiliates (23,195) 107,273 (9,000)
Noncash compensation related to stock plans 196,875 119,800 169,894
Changes in operating assets and liabilities, net of
effects of acquisitions:
Trade accounts receivable, net (2,510,320) (8,331,101) (9,463,554)
Inventories (11,573,449) (15,563,766) (1,357,108)
Other current assets (1,233,190) (40,401) 440,773
Other noncurrent assets (738,506) (1,322,851) (509,138)
Trade accounts payable 2,023,783 1,019,384 2,948,041
Accrued liabilities 1,620,192 2,227,864 84,388
Accrued profit sharing trust contributions 431,918 330,924 286,487
Accrued cash profit sharing and commissions (1,552,527) 512,055 924,972
Accrued workers' compensation 130,000 466,492 220,000
Income taxes payable (4,726,708) 8,200,744 2,065,429
------------ ------------ ------------
Total adjustments (7,483,725) (2,426,608) 3,577,913
------------ ------------ ------------
Net cash provided by operating activities 30,870,378 36,040,784 34,719,436
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (14,421,672) (15,305,226) (20,057,435)
Proceeds from sale of capital equipment 188,809 263,158 57,069
Asset acquisitions, net of cash acquired and equity
interest already owned (6,250,783) (8,266,403) --
------------ ------------ ------------
Net cash used in investing activities (20,483,646) (23,308,471) (20,000,366)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of debt 148,310 266,700 3,019,247
Repayment of debt (495,833) (398,484) (152,966)
Buyback of common stock (5,901,998) -- --
Issuance of Company's common stock 902,898 4,568,970 576,343
------------ ------------ ------------
Net cash provided by (used in) financing activities (5,346,623) 4,437,186 3,442,624
------------ ------------ ------------
Effect of exchange rate changes on cash (132,061) (62,339) (177,933)
------------ ------------ ------------
Net increase in cash and cash equivalents 4,908,048 17,107,160 17,983,761
Cash and cash equivalents at beginning of period 54,509,610 37,402,450 19,418,689
------------ ------------ ------------
Cash and cash equivalents at end of period $ 59,417,658 $ 54,509,610 $ 37,402,450
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
CASH PAID DURING THE YEAR FOR
Interest, net of Amounts capitalized $ 235,584 $ 268,184 $ 180,607
============ ============ ============
Income taxes $ 31,321,526 $ 18,964,736 $ 18,660,244
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
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30
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. ("Simpson Strong-Tie") 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
shearwalls 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. Simpson Strong-Tie also
offers a line of adhesives, mechanical anchors and powder actuated tools for
concrete, masonry and steel.
The Company operates exclusively in the building products industry segment. The
Company's products are sold primarily throughout the United States of America.
Revenues have some geographic market concentration on the West Coast. A portion
of the Company's business is therefore dependent upon economic activity within
this region and market.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of Simpson
Manufacturing Co., Inc. and its subsidiaries. Investments in less than 50% owned
affiliates are accounted for using the equity method. All significant
intercompany transactions have been eliminated.
Cash Equivalents
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents.
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, Canada and South
America, where inventories of approximately $9,794,000 and $9,269,000 at
December 31, 2000 and 1999, 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.
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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
shorter of the expected life or the remaining term of the lease. Amortization of
intangible assets is computed using the straight-line method over the estimated
useful lives of the asset.
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 $2,226,000, $1,809,000
and $1,518,000 in 2000, 1999 and 1998, 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 operations in
Europe and Canada. Assets and liabilities denominated in foreign currencies are
translated using the exchange rate on the balance sheet date. Revenues and
expenses are translated using average exchange rates prevailing during the year.
The translation adjustment resulting from this process is shown separately as a
component of stockholders' equity. Foreign currency transaction gains or losses
are included in the determination of net income.
Common Stock
Subject to the rights of holders of any Preferred Stock that may be issued in
the future, holders of Common Stock are entitled to receive such dividends, if
any, as may be declared from time to time by the Board of Directors (the
"Board") out of legally available funds and in the event of liquidation,
dissolution or winding-up of the Company, to share ratably in all assets
available for distribution. The holders of Common Stock have no preemptive or
conversion rights. Subject to the rights of any Preferred Stock that may be
issued in the future, the holders of Common Stock are entitled to one vote per
share on any matter submitted to a vote of the stockholders, except that, on
giving notice as required by law and subject to compliance with other statutory
conditions, stockholders may cumulate their votes in an election of directors,
and each stockholder may give one candidate a number of votes equal to the
number of directors to be elected multiplied by the number of shares held by
such stockholder or may distribute such stockholder's votes on the same
principle among as many candidates as such stockholder thinks fit. There are no
redemption or sinking fund provisions applicable to the Common Stock.
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In 1999, the Company declared a dividend distribution of one Right to purchase
Series A Participating Preferred Stock per share of Common Stock. The Rights
will be exercisable, unless redeemed earlier by the Company, if a person or
group acquires, or obtains the right to acquire, 15% or more of the outstanding
shares of Common Stock or commences a tender or exchange offer that would result
in it acquiring 15% or more of the outstanding shares of Common Stock, either
event occurring without the prior consent of the Company. The amount of Series A
Participating Preferred Stock that the holder of a Right is entitled to receive
and the purchase price payable on exercise of a Right are both subject to
adjustment. Any person or group that acquires 15% or more of the outstanding
shares of Common Stock without the prior consent of the Company would not be
entitled to this purchase. Any stockholder who holds 25% or more of the
Company's Common Stock on the date of the Rights distribution would not be
treated as having acquired 15% or more of the outstanding shares unless such
stockholder's ownership is increased to more than 40% of the outstanding shares.
The Rights will expire on July 29, 2009, or they may be redeemed by the Company
at one cent per Right prior to that date. The Rights do not have voting or
dividend rights and, until they become exercisable, have no dilutive effect on
the earnings of the Company. One million shares of the Company's Preferred Stock
have been designated Series A Participating Preferred Stock and reserved for
issuance on exercise of the Rights. No event during 2000 made the Rights
exercisable.
Preferred Stock
The Board has the authority to issue the authorized and unissued Preferred Stock
in one or more series with such designations, rights and preferences as may be
determined from time to time by the Board. Accordingly, the Board is empowered,
without stockholder approval, to issue Preferred Stock with dividend,
liquidation, conversion, voting or other rights that could adversely affect the
voting power or other rights of the holders of the Company's Common Stock.
Net Income per Common Share
Basic net income per common share is computed based upon the weighted average
number of common shares outstanding. Common equivalent shares, using the
treasury stock method, are included in the diluted per-share calculations for
all periods when the effect of their inclusion is dilutive.
The following is a reconciliation of basic earnings per share ("EPS") to diluted
EPS:
2000 1999
------------------------------------------ ------------------------------------------
PER PER
INCOME SHARES SHARE INCOME SHARES SHARE
---------- ---------- ---------- ----------- ---------- ----------
BASIC EPS
Income available to
common stockholders $38,354,103 12,022,704 $ 3.19 $38,467,392 11,837,315 $ 3.25
EFFECT OF DILUTIVE SECURITIES
Stock options -- 272,218 (0.07) -- 396,550 (0.11)
----------- ---------- ---------- ----------- ---------- ----------
DILUTED EPS
Income available to
common stockholders $38,354,103 12,294,922 $ 3.12 $38,467,392 12,233,865 $ 3.14
=========== ========== ========== =========== ========== ==========
1998
------------------------------------------
PER
INCOME SHARES SHARE
---------- ---------- ----------
BASIC EPS
Income available to
common stockholders $31,141,523 11,560,454 $ 2.69
EFFECT OF DILUTIVE SECURITIES
Stock options -- 487,743 (0.11)
---------- ---------- ----------
DILUTED EPS
Income available to
common stockholders $31,141,523 12,048,197 $ 2.58
=========== ========== ==========
Comprehensive Income
Comprehensive income, which is included in the consolidated statement of
stockholders' equity, is defined as net income and other comprehensive income.
Other comprehensive income includes changes in foreign currency translation
adjustments recorded directly into stockholders' equity.
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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 2000, Financial Accounting Standards Board ("FASB") statement No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities--an amendment of FASB statement No. 133" was issued. FASB statement
No. 133 was amended by FASB statement No. 137, which deferred the effective date
of implementation to the first quarter of fiscal years beginning after June 15,
2000. FASB statement No. 133 requires companies to record derivative financial
instruments on the balance sheet as assets or liabilities, as appropriate, at
fair value. Gains or losses resulting from changes in the fair value of those
derivatives are accounted for depending on the use of the derivative and whether
it qualifies for hedge accounting. The Company does not believe that the
implementation of this standard will have a material effect on its financial
position or results of operations.
Reclassifications
Certain prior year amounts have been reclassified to conform to the 2000
presentation with no effect on net income or retained earnings as previously
reported.
2. Acquisitions
In July 2000, Simpson Strong-Tie purchased the assets of Anchor Tiedown Systems,
Inc. ("ATS"). ATS manufactures and distributes a product line used to anchor
multi-story buildings with a threaded rod hold down system. The purchase price
was approximately $4.6 million in cash. In December 2000, Simpson Strong-Tie
purchased the assets of Masterset Fastening Systems, Inc. ("Masterset") for
approximately $2.3 million in cash plus an earnout of up to $0.3 million.
Masterset sells a system of specially designed powder actuated fasteners and
installation tools.
In August 1999, Simpson Strong-Tie International, Inc. ("SSTI"), a subsidiary of
the Company, purchased the assets of Furfix Products Limited and Easy Arches
Limited (together, "Furfix"), which manufacture a line of structural connectors
for the wood and masonry construction markets in the United Kingdom and Europe.
The purchase price was approximately $7.8 million in cash plus an earnout based
on future operating performance. Included in the purchase price were costs
associated with the closure of Furfix's existing facility and integration into
SSTI's facility in Tamworth, England.
3. Trade Accounts Receivable
Trade accounts receivable consist of the following:
DECEMBER 31,
-------------------------------
2000 1999
------------ ------------
Trade accounts receivable $ 47,119,344 $ 43,952,137
Allowance for doubtful accounts (1,201,289) (1,203,147)
Allowance for sales discounts (333,869) (328,767)
------------ ------------
$ 45,584,186 $ 42,420,223
============ ============
The Company sells product on credit and generally does not require collateral.
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4. Inventories
The components of inventories consist of the following:
DECEMBER 31,
-------------------------------
2000 1999
-------------- -------------
Raw materials $ 26,883,866 $ 22,816,584
In-process products 10,863,721 7,593,038
Finished products 47,365,108 42,341,623
-------------- -------------
$ 85,112,695 $ 72,751,245
============== =============
At December 31, 2000, the replacement value of LIFO inventories exceeded LIFO
cost by approximately $157,000. At December 31, 1999, LIFO cost exceeded the
replacement value of LIFO inventories by approximately $1,503,000.
5. Property, Plant and Equipment, net
Property, plant and equipment consists of the following:
DECEMBER 31,
-------------------------------
2000 1999
-------------- -------------
Land $ 4,454,322 $ 4,316,015
Buildings and site improvements 27,634,848 26,724,935
Leasehold improvements 4,042,063 3,942,613
Machinery and equipment 88,221,556 81,147,265
-------------- -------------
124,352,789 116,130,828
Less accumulated depreciation and amortization (69,293,151) (58,949,908)
--------------- --------------
55,059,638 57,180,920
Capital projects in progress 8,762,875 3,962,604
-------------- -------------
$ 63,822,513 $ 61,143,524
============== =============
Included in property, plant and equipment at December 31, 2000 and 1999, are
fully depreciated assets with an original cost of approximately $26,475,000 and
$24,453,000, respectively. These fully depreciated assets are still in use in
the Company's operations.
6. Investments
The Company's 49% investment in Bulldog-Simpson GmbH is accounted for using the
equity method. The Company's equity in the earnings or losses of its equity
investments was not material in any of the three years in the period ended
December 31, 2000.
7. Accrued Liabilities
Accrued liabilities consist of the following:
DECEMBER 31,
-------------------------------
2000 1999
-------------- -------------
Sales incentive and advertising allowances $ 4,372,473 $ 3,138,607
Vacation liability 1,713,400 1,505,409
Other 3,287,134 3,175,139
-------------- -------------
$ 9,373,007 $ 7,819,155
============== =============
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8. Debt
The outstanding debt at December 31, 2000 and 1999, and the available credit at
December 31, 2000, consisted of the following:
AVAILABLE ON
CREDIT FACILITY DEBT OUTSTANDING
AT DECEMBER 31, AT DECEMBER 31,
-------------------------------
2000 2000 1999
------------ ------------ ------------
Revolving line of credit, interest at bank's
reference rate less 0.5% (at December 31,
2000, the bank's reference rate less 0.5%
was 9.0%), matures November 2001,
commitment fees are paid at the annual
rate of 0.125% on the unused portion of
the facility $ 12,243,241 $ -- $ --
Revolving term commitment, interest at
bank's prime rate less 0.5% (at December
31, 2000, the bank's prime rate less 0.5%
was 9.0%), matures September 2002,
commitment fees are paid at the annual
rate of 0.125% on the unused portion of
the facility 8,344,838 -- --
Revolving line of credit, interest rate at
the bank's base rate of interest plus 2%
(at December 31, 2000, this rate was
8.0%), matures July 2001, has an annual
commission charge of 0.45% 373,190 -- --
Term loan, interest at LIBOR plus 1.375% (at
December 31, 2000, LIBOR plus 1.375% was
8.0213%), expires May 2008 -- 2,250,000 2,550,000
Term loan, fixed interest rate of 5.3%,
expires September 2006 -- 119,028 164,562
Standby letter of credit facilities 2,411,921 -- --
Other notes payable -- 35,754 49,541
------------ ------------ ------------
23,373,190 2,404,782 2,764,103
Less current portion (335,754) (349,541)
------------ ------------
$ 2,069,028 $ 2,414,562
============ ============
Less standby letters of credit issued and outstanding (2,411,921)
Net credit available $ 20,961,269
============
The revolving lines of credit are guaranteed by the Company and its
subsidiaries. At December 31, 2000, the Company had three outstanding standby
letters of credit. Two of these letters of credit, in the aggregate amount of
$1,710,324, were used to support the Company's self-insured workers'
compensation insurance requirements. The third, in the amount of $701,597, was
used to guarantee performance on the Company's leased facility in the UK. These
letters of credit mature between November 2001 and September 2002.
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9. Commitments and Contingencies
Leases
Certain properties occupied by the Company are leased. The leases expire at
various dates through 2012 and generally require the Company to assume the
obligations for insurance, property taxes, and maintenance of the facilities.
Some of the properties were leased from partnerships formed by certain current
and former Company stockholders, directors, officers and employees. Rental
expenses under these related party leases were as follows:
YEARS ENDED DECEMBER 31,
--------------------------------------------
2000 1999 1998
------------- ------------- --------------
Simpson Investment Company $ 197,594 $ 185,100 $ 185,100
Doolittle Investors 253,080 253,080 239,400
Vacaville Investors 437,640 437,640 437,640
Vicksburg Investors 367,013 354,868 353,411
Columbus Westbelt Investment Co. 592,381 581,064 581,064
------------- ------------- --------------
$ 1,847,708 $ 1,811,752 $ 1,796,615
============= ============= ==============
Rental expense for 2000, 1999 and 1998 with respect to all other leased property
was approximately $2,658,000, $2,362,000 and $2,285,000, respectively.
At December 31, 2000, minimum rental commitments under all noncancelable leases
are as follows:
2001 $ 6,035,799
2002 5,083,545
2003 4,608,552
2004 3,977,430
2005 3,818,462
Thereafter 8,768,886
-------------
$ 32,292,674
=============
Some of these minimum rental commitments that involve the related parties
described above, contain renewal options and provide for periodic rental
adjustments based on changes in the consumer price index or current market
rental rates.
The nominal term of SSTI's lease in the United Kingdom is 25 years but includes
an option to terminate without penalty in either the fifteenth or twentieth year
upon one year written notice by SSTI. As such, future minimum rental payments
associated with the first 15 years of this lease are included in minimum rental
commitments in the table above.
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Environmental
At two of the Company's operating facilities, evidence of contamination
resulting from activities of prior occupants was discovered. The Company took
certain remedial actions at one facility in 1990 and continues to monitor the
condition of this property. The Company does not believe that any further action
will be required. The Company has been informed by the lessor of the other
facility, Vicksburg Investors, that appropriate remedial action has been taken.
The Company does not believe that either of these matters will have a material
adverse effect on its financial condition or results of operations.
Litigation
From time to time, the Company is involved in litigation that it considers to be
in the normal course of its business. No such litigation within the last five
years resulted in any material loss. The Company is not engaged in any legal
proceedings as of the date hereof, which the Company expects individually or in
the aggregate to have a material adverse effect on the Company's financial
condition or results of operations.
10. Income Taxes
The provision for income taxes consists of the following:
YEARS ENDED DECEMBER 31,
-------------------------------------------------
2000 1999 1998
------------- ------------- --------------
Current
Federal $ 21,885,000 $ 22,509,000 $ 18,075,000
State 4,901,000 4,354,000 3,345,000
Foreign 4,000 97,000 82,000
Deferred (1,151,000) (1,207,000) (474,000)
-------------- -------------- ---------------
$ 25,639,000 $ 25,753,000 $ 21,028,000
============= ============= ==============
Reconciliations between the statutory federal income tax rates and the Company's
effective income tax rates as a percentage of income before income taxes are as
follows:
YEARS ENDED DECEMBER 31,
--------------------------------------
2000 1999 1998
--------- -------- ---------
Federal tax rate 35.0% 35.0% 35.0%
State taxes, net of federal benefit 4.6% 4.3% 4.5%
Other 0.5% 0.8% 0.8%
--------- -------- ---------
Effective income tax rate 40.1% 40.1% 40.3%
========= ======== =========
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The tax effects of the significant temporary differences that constitute the
deferred tax assets and liabilities at December 31, 2000, 1999 and 1998, were as
follows:
YEARS ENDED DECEMBER 31,
----------------------------------------------
2000 1999 1998
----------- ---------- -----------
Current deferred tax assets
State tax $ 1,680,197 $1,488,904 $ 1,170,805
Compensation related to stock plans 83,375 46,728 128,657
Workers' compensation 584,912 298,808 115,436
Health claims 486,665 604,580 435,294
Vacation 642,637 555,420 399,472
Accounts receivable allowance 567,577 600,439 573,265
Inventory allowance 1,252,000 874,726 619,447
Sales incentive and advertising allowances 87,489 125,277 163,008
Other 102,402 150,652 144,215
----------- ---------- -----------
$ 5,487,254 $4,745,534 $ 3,749,599
=========== ========== ===========
Long-term deferred tax assets (liabilities)
Depreciation $ 1,377,291 $1,161,552 $ 911,723
Goodwill amortization 715,992 560,479 602,182
Other (484,595) (419,829) (421,710)
----------- ---------- -----------
$ 1,608,688 $1,302,202 $ 1,092,195
=========== ========== ===========
No valuation allowance has been recorded for deferred tax assets for the years
ended December 31, 2000, 1999 and 1998, due to the Company's taxable income in
2000 and prior years.
11. Profit Sharing and Pension Plans
The Company has five profit sharing plans covering substantially all salaried
employees and nonunion hourly employees. Two of the plans, covering U.S.
employees, provide for annual contributions in amounts that the Board of
Directors may authorize, subject to certain limitations, but in no event more
than the amounts permitted under the Internal Revenue Code as deductible
expense. The other three plans, covering the Company's European and Canadian
employees, require the Company to make contributions ranging from 3% to 15% of
the employees' compensation. The total cost for these profit sharing plans for
the years ended December 31, 2000, 1999 and 1998, was approximately $4,009,000,
$3,360,000 and $3,078,000, 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 $1,149,000, $977,000 and $809,000 for the years ended
December 31, 2000, 1999 and 1998, respectively.
12. Related Party Transactions
The Chairman and the President and Chief Executive Officer of the Company, who
are directors and significant stockholders of the Company, served as directors
and officers of the Simpson PSB Fund (a charitable organization) until October
1997. The Company contributed $75,496 to this organization in 1998. The Chairman
and the President and Chief Executive Officer of the Company were again
appointed as directors and officers of the Simpson PSB Fund in January 1999.
Refer to Note 9 regarding related party transactions involving Company leases.
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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 2000, 1999
and 1998 would have been:
YEARS ENDED DECEMBER 31,
------------------------------------------------
2000 1999 1998
------------- ------------- -------------
Net income, as reported $ 38,354,103 $ 38,467,392 $ 31,141,523
Pro forma 37,517,425 37,458,366 30,423,968
Diluted earnings per share, as reported 3.12 3.14 2.58
Pro forma 3.05 3.06 2.53
The fair value of each option granted was estimated on the date of grant using
the Black-Sholes option-pricing model with the following assumptions for 2000,
1999 and 1998, respectively: risk-free interest rate of 4.86%, 4.60% and 4.63%
for 2000, 1999 and 1998, respectively; no dividend yield for all years; expected
lives of 6.3 years for options committed to be granted for 2000 and 6.2 for
options granted for 1999 and 1998; and volatility of 29.7% for 2000, 30.4% for
1999 and 30.7% for 1998. The weighted average fair value per share of options
granted during 2000, 1999 and 1998 was $21.78, $17.49 and $15.09, 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. Last year, the Company met some of the operating goals established
for one of its stock option plans and has committed to grant options to purchase
7,000 shares for the year 2000. During 1999 and 1998, the Company met most of
the operating goals established for both of its stock option plans and
accordingly, and granted options to purchase 143,250 and 118,750 shares for 1999
and 1998, respectively. These options have an exercise price of $51.00 per share
for 2000, and an exercise price range of $38.94 to $48.13 per share for 1999 and
an exercise price range of $36.63 to $41.18 per share for 1998.
The following table summarizes the Company's stock option activity for the years
ended December 31, 2000, 1999 and 1998:
2000 1999 1998
--------------------------- --------------------------- ---------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
NON-QUALIFIED STOCK OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE
---------- ---------- ---------- ---------- ---------- ----------
Outstanding at beginning of year 738,990 $ 26.08 1,033,019 $ 17.05 978,917 $ 14.29
Granted 7,000 51.00 143,250 43.65 118,750 37.44
Exercised (77,673) 11.62 (436,279) 10.49 (57,147) 10.09
Forfeited (5,670) 37.93 (1,000) 33.90 (7,501) 31.37
---------- ---------- ----------
Outstanding at end of year 662,647 27.93 738,990 26.08 1,033,019 17.05
========== ========== ==========
The number of stock options exercisable at the end of 2000, 1999 and 1998 was
448,930, 414,817 and 740,638, respectively.
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40
The following table summarizes information about the Company's stock options
outstanding at December 31, 2000:
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, 2000 LIFE PRICE 31, 2000 PRICE
------------------------ ------------- ------------- ------------- ------------ ------------
$ 3.64 31,112 0.5 years $ 3.64 31,112 $ 3.64
$ 11.50 70,476 0.4 years 11.50 70,476 11.50
$10.00 to $11.28 46,208 1.1 years 10.23 46,208 10.23
$ 13.50 58,716 2.0 years 13.50 58,716 13.50
$23.00 to $29.25 90,054 3.0 years 23.08 84,152 23.11
$33.31 to $37.31 106,045 4.0 years 33.37 74,718 33.38
$36.63 to $41.18 112,493 5.0 years 37.45 50,934 37.43
$38.94 to $48.13 140,543 6.0 years 43.65 32,614 43.23
$ 51.00 7,000 7.0 years 51.00 -- --
------- ------------
$3.64 to $51.00 662,647 3.6 years 27.93 448,930 19.01
======= ============
The tax benefit to the Company from the exercise of stock options, a reduction
of the Company's income tax payable, was $1,054,238, $6,303,873 and $600,045 for
2000, 1999 and 1998, respectively.
The Company also maintains a Stock Bonus Plan whereby, for each ten years of
continuous employment with the Company, each employee who does not participate
in one of the Company's stock option plans receives 100 shares of common stock.
In 2000, 1999 and 1998, the Company committed to issue 2,700, 4,500 and 3,200
shares, respectively, which resulted in compensation charges of $210,359,
$353,149 and $203,500, respectively. The shares are issued in the year following
the year in which they are earned.
14. Segment Information
The Company is organized into two primary segments. The segments are defined by
types of products manufactured, marketed and distributed to the Company's
customers. The two product segments are construction connector products and
venting products. These segments are differentiated in several ways, including
the types of materials used, the production process, the distribution channels
used and the applications in which the products are used. Transactions between
the two segments were immaterial for each of the years presented.
The following table illustrates certain measurements used by management to
assess the performance of the segments described above as of December 31, 2000,
1999 and 1998, or for the years then ended:
CONNECTOR VENTING
2000 PRODUCTS PRODUCTS ALL OTHER TOTAL
- ------------------------------- ------------- ------------- ------------- -------------
Net sales $ 303,774,000 $ 65,314,000 $ -- $ 369,088,000
Income from operations 51,068,000 8,676,000 (7,000) 59,737,000
Depreciation and amortization 10,951,000 2,063,000 122,000 13,136,000
Capital expenditures and
acquisitions 18,277,000 2,226,000 169,000 20,672,000
Total assets 171,997,000 43,067,000 64,416,000 279,480,000
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41
CONNECTOR VENTING
1999 PRODUCTS PRODUCTS ALL OTHER TOTAL
- ------------------------------- ------------- ------------- ------------- -------------
Net sales $ 260,943,000 $ 67,497,000 $ -- $ 328,440,000
Income from operations 51,902,000 10,628,000 21,000 62,551,000
Depreciation and amortization 8,895,000 1,867,000 100,000 10,862,000
Capital expenditures and
acquisitions 21,642,000 1,930,000 -- 23,572,000
Total assets 148,328,000 38,828,000 60,098,000 247,254,000
CONNECTOR VENTING
1998 PRODUCTS PRODUCTS ALL OTHER TOTAL
- ------------------------------- ------------- ------------- ------------- -------------
Net sales $ 220,319,000 $ 58,762,000 $ -- $ 279,081,000
Income from operations 42,674,000 8,709,000 (153,000) 51,230,000
Depreciation and amortization 6,738,000 1,417,000 103,000 8,258,000
Capital expenditures and
acquisitions 11,509,000 8,548,000 -- 20,057,000
Total assets 115,507,000 35,095,000 40,998,000 191,600,000
Cash collected by the Company's subsidiaries is routinely transferred into the
Company's cash management accounts, and therefore, has been included in the
total assets of the segment entitled "All Other." Cash balances in this segment
were approximately $54,183,000, $53,682,000 and $36,433,000 as of December 31,
2000, 1999 and 1998, respectively.
The following table illustrates how the Company's net sales and long-lived
assets are distributed geographically as of December 31, 2000, 1999 and 1998, or
for the years then ended.
2000 1999 1998
----------------------------- ----------------------------- ----------------------------
NET LONG-LIVED NET LONG-LIVED NET LONG-LIVED
SALES ASSETS SALES ASSETS SALES ASSETS
-------------- ------------- ------------- ------------- ------------- -------------
United States $ 347,516,000 $ 64,615,000 $ 310,300,000 $ 55,097,000 $ 265,201,000 $ 50,753,000
Other countries 21,572,000 12,615,000 18,140,000 15,105,000 13,880,000 6,891,000
-------------- ------------- ------------- ------------- ------------- -------------
$ 369,088,000 $ 77,230,000 $ 328,440,000 $ 70,202,000 $ 279,081,000 $ 57,644,000
============== ============= ============= ============= ============= =============
Net sales and long-lived assets are attributable to the country where the
operations are located.
In 2000, net sales of approximately 12% were from one customer and were
attributable mostly to the Connector segment.
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15. Subsequent Events
In January 2001, SSTI acquired 100% of the shares of BMF Bygningsbeslag A/S
("BMF") of Denmark for $12.8 million in cash with an additional amount of
approximately $2.6 million possible based on operating performance. BMF
manufactures and distributes connector products in northern and central Europe.
Also in January 2001, the Company reached agreements to amended a certain
related party lease and to exercise an option to purchase the property which is
subject to another related party lease. Both of the transactions relate to
properties that are located in San Leandro, California. Both of the transactions
were unanimously approved by the outside members of the Board of Directors. The
Doolittle Investors lease was extended through December 31, 2009, and the option
to purchase the property from Simpson Investment Company has been exercised and
is expected to close in May 2001 (See Note 9).
The effect of these changes on the Company's future minimum rental commitments
is as follows:
Minimum Rental
Commitments at Revised Future
December 31, Effect of Minimum Rental
2000 Modifications Commitments
------------- ------------- -------------
2001 $ 6,035,799 $ (131,729) $ 5,904,070
2002 5,083,545 367,992 5,451,537
2003 4,608,552 367,992 4,976,544
2004 3,977,430 367,992 4,345,422
2005 3,818,462 367,992 4,186,454
Thereafter 8,768,886 1,471,968 10,240,854
------------- ------------- -------------
$ 32,292,674 $ 2,812,207 $ 35,104,881
============= ============= =============
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SCHEDULE II
SIMPSON MANUFACTURING CO., INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
ADDITIONS
---------------------------
CHARGED CHARGED
BALANCE AT TO COSTS TO OTHER BALANCE
BEGINNING AND ACCOUNTS -- AT END
CLASSIFICATION OF YEAR EXPENSES WRITE-OFFS DEDUCTIONS OF YEAR
-------------- ----------- ----------- ----------- ----------- -----------
YEAR ENDED DECEMBER 31, 2000
Allowance for doubtful accounts $ 1,203,147 $ 684,356 $ -- $ 686,214 $ 1,201,289
Allowance for obsolete inventory 1,641,746 2,439,787 -- 1,080,741 $ 3,000,792
YEAR ENDED DECEMBER 31, 1999
Allowance for doubtful accounts 1,173,656 646,236 -- 616,745 1,203,147
Allowance for obsolete inventory 944,331 967,074 -- 269,659 1,641,746
YEAR ENDED DECEMBER 31, 1998
Allowance for doubtful accounts 1,539,691 767,339 -- 1,133,374 1,173,656
Allowance for obsolete inventory 742,578 212,334 -- 10,581 944,331
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information required by this Item will be contained in the Registrant's proxy
statement for the annual meeting of stockholders to be held on May 18, 2001, to
be filed not later than 120 days following the end of the Registrant's fiscal
year ended December 31, 2000, which will set forth certain information with
respect to the directors and executive officers of the Registrant and is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
Information required by this Item will be contained in the Registrant's proxy
statement for the annual meeting of stockholders to be held on May 18, 2001, to
be filed not later than 120 days following the end of the Registrant's fiscal
year ended December 31, 2000, which will set forth certain information with
respect to executive compensation of the Registrant and is incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information required by this Item will be contained in the Registrant's proxy
statement for the annual meeting of stockholders to be held on May 18, 2001, to
be filed not later than 120 days following the end of the Registrant's fiscal
year ended December 31, 2000, which will set forth certain information with
respect to security ownership of certain beneficial owners and management of the
Registrant and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information required by this Item will be contained in the Registrant's proxy
statement for the annual meeting of stockholders to be held on May 18, 2001, to
be filed not later than 120 days following the end of the Registrant's fiscal
year ended December 31, 2000, which will set forth certain information with
respect to certain relationships and related transactions of the Registrant and
is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
a. Exhibits
10.1 Asset Purchase Agreement, dated November 17, 2000, between
Masterset Fastening Systems, Inc., Brian Berry, John E.
Swiggard, Manzo Associates Inc. and Leo V. Peterson and
Simpson Strong-Tie Company Inc.
10.2 Share Purchase Agreement, dated January 11, 2001, between
Simpson Strong-Tie International, Inc. and BMF Holdings
A/S.
11. Statement re computation of earnings per share.
21. List of Subsidiaries of the Registrant.
23. Consent of Independent Accountants.
b. Reports on Form 8-K
Report on Form 8-K, dated December 1, 2000, reporting under Item
5 that the Company acquired the assets of Masterset Fastening
Systems, Inc.
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SIGNATURES
Pursuant to the requirements Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: March 29, 2001 SIMPSON MANUFACTURING CO., INC.
-----------------------------------------
(Registrant)
By /s/ Michael J. Herbert
-----------------------------------------
Michael J. Herbert
Chief Financial Officer
and Duly Authorized Officer
of the Registrant
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated below.
Signature Title Date
--------- ----- ----
CHIEF EXECUTIVE OFFICER:
/s/ Thomas J Fitzmyers President, Chief Executive March 29, 2001
- -------------------------------------------- Officer and Director
(Thomas J Fitzmyers)
CHIEF FINANCIAL OFFICER:
/s/ Michael J. Herbert Chief Financial Officer, March 29, 2001
- -------------------------------------------- Treasurer and Secretary
(Michael J. Herbert)
DIRECTORS:
/s/ Barclay Simpson Chairman of the Board March 29, 2001
- --------------------------------------------
(Barclay Simpson)
/s/ Earl F. Cheit Director March 29, 2001
- --------------------------------------------
(Earl F. Cheit)
/s/ Stephen B. Lamson Director March 29, 2001
- --------------------------------------------
(Stephen B. Lamson)
/s/ Peter N. Louras Director March 29, 2001
- --------------------------------------------
(Peter N. Louras)
/s/ Sunne Wright McPeak Director March 29, 2001
- --------------------------------------------
(Sunne Wright McPeak)
/s/ Barry Lawson Williams Director March 29, 2001
- --------------------------------------------
(Barry Lawson Williams)
45
46
EXHIBITS DESCRIPTION
- -------- -----------
10.1 Asset Purchase Agreement, dated November 17, 2000, between
Masterset Fastening Systems, Inc., Brian Berry, John E.
Swiggard, Manzo Associates Inc. and Leo V. Peterson and
Simpson Strong-Tie Company Inc.
10.2 Share Purchase Agreement, dated January 11, 2001, between
Simpson Strong-Tie International, Inc. and BMF Holdings A/S.
11. Statement re computation of earnings per share.
21. List of Subsidiaries of the Registrant.
23. Consent of Independent Accountants.