<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 21, 1998.
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
---------------------
FORM S-3
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
---------------------
SIMPSON MANUFACTURING CO., INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 94-3196943
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
4637 CHABOT DRIVE, SUITE 200
PLEASANTON, CALIFORNIA 94588
(510) 460-9912
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
STEPHEN B. LAMSON
CHIEF FINANCIAL OFFICER
4637 CHABOT DRIVE, SUITE 200
PLEASANTON, CALIFORNIA 94588
(510) 460-9912
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPIES TO:
DOUGLAS L. HAMMER, ESQ. DANIEL J. ZUBKOFF, ESQ.
SHARTSIS, FRIESE & GINSBURG LLP CAHILL GORDON & REINDEL
ONE MARITIME PLAZA, 18TH FLOOR 80 PINE STREET
SAN FRANCISCO, CA 94111 NEW YORK, NY 10005
(415) 421-6500 (212) 701-3000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS
SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
IF THE ONLY SECURITIES BEING REGISTERED ON THIS FORM ARE BEING
OFFERED PURSUANT TO DIVIDEND OR INTEREST REINVESTMENT PLANS, PLEASE CHECK THE
FOLLOWING BOX. [ ]
IF ANY OF THE SECURITIES BEING REGISTERED ON THIS FORM ARE TO BE
OFFERED ON A DELAYED OR CONTINUOUS BASIS PURSUANT TO RULE 415 UNDER THE
SECURITIES ACT OF 1993, OTHER THAN SECURITIES OFFERED ONLY IN CONNECTION WITH
DIVIDEND OR INTEREST REINVESTMENT PLANS, CHECK THE FOLLOWING BOX. [ ]
IF THIS FORM IS FILED TO REGISTER ADDITIONAL SECURITIES FOR AN
OFFERING PURSUANT TO RULE 462(b) UNDER THE SECURITIES ACT, PLEASE CHECK THE
FOLLOWING BOX AND LIST THE SECURITIES ACT REGISTRATION STATEMENT NUMBER OF THE
EARLIER EFFECTIVE REGISTRATION STATEMENT FOR THE SAME OFFERING. [ ]
IF THIS FORM IS A POST-EFFECTIVE AMENDMENT FILED PURSUANT TO RULE
462(c) UNDER THE SECURITIES ACT, CHECK THE FOLLOWING BOX AND LIST THE SECURITIES
ACT REGISTRATION STATEMENT NUMBER OF THE EARLIER EFFECTIVE REGISTRATION
STATEMENT FOR THE SAME OFFERING. [ ]
IF DELIVERY OF THE PROSPECTUS IS EXPECTED TO BE MADE PURSUANT TO RULE
434, PLEASE CHECK THE FOLLOWING BOX. [ ]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
=================================================================================================================
PROPOSED PROPOSED
MAXIMUM MAXIMUM
OFFERING AGGREGATE
TITLE OF SHARES AMOUNT TO BE PRICE PER OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED UNIT(1) PRICE (1) REGISTRATION
FEE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCK (WITHOUT PAR VALUE) 1,437,500 SHARES(2) $32.875 $47,257,812.50 $13,941.05
=================================================================================================================
</TABLE>
(1) ESTIMATED SOLELY FOR THE PURPOSE OF CALCULATING THE AMOUNT OF THE
REGISTRATION FEE PURSUANT TO RULE 457(c), BASED ON THE AVERAGE OF THE
HIGH AND LOW PRICES OF THE COMMON STOCK AS REPORTED BY THE NEW YORK
STOCK EXCHANGE ON JANUARY 14, 1998.
(2) INCLUDES SHARES TO BE SOLD BY SIMPSON PSB FUND ON EXERCISE OF THE
UNDERWRITERS' OVERALLOTMENT OPTION.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(A), MAY DETERMINE.
================================================================================
<PAGE> 2
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of such State.
SUBJECT TO COMPLETION
DATED JANUARY 21, 1998
PROSPECTUS
1,250,000 Shares
SIMPSON
MANUFACTURING
CO., INC.
Common Stock
(without par value)
All of the 1,250,000 shares of the Common Stock, without par value (the "Common
Stock"), of Simpson Manufacturing Co., Inc., a California corporation (the
"Company"), are hereby offered by Simpson PSB Fund (the "Principal Selling
Shareholder") and Thomas J Fitzmyers (together, the "Selling Shareholders"). See
"Principal and Selling Shareholders." The Company will not receive any of the
proceeds from the sale of Common Stock by the Selling Shareholders. See "Use of
Proceeds."
The Common Stock is traded on the New York Stock Exchange, Inc. (the
"NYSE") under the symbol "SSD." On January 20, 1998, the last reported sale
price of the Common Stock on the NYSE was $33 1/8 per share. See
"Price Range of Common Stock."
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR CERTAIN INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
PROCEEDS TO
PRICE TO UNDERWRITING SELLING
PUBLIC DISCOUNTS(1) SHAREHOLDERS(2)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share $ $ $
------ ------ ------
- -------------------------------------------------------------------------------------------------
Total(3) $ $ $
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=================================================================================================
</TABLE>
(1) The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses of the offering payable by the Selling
Shareholders, estimated at $________. The Company intends to make a charitable
donation to the Principal Selling Shareholder in an amount equal to one-half of
such expenses that the Principal Shareholder pays.
(3) The Principal Selling Shareholder has granted the Underwriters an option,
exercisable within 30 days after the date of this Prospectus, to purchase up to
an additional 187,500 shares of Common Stock, on the same terms as set forth
above, solely to cover overallotments, if any. If such overallotment option is
exercised in full, the total Price to Public, Underwriting Discounts and
Proceeds to Selling Shareholders will be $_______________, $____________ and
$__________, respectively. See "Underwriting."
The shares of Common Stock offered by this Prospectus are being offered by the
Underwriters, subject to prior sale, when, as and if delivered to and accepted
by the Underwriters, and subject to approval of certain legal matters by Cahill
Gordon & Reindel, counsel for the Underwriters. It is expected that delivery of
the shares of Common Stock will be made against payment therefor on or about
____________, 1998, at the offices of J.P. Morgan Securities Inc., 60 Wall
Street, New York, New York.
J.P. MORGAN & CO. MERRILL LYNCH & CO. BANCAMERICA ROBERTSON STEPHENS
___________, 1998
<PAGE> 3
[INSIDE FRONT COVER]
[PHOTOGRAPHS OF COMPANY PRODUCTS]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING,
AND MAY BID FOR, AND PURCHASE, SHARES OF THE COMMON STOCK IN THE OPEN MARKET.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE> 4
No person has been authorized to give any information or make any
representations in connection with this offering other than those contained or
incorporated by reference in this Prospectus, and, if given or made, such
information or representations must not be relied on as having been authorized
by the Company, the Selling Shareholders or any of the Underwriters. This
Prospectus does not constitute an offer to sell, or a solicitation of an offer
to buy, any securities in any jurisdiction to any person to whom it is unlawful
to make such offer or solicitation. Neither the delivery of this Prospectus nor
any sale made hereunder shall, under any circumstances, create any implication
that there has been no change in the affairs of the Company or that the
information contained herein is correct as of any date subsequent to the date
hereof.
TABLE OF CONTENTS
Incorporation of Certain
Documents by Reference...................................4
Additional Information.....................................4
Prospectus Summary.........................................5
Risk Factors...............................................8
Use of Proceeds...........................................13
Dividend Policy...........................................13
Price Range of Common Stock...............................13
Capitalization............................................14
Selected Consolidated
Financial Information...................................15
Management's Discussion and
Analysis of Financial Condition
and Results of Operations...............................17
Business..................................................23
Management................................................34
Principal and Selling Shareholders........................36
Description of Capital Stock..............................37
Underwriting..............................................39
Legal Matters.............................................40
Experts...................................................40
Index to Consolidated Financial
Statements...............................................F-1
Strong-Tie(R), Dura-Vent(R), Dura/Connect(R), Dura-Plus(R), Dura/Liner(R),
Direct Vent G.S.(R) and There Is No Equal(R) (when used with the registered
design) are registered trademarks of the Company's subsidiaries.
3
<PAGE> 5
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed or to be filed with the Securities and Exchange
Commission (the "Commission") under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), are hereby incorporated by reference into this
Prospectus:
1. The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996;
2. The Company's Proxy Statement dated April 14, 1997;
3. The Company's Quarterly Reports on Form 10-Q dated May 14, August 13 and
November 10, 1997; and
4. The Company's Current Reports on Form 8-K dated January 7, March 21 and
September 25, 1997.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Prospectus and prior to the
termination of the offering shall be deemed to be incorporated by reference
herein and to be a part hereof from the date of filing of such documents. Any
statement contained in this Prospectus or in a document incorporated or deemed
to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any subsequently-filed document which also is or is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person, including any beneficial
owner, to whom this Prospectus is delivered, on written or oral request of such
person, a copy of any and all of the documents that have been incorporated by
reference herein (not including exhibits to such documents unless such exhibits
are specifically incorporated by reference herein or into such documents). Such
request may be directed to Simpson Manufacturing Co., Inc., 4637 Chabot Drive,
Suite 200, P.O. Box 10789, Pleasanton, California 94588-0789, telephone (510)
460-9912, Attn: Chief Financial Officer.
ADDITIONAL INFORMATION
The Company is subject to the reporting requirements of the Exchange Act and, in
accordance therewith, files annual and quarterly reports, proxy statements and
other information with the Commission. Such reports, proxy statements and other
information may be inspected and copied at the Commission's Regional Offices at
7 World Trade Center, 13th Floor, New York, New York 10048, and 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such material can be
obtained at prescribed rates from the Public Reference Section of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549. The Common Stock of the
Company is listed on the NYSE. Reports and other information concerning the
Company may be inspected at the offices of the NYSE at 20 Broad Street, New
York, New York 10005. The Commission also maintains a World Wide Web site
(http://www.sec.gov) that contains reports, proxy and information statements and
other information regarding registrants, including the Company, that file
electronically with the Commission.
A registration statement on Form S-3 with respect to the Common Stock offered
hereby (the "Registration Statement") has been filed with the Commission under
the Securities Act of 1933, as amended (the "Securities Act"). This Prospectus
does not contain all of the information contained in the Registration Statement
and the exhibits and schedules thereto, certain portions of which have been
omitted pursuant to the rules and regulations of the Commission. For further
information with respect to the Company and the Common Stock offered hereby,
reference is made to the Registration Statement and the exhibits and schedules
thereto. Statements contained in this Prospectus regarding the contents of any
contract or any other document are not necessarily complete and, in each
instance, reference is hereby made to the copy of such contract or document
filed as an exhibit to the Registration Statement. The Registration Statement,
including exhibits thereto, may be inspected without charge at the Commission's
principal office in Washington, D.C., and copies of all or any part thereof may
be obtained from the Public Reference Section, Securities and Exchange
Commission, Washington, D.C. 20549, on payment of the prescribed fees.
4
<PAGE> 6
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by and should be read in
conjunction with the more detailed information, including "Risk Factors" and the
Consolidated Financial Statements and Notes thereto, appearing elsewhere or
incorporated by reference in this Prospectus. All references to the Company
refer to the Company and its predecessors unless indicated otherwise.
THE COMPANY
Simpson Manufacturing Co., Inc. (the "Company"), through its subsidiary, Simpson
Strong-Tie Company Inc. ("Simpson Strong-Tie" or "SST"), designs, engineers and
is a leading manufacturer of wood-to-wood, wood-to-concrete and wood-to-masonry
connectors, and through its subsidiary, Simpson Dura-Vent Company, Inc.
("Simpson Dura-Vent" or "SDV"), designs, engineers and manufactures venting
systems for gas and wood burning appliances. The Company markets its products to
the residential construction, light industrial and commercial construction,
remodeling and do-it-yourself ("DIY") markets. The Company believes that Simpson
Strong-Tie benefits from strong brand name recognition among architects and
engineers who frequently specify in building plans the use of SST products, and
that Simpson Dura-Vent benefits from strong brand name recognition among
contractors, dealers, distributors and original equipment manufacturers ("OEMs")
to which SDV markets its products. The Company has continuously manufactured
structural connectors since 1956.
From 1992 through 1996, the Company's annual net sales grew from $98.1 million
to $202.4 million, a compound annual growth rate of 19.8%. In the same period,
the Company's annual net income grew from $6.1 million to $19.7 million, a
compound annual growth rate of 34.3%. In 1997, the Company has continued to
experience increases in sales and earnings. Growth has been derived primarily
from frequent new product introductions, expansion into new geographic markets
and growth of distribution channels.
Connectors produced by Simpson Strong-Tie typically are steel devices that are
used to strengthen, support and connect joints in residential and commercial
construction and DIY projects. These products enhance the safety and durability
of the structures in which they are installed and can save time and labor costs
for the contractor. SST's connector products increase structural integrity and
improve structural resistance to seismic, wind and other forces. Applications
range from building framing to deck construction to DIY projects. SST produces
and markets more than 1,300 standard connector products in addition to products
that it manufactures to custom specifications requested by architects and
engineers.
Simpson Dura-Vent's venting systems are used to vent gas furnaces and water
heaters, gas fireplaces and stoves, wood burning stoves and pellet stoves. SDV's
metal vents, chimneys and chimney liner systems exhaust the products of
combustion to the exterior of the building, and some products introduce outside
air into the appliance. SDV designs its products for ease of assembly and safe
operation and to achieve a high level of performance. SDV produces and markets
several hundred different venting products and systems.
The Company emphasizes continuous new product development and often obtains
patent protection for its new products. The Company's products are marketed in
all 50 states of the United States and in England, France, Germany, Canada,
Mexico, Japan and Australia. Both Simpson Strong-Tie and Simpson Dura-Vent
products are distributed through a contractor and dealer distributor network,
home centers and OEMs.
The Company has developed and uses automated manufacturing processes. Its
innovative manufacturing systems and techniques have allowed it to control
manufacturing costs, even while developing both new products and products that
meet customized requirements and specifications. The Company's development of
specialized manufacturing processes has also permitted increased operating
flexibility and enhanced product design innovation. The Company has developed a
quality management system that employs numerous quality-control procedures.
Since 1996, SST's quality management system has been registered under ISO 9001.
The Company has 11 manufacturing locations in the United States, Canada, France
and the United Kingdom.
5
<PAGE> 7
The Company is a California corporation and was reorganized in 1994 as a holding
company for Simpson Strong-Tie and Simpson Dura-Vent. The Company's principal
business offices are located at 4637 Chabot Drive, Suite 200, P.O. Box 10789,
Pleasanton, California 94588-0789, telephone (510) 460-9912.
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Selling
Shareholders.................................... 1,250,000 shares
Common Stock Outstanding before and after
this Offering .................................. 11,517,113 shares(1)
Use of Proceeds..................................... The net proceeds to Simpson PSB
Fund, a California nonprofit
public benefit corporation (the
"Principal Selling Shareholder"),
will be used principally for
charitable purposes. See "Use of
Proceeds."
Risk Factors........................................ For a discussion of certain
considerations relevant to an
investment in the Common Stock,
see "Risk Factors."
NYSE Symbol......................................... "SSD"
</TABLE>
- ----------
(1) Excludes an aggregate of 853,661 shares of Common Stock issuable on
exercise of stock options that were outstanding as of December 31, 1997. See
"Business--Employees and Labor Relations" and "Principal and Selling
Shareholders."
6
<PAGE> 8
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth summary consolidated financial information with
respect to the Company for each of the five years ended December 31, 1992, 1993,
1994, 1995 and 1996, derived from the audited Consolidated Financial Statements
of the Company, the most recent three years of which appear elsewhere herein,
and for the nine-month periods ended September 30, 1996 and 1997, which are
unaudited and also appear elsewhere herein. In the opinion of the Company, such
unaudited data include all adjustments (consisting of only normal recurring
adjustments) necessary for a fair presentation of the information set forth
therein, in accordance with generally accepted accounting principles. The data
presented below should be read in conjunction with the Consolidated Financial
Statements and related Notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included elsewhere herein.
<TABLE>
<CAPTION>
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Nine Months
YEARS ENDED DECEMBER 31, Ended September 30,
Dollars in thousands,
except per share data 1992 1993 1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
STATEMENT OF OPERATIONS
DATA
Net sales $ 98,106 $ 113,923 $ 151,290 $ 167,958 $ 202,409 $ 152,346 $ 186,307
Gross profit 32,764 41,536 54,306 58,590 78,015 58,040 74,106
Compensation related to
stock plans(1)(2) 120 693 6,909 61 180 -- 290
Income from operations 10,956 14,550 14,075 22,907 32,695 24,750 33,379
Net income 6,058 7,970 5,451 14,122 19,721 14,823 19,966
Net income per share
Primary(3) $ .69 $ .89 $ .51 $ 1.23 $ 1.68 $ 1.26 $ 1.67
Fully diluted(3) $ .69 $ .86 $ .51 $ 1.22 $ 1.67 $ 1.26 $ 1.66
Weighted average shares
outstanding
Primary 8,815,501 9,051,425 10,561,641 11,460,567 11,755,184 11,727,496 11,946,675
Fully diluted 8,854,741 9,358,180 10,569,055 11,532,872 11,838,658 11,788,732 12,055,519
</TABLE>
<TABLE>
<CAPTION>
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AS OF DECEMBER 31, AS OF SEPTEMBER 30,
1995 1996 1997
-------- -------- -------------------
<S> <C> <C> <C>
BALANCE SHEET DATA (UNAUDITED)
Working capital $ 51,984 $ 70,676 $ 82,530
Net plant, property and equipment 26,420 28,688 37,359
Total assets 96,642 122,521 151,636
Total debt 20 -- 30
Total shareholders' equity 81,553 102,297 122,791
</TABLE>
- ----------
(1) In 1994, a reorganization was effected to consolidate shareholdings in
Simpson Strong-Tie and Simpson Dura-Vent (the "1994 Reorganization"). As part of
the 1994 Reorganization, the Company recorded a one-time, non-cash,
non-deductible compensation charge of approximately $6.4 million in the first
quarter of 1994, resulting from an exchange of Company shares for outstanding
SST and SDV shares held by employees. After giving effect to all components of
the 1994 Reorganization, including this non-cash compensation charge,
shareholders' equity increased by $1.1 million. The Company also recorded in the
first quarter of 1994 other non-cash compensation charges aggregating
approximately $400,000 and a cash compensation charge of approximately $100,000.
See Notes 2 and 14 to the Consolidated Financial Statements.
(2) The year ended December 31, 1993, includes $470,000 in one-time, non-cash
expense for options earned by employees pursuant to compensation arrangements
with exercise prices less than fair value. The balance for the years 1992 and
1993 includes dividends paid to and repurchases of shares of common stock from
employees, which shares are deemed to be stock options (deemed options) for
financial reporting purposes. See Notes 2 and 14 to the Consolidated Financial
Statements.
(3) For purposes of calculating net income per share, common and common
equivalent shares issued during the 12-month period prior to the Company's
initial public offering in 1994 have been included as if they were outstanding
for all periods presented using the treasury stock method.
7
<PAGE> 9
RISK FACTORS
This Prospectus contains forward-looking statements that involve risks and
uncertainties, certain of which are discussed below and in reports filed by the
Company with the Securities and Exchange Commission. See "Incorporation of
Certain Documents by Reference" and "Additional Information." Actual results
might differ materially from results suggested by any forward-looking
statements in this Prospectus.
In addition to the other information included or incorporated by reference in
this Prospectus, the following risk factors should be considered carefully by
prospective investors in evaluating the Company and its business before
purchasing shares of Common Stock offered hereby.
EFFECT OF INCREASED RAW MATERIAL COSTS
Steel and other metals are the Company's principal raw materials. The Company
purchases steel and other raw materials from various suppliers. The steel
industry is highly cyclical and prices for the Company's raw materials are
influenced by numerous factors beyond the Company's control, including general
economic conditions, competition, labor costs, import duties and other trade
restrictions. The Company historically has not attempted to hedge against
changes in prices of steel or other raw materials. The Company might not be able
to increase its product prices in amounts that correspond to increases in raw
materials prices without materially and adversely affecting its sales and
profits. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business--Raw Materials."
SEASONALITY AND FLUCTUATIONS IN QUARTERLY RESULTS
The Company's sales are seasonal, with operating results varying from quarter to
quarter. The Company's sales and income have historically been lower in the
first and fourth quarters and higher in the second and third quarters of the
year as retailers and contractors purchase construction materials in the late
spring and summer months for the construction season. In addition, demand for
the Company's products and the Company's results of operations are significantly
affected by weather conditions, such as unseasonably warm, cold or wet weather,
which affect, and sometimes delay or accelerate, installation of certain of the
Company's products. Political and economic events can also affect the Company's
revenues. The Company has little control over the timing of customer purchases,
and sales anticipated in one quarter may occur in another quarter, thereby
affecting both quarters' results. In addition, the Company incurs significant
expenses as it develops, produces and markets its products in anticipation of
future orders. Products typically are shipped as orders are received, and
accordingly the Company operates with little backlog. As a result, net sales in
any quarter generally depend on orders booked and shipped in that quarter. A
significant portion of the Company's operating expenses are fixed, and planned
expenditures are based primarily on sales forecasts. If sales fall below the
Company's expectations, operating results would be adversely affected for the
relevant quarters, as expenses based on those expectations will already have
been incurred. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
CONSTRUCTION INDUSTRY CYCLES
The Company's principal markets are in the building construction industry. That
industry is subject to significant volatility as a result of fluctuations in
interest rates, the availability of credit to builders and developers, inflation
rates and other economic factors and trends, none of which is within the
Company's control. Declines in commercial and residential construction may be
expected to reduce the demand for the Company's products. The Company cannot
provide any assurance that its business will not be adversely affected by future
negative economic or construction industry performance or that future declines
in construction activity or the demand for the Company's products will not have
material adverse effects on the Company and its business and financial
condition. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
8
<PAGE> 10
DEPENDENCE ON INTELLECTUAL PROPERTY PROTECTION
The Company's ability to compete effectively with other companies depends in
part on its ability to maintain the proprietary nature of its technology. The
Company owns more than 80 patents in the United States and other countries and
has applied for an additional 23 patents, but there can be no assurance as to
the degree of protection afforded by these patents or the likelihood that
patents will issue pursuant to pending patent applications. Furthermore, there
can be no assurance that others will not independently develop the same or
similar technology, develop around the patented aspects of any of the Company's
products or proposed products, or otherwise obtain access to the Company's
proprietary technology.
In addition to seeking patent protection, the Company also relies on unpatented
proprietary technology to maintain its competitive position. Nevertheless, there
can be no assurance that the Company will be able to protect its know-how or
other proprietary information.
In attempting to protect its proprietary information, the Company expects that
it may sometimes be necessary to prosecute lawsuits against competitors and
others that the Company believes have infringed or are infringing the Company's
rights. In such an event, the defendant may assert counterclaims to complicate
or delay the litigation or for other reasons. If the Company were to be unable
to maintain the proprietary nature of its significant products, the Company's
business and financial condition could be materially and adversely affected. See
"Business--Patents and Proprietary Rights."
PRODUCT LIABILITY
The Company designs and manufactures most of its standard products and expects
that it will continue to do so. The Company employs engineers and designers to
design and test its products under development. In addition, the Company
maintains a quality control system. The Company has on occasion found
manufacturing flaws in its products. In addition, the Company purchases from
third party suppliers raw materials, principally steel, and finished goods that
are produced and processed by other manufacturers. The Company also has on
occasion found flaws in raw materials and finished goods produced by others,
some of which flaws have not been apparent until after the products were
installed by customers. Many of the Company's products are integral to the
structural soundness or fire safety of the buildings in which they are used. As
a result, if any flaws exist in the Company's products (as a result of design,
raw material or manufacturing flaws) and such flaws are not discovered and
corrected before the Company's products are incorporated into structures, the
structures could suffer severe damage (such as collapse or fire) and personal
injury could result. To the extent that such damage or injury is not covered by
the Company's product liability insurance, and if the Company were to be found
to have been negligent or otherwise culpable, the Company and its business and
financial condition could be materially and adversely affected by the necessity
to correct such damage and to compensate persons who might have suffered injury.
Furthermore, in the event that a flaw is discovered after installation but
before any damage or injury occurs, it may be necessary for the Company to
recall products, and the Company may be liable for any costs necessary to
retrofit the affected structures. Any such recall or retrofit could entail
substantial costs and adversely affect the Company's reputation, sales and
financial condition. The Company does not carry insurance against recall costs,
and its product liability insurance may not cover retrofit costs.
The severe earthquake in Northridge, California, in January 1994, damaged or
destroyed numerous structures, and Company products were installed in some of
those structures. No assurance can be given that claims will not be made against
the Company with regard to damage or destruction of structures incorporating
Company products resulting from a natural disaster. Any such claims, if
asserted, could materially and adversely affect the Company.
REGULATORY MATTERS
The design, capacity and quality of most of the Company's products and
manufacturing processes are subject to numerous and extensive regulations and
standards promulgated by governmental, quasi-governmental and
9
<PAGE> 11
industry organizations. Such regulations and standards are highly technical and
complex and are subject to frequent revision. The failure of the Company's
products or manufacturing processes to comply with any of such regulations and
standards could impair the Company's ability to manufacture and market its
products profitably and materially and adversely affect the Company's business
and financial condition. In addition, under the National Appliance Energy
Conservation Act, the Department of Energy periodically reviews the necessity
for increased efficiency standards with respect to gas furnaces. A substantial
percentage of Simpson Dura-Vent's Type B Gas Vent sales are for gas furnace
applications. Minimum appliance efficiency standards might be adopted that could
negatively affect sales of Type B Gas Vents, which could materially and
adversely affect the Company's operating results and financial condition. See
"Business--Regulation."
ENVIRONMENTAL, HEALTH AND SAFETY MATTERS
The Company is subject to environmental laws and regulations governing emissions
into the air, discharges into water, and generation, handling, storage,
transportation, treatment and disposal of waste materials. The Company is also
subject to other Federal and state laws and regulations regarding health and
safety matters. The Company's manufacturing operations involve the use of
solvents, chemicals, oils and other materials that are regarded as hazardous or
toxic and the use of complex and heavy machinery and equipment that can pose
severe safety hazards (especially if not properly and carefully used). Some of
the Company's products also incorporate materials that are hazardous or toxic in
some forms (such as zinc and lead, which are used in some steel galvanizing
processes). The Company believes that it has obtained all material licenses and
permits required by environmental, health and safety laws and regulations in
connection with the Company's operations and that its policies and procedures
comply in all material respects with existing environmental, health and safety
laws and regulations. It is possible that additional licenses or permits may be
required, that the Company's policies and procedures might not comply in all
respects with all such laws and regulations or, even if they do, that employees
might fail or neglect to follow them in all respects, and that the Company's
generation, handling, use, storage, transportation, treatment or disposal of
hazardous or toxic materials, machinery and equipment might cause injury to
persons or to the environment. In addition, properties occupied by the Company
may be contaminated by hazardous or toxic substances and remedial action may be
required at some time in the future. It is also possible that materials in
certain of the Company's products could cause injury or sickness. Relevant laws
and regulations could also be changed or new ones could be adopted that require
the Company to obtain additional licenses and permits and cause the Company to
incur substantial expense. Any such event or contamination could have a material
adverse effect on the Company and its liquidity, results of operations and
financial condition. See "Business--Regulation."
DEPENDENCE ON NEW MARKETS; EXPANSION OUTSIDE THE UNITED STATES
The Company's future growth, if any, will depend to some extent on its ability
to penetrate new markets, both domestically and internationally. In addition,
construction customs, standards, techniques and methods in international markets
differ from those in the United States. Laws and regulations applicable in new
markets for the Company are likely to be unfamiliar to the Company and
compliance may be substantially more costly than the Company anticipates. As a
result, it may become necessary for the Company to redesign products or to
invent or design new products in order to compete effectively and profitably
outside the United States or in markets that are new to the Company in the
United States. The Company expects that significant time will be required for it
to generate substantial sales or profits in new markets. Other significant
challenges to conducting business in foreign countries include, among other
factors, local acceptance of the Company's products, political instability,
currency controls, changes in import and export regulations, changes in tariff
and freight rates, and fluctuations in foreign exchange rates. There can be no
assurance that the Company will be able to penetrate these markets or that any
such market penetration can be achieved on a timely basis or profitably. If the
Company is not successful in penetrating these markets within a reasonable time,
it will be unable to recoup part or all of the significant investments it will
have made in attempting to do so. See "Business--Business Strategy" and
"Business--Industry and Market Trends."
10
<PAGE> 12
ABILITY TO ASSIMILATE ACQUISITIONS
The Company has recently made several small acquisitions and may in the future
pursue additional acquisitions of product lines or businesses. Acquisitions
involve numerous risks, including difficulties in the assimilation of the
operations and products of the acquired companies, the diversion of management's
attention from other business concerns, risks of entering markets in which the
Company has little or no direct prior experience, and the potential loss of key
employees of the acquired company. In addition, future acquisitions by the
Company may result in potentially dilutive issuances of equity securities, the
incurring of additional debt, and amortization expenses related to goodwill and
intangible assets, which could adversely affect the Company's profitability. If
an acquisition occurs, no assurance can be given as to its effect on the
Company's business or operating results. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and
"Business--Acquisitions and Strategic Investments."
LOSS OF MANUFACTURING CAPACITY
Each of the Company's current and planned manufacturing facilities is located in
a geographic region that has experienced major natural disasters, such as
earthquakes, floods and hurricanes. For example, the 1989 Loma Prieta earthquake
in Northern California destroyed a freeway and caused other major damage within
a few miles of the Company's facilities in San Leandro, California, and the
earthquakes in Northridge, California, in January 1994, destroyed several
freeways and numerous buildings in the region in which the Company's facilities
in Brea are located. The Company does not carry earthquake insurance. Other
insurance that it carries is limited and not likely to be adequate to cover all
of the Company's resulting costs, business interruption and lost profits in the
event of a major natural disaster in the future. If a natural disaster were to
render one or more of the Company's manufacturing facilities totally or
partially unusable, whether or not covered by insurance, the Company's business
and financial condition could be materially and adversely affected.
COMPETITION
The markets for the Company's products are highly competitive. The Company has
different competitors in various markets that it serves. Some of the Company's
competitors have significantly greater financial and marketing resources than
the Company. In addition, other technologies may be the bases for competitive
products that could render the Company's products obsolete or uncompetitive, and
other companies may find the Company's markets attractive and enter those
markets. Competitive pricing, including price competition or the introduction of
new products, could have material adverse effects on the Company's revenues and
profit margins. See "Business--Competition."
CONTROL BY PRINCIPAL SHAREHOLDERS
Barclay Simpson, the Chairman of the Board of the Company, and his seven adult
children collectively own or control approximately 43.3% of the outstanding
shares of Common Stock, and Thomas J Fitzmyers, the President and Chief
Executive Officer of the Company, owns approximately 3.7% of the outstanding
shares of Common Stock. In addition, the Company's profit sharing trusts, of
which Messrs. Simpson and Fitzmyers are trustees, own an aggregate of
approximately 1.3% of the outstanding shares of Common Stock. Mr. Fitzmyers will
sell 50,000 of his shares (approximately 0.4% of the outstanding shares of
Common Stock) in this offering. As a result of such share ownership, under
California law, which provides for cumulative voting for directors, Mr. Simpson,
his children and Mr. Fitzmyers together will continue to have the right to elect
at least three of the seven directors; Messrs. Simpson and Fitzmyers will also
have substantial influence with respect to the election of the other directors.
Messrs. Simpson and Fitzmyers are also expected to continue to exercise
substantial control over fundamental changes affecting the Company, such as a
merger or sale of assets or amendment of the Company's Articles of Incorporation
or Bylaws. Notwithstanding that investors in this offering will have the right
to vote their shares of Common Stock, the Company and its management will
continue to be controlled by Messrs. Simpson and Fitzmyers. See "Management,"
"Principal and Selling Shareholders" and "Description of Capital Stock."
11
<PAGE> 13
CONFLICTS OF INTEREST
Barclay Simpson, Thomas J Fitzmyers and Stephen B. Lamson, the Company's
principal executive officers (see "Management"), have and will continue to have
significant conflicts of interest regarding certain properties that the Company
leases from partnerships in which those officers participate. Those partnerships
were organized principally to purchase, own and lease to the Company
manufacturing and warehouse facilities that the Company currently uses. Based on
formal and informal third-party appraisals, the Company believes that some of
the rent and other terms under these leases are less favorable to the Company
than terms that could be obtained from unrelated persons in the current real
estate markets. The Company intends to continue to lease and occupy most of
these facilities for the foreseeable future, and, subject to the approval of the
Company's independent directors, the leases may be amended, renewed or replaced
at any time or from time to time. In such event, Messrs. Simpson, Fitzmyers and
Lamson would be subject to conflicting interests in their capacities as partners
in the partnerships and as officers, directors and controlling shareholders of
the Company. See "Description of Capital Stock" and Note 10 to the Consolidated
Financial Statements.
COLLECTIVE BARGAINING AGREEMENTS
A significant number of the Company's employees at two of the Company's major
manufacturing facilities are represented by labor unions and are covered by
collective bargaining agreements, one of which (covering approximately 125
employees) will expire in July 1998. A work stoppage or interruption by a
significant number of the Company's employees could have a material and adverse
effect on the Company and its business and financial condition. See
"Business--Employees and Labor Relations."
DEPENDENCE ON KEY PERSONNEL
The Company is dependent on certain key management and technical personnel,
including Barclay Simpson, Thomas J Fitzmyers, Stephen B. Lamson and Donald M.
Townsend. The loss of one or more key employees could have a material adverse
effect on the Company. The Company's success will also depend on its ability to
attract and retain additional highly qualified technical, marketing and
management personnel necessary for the maintenance and expansion of the
Company's activities. The Company faces strong competition for such personnel
and there can be no assurance that the Company will be able to attract or retain
such personnel. See "Management."
ISSUANCE OF PREFERRED STOCK
The Board of Directors of the Company is authorized by the Company's Articles of
Incorporation to determine the terms of one or more series of preferred stock
and to authorize the issuance of shares of any such series on such terms as the
Board of Directors may approve. See "Description of Capital Stock." No plans or
proposals currently are pending to issue any preferred stock, but any such
issuance in the future could be used to impede an acquisition of the Company
that the Board of Directors does not approve, could further dilute the equity
investments of purchasers of Common Stock in this offering and could reduce the
Company's funds potentially available for the payment of dividends to holders of
Common Stock. See "Risk Factors--Control by Principal Shareholders" and
"Dividend Policy."
SHARE PRICE VOLATILITY
The trading price of the Common Stock could be subject to wide fluctuations in
response to quarter to quarter variations in operating results, changes in
earnings estimates by analysts, announcements of technological innovations or
new products by the Company or its competitors, general conditions in the
construction and construction materials industries, relatively low trading
volume in the Common Stock and other events or factors. In addition, in recent
years the stock market has experienced extreme price fluctuations. This
volatility has had a substantial effect on the market prices of securities
issued by many companies for reasons unrelated to the operating performance of
those companies. These broad market fluctuations may adversely affect the market
price of the Common Stock.
12
<PAGE> 14
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock in the public market after this
offering could adversely affect the prevailing market price for the Common
Stock. On completion of this offering, all of the outstanding shares of Common
Stock will be freely tradeable without restriction under the Securities Act,
other than the 4,438,234 outstanding shares that will be held (assuming the
Underwriters' overallotment option will not be exercised) by persons who are
"affiliates" of the Company as that term is defined in Rule 144 under the
Securities Act. Options to purchase 853,661 shares of Common Stock are currently
outstanding, including options to purchase 693,637 shares that are currently
exercisable. If a substantial number of shares were sold in the public market
pursuant to Rule 144 or on exercise of options, the trading price of the Common
Stock in the public market could be adversely affected.
USE OF PROCEEDS
The Company will not receive any proceeds from this offering. The net proceeds
to the Selling Shareholders (after deducting underwriting discounts and
estimated offering expenses) from the sale of 1,250,000 shares of Common Stock
offered hereby by the Selling Shareholders are estimated to be $____ million
($____ million if the Underwriters' overallotment option is exercised in full).
Of that total, the Principal Selling Shareholder will receive approximately
$_______ million, which it will apply principally to its charitable purposes and
to its administrative and operating expenses.
DIVIDEND POLICY
The Company has not paid any dividends since 1993 and currently intends to
retain its future earnings, if any, to finance operations and fund its growth.
The Company does not anticipate paying cash dividends on the Common Stock for
the foreseeable future. Future dividends, if any, will be determined by the
Company's Board of Directors, based on the Company's earnings, financial
condition and other factors deemed relevant by the Board of Directors.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock has been listed on the NYSE under the symbol "SSD"
since October 13, 1997. Prior to that time, the Common Stock was traded on the
Nasdaq National Market tier of The Nasdaq Stock Market under the trading symbol
"SMCO." The following table shows the range of high and low closing sale prices
per share of the Common Stock as reported by The Nasdaq Stock Market or the
NYSE, as applicable, for the calendar quarters indicated:
<TABLE>
<CAPTION>
Quarter High Low Close
------- ---- --- -----
<S> <C> <C> <C>
1995 First $ 11 1/8 $ 9 3/8 $ 9 3/4
Second 12 1/8 9 1/2 12 1/8
Third 12 1/2 11 5/8 12 1/8
Fourth 15 1/4 11 5/8 13 1/2
1996 First 15 3/4 13 15 3/4
Second 20 3/4 15 3/4 20
Third 21 18 1/2 20
Fourth 24 20 23
1997 First 29 1/2 22 25 1/2
Second 27 1/8 21 3/4 26 1/2
Third 41 7/8 26 3/16 41 7/8
Fourth 40 1/4 32 1/4 33 5/16
1998 First (through 1/20) 33 1/8 32 3/4 33 1/8
</TABLE>
13
<PAGE> 15
On January 20, 1998,the reported closing sale price of the Common Stock on the
NYSE was $33 1/8 per share.
CAPITALIZATION
The table below sets forth the capitalization of the Company as of September 30,
1997. The information in the table below is qualified in its entirety by, and
should be read in conjunction with, the Company's Consolidated Financial
Statements and Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
As of September 30,
1997
Dollars in thousands
<S> <C>
(UNAUDITED)
Cash and cash equivalents $ 15,337
========
Notes payable(1) 30
--------
Shareholders' equity
Common stock, 20,000,000 shares authorized, 11,501,006
shares 32,045
outstanding(2)
Retained earnings 90,829
Cumulative translation adjustment
(83)
--------
Total shareholders' equity 122,791
--------
Total capitalization $122,821
========
</TABLE>
- ----------
(1) See Note 9 to Consolidated Financial Statements for a discussion of the
Company's outstanding debt. The Company expects to borrow, repay and reborrow
from time to time under revolving credit agreements amounts needed for
facilities expansion and improvement and general corporate purposes.
(2) Excludes an aggregate of 861,218 shares of Common Stock issuable on exercise
of stock options that were outstanding as of September 30, 1997. See
"Business--Employees and Labor Relations."
14
<PAGE> 16
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth selected consolidated financial information with
respect to the Company for each of the five years ended December 31, 1992, 1993,
1994, 1995 and 1996, derived from the audited Consolidated Financial Statements
of the Company, the most recent three years of which appear elsewhere herein,
and for the nine-month periods ended September 30, 1996 and 1997, which are
unaudited and also appear elsewhere herein. In the opinion of the Company, such
unaudited data include all adjustments (consisting of only normal recurring
adjustments) necessary for a fair presentation of the information set forth
therein, in accordance with generally accepted accounting principles. The
Company's interim results fluctuate. Results of operations for interim periods
are not necessarily indicative of results for a full year or any future period.
The data presented below should be read in conjunction with the Consolidated
Financial Statements and related Notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
herein.
<TABLE>
<CAPTION>
Nine Months
YEARS ENDED DECEMBER 31, Ended September 30,
Dollars in thousands,
except per share data 1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
STATEMENT OF OPERATIONS
DATA
Net sales $ 98,106 $ 113,923 $ 151,290 $ 167,958 $ 202,409 $ 152,346 $ 186,307
Cost of sales 65,342 72,387 96,984 109,368 124,394 94,306 112,201
--------- --------- --------- --------- --------- --------- ---------
Gross profit 32,764 41,536 54,306 58,590 78,015 58,040 74,106
Selling expense 11,239 12,137 14,714 17,110 20,104 14,902 17,468
General and administrative
expense 10,449 14,156 18,608 18,512 25,036 18,388 22,969
Compensation related to
stock plans(1)(2) 120 693 6,909 61 180 -- 290
--------- --------- --------- --------- --------- --------- ---------
Income from operations 10,956 14,550 14,075 22,907 32,695 24,750 33,379
Interest income (expense), (1,113) (997) (559) 142 595 326 248
--------- --------- --------- --------- --------- --------- ---------
net
Income before income taxes
and minority interest 9,843 13,553 13,516 23,049 33,290 25,076 33,627
Provision for income taxes 3,762 5,517 8,098 8,927 13,569 10,253 13,661
Minority interest 23 66 (33) -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net income $ 6,058 $ 7,970 $ 5,451 $ 14,122 $ 19,721 $ 14,823 $ 19,966
========= ========= ========= ========= ========= ========= =========
Net income per share
Primary(3) $ .69 $ .89 $ .51 $ 1.23 $ 1.68 $ 1.26 $ 1.67
Fully diluted(3) $ .69 $ .86 $ .51 $ 1.22 $ 1.67 $ 1.26 $ 1.66
Weighted average shares
outstanding
Primary 8,815,501 9,051,425 10,561,641 11,460,567 11,755,184 11,727,496 11,946,675
Fully diluted 8,854,741 9,358,180 10,569,055 11,532,872 11,838,658 11,788,732 12,055,519
</TABLE>
15
<PAGE> 17
(continued from preceding page)
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, AS OF SEPTEMBER
1992 1993 1994 1995 1996 30, 1997
-------- -------- -------- -------- -------- ---------------
(UNAUDITED)
BALANCE SHEET DATA
<S> <C> <C> <C> <C> <C> <C>
Working capital $ 19,667 $ 24,526 $ 44,127 $ 51,984 $ 70,676 $ 82,530
Net plant, property and
equipment 12,530 13,551 20,843 26,420 28,688 37,359
Total assets 44,558 58,325 80,311 96,642 122,521 151,636
Total debt 12,306 14,998 -- 20 -- 30
Total liabilities 19,312 25,487 13,789 15,089 20,224 28,845
Total shareholders'
equity(1) 25,123 32,535 66,522 81,553 102,297 122,791
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, NINE MONTHS ENDED
SEPTEMBER 30,
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
OTHER DATA
EBITDA(4) $ 13,377 $ 17,656 $ 24,820 $ 28,260 $ 39,927 $ 29,163 $ 39,129
Net cash provided by (used in)
operating activities 3,794 4,366 9,613 13,398 24,610 19,043 10,388
Net cash used in investing
activities (2,382) (4,480) (11,096) (13,109) (12,256) (4,259) (14,962)
Net cash provided by (used in)
financing activities (1,826) 1,778 5,484 855 506 373 96
Capital expenditures 2,415 3,656 9,939 10,050 7,364 4,291 9,679
Depreciation and amortization 2,421 2,636 3,973 5,291 7,198 4,413 5,460
</TABLE>
- ----------
(1) In 1994, a reorganization was effected to consolidate shareholdings in
Simpson Strong-Tie and Simpson Dura-Vent (the "1994 Reorganization"). As part of
the 1994 Reorganization, the Company recorded a one-time, non-cash,
non-deductible compensation charge of approximately $6.4 million, resulting from
an exchange of Company shares for outstanding SST and SDV shares held by
employees. After giving affect to all components of the 1994 Reorganization,
including this non-cash compensation charge, shareholders' equity increased by
$1.1 million. The Company also recorded in 1994 other non-cash compensation
charges aggregating approximately $400,000 and a cash compensation charge of
approximately $100,000. See Notes 2 and 14 to the Consolidated Financial
Statements.
(2) The year ended December 31, 1993, includes $470,000 in one-time, non-cash
expense for options earned by employees pursuant to compensation arrangements
with exercise prices less than fair value. The balance for the years 1992 and
1993 includes dividends paid to and repurchases of shares of common stock from
employees, which shares are deemed to be stock options (deemed options) for
financial reporting purposes. See Notes 2 and 14 to the Consolidated Financial
Statements.
(3) For purposes of calculating net income per share, common stock and common
stock equivalent shares issued during the 12-month period prior to the Company's
initial public offering in 1994 have been included as if they were outstanding
for all periods presented using the treasury stock method.
(4) Represents net income before minority interest, income taxes, interest
expense, depreciation and amortization, and non-cash compensation related to
stock plans as described in notes (1) and (2) above.
16
<PAGE> 18
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 Prospectus and
in reports filed by the Company with the Securities and Exchange Commission. See
"Incorporation of Certain Documents by Reference," "Additional Information" and
"Risk Factors." Actual results might differ materially from results suggested by
any forward-looking statements in this Prospectus.
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, 1994, 1995 and 1996, and for the nine-month periods ended September 30, 1996
and 1997, and of certain factors that may affect the Company's prospective
financial condition and results of operations. The following should be read in
conjunction with the Consolidated Financial Statements and related Notes
appearing elsewhere herein.
OVERVIEW
From 1994 through 1996, annual net sales of the Company increased 33.8% from
$151.3 million in 1994 to $202.4 million in 1996. The increase in sales resulted
principally from increased geographic distribution and a broadening of the
Company's customer base and product lines. Sales increased from 1994 to 1996 in
all regions of the United States, with above average rates of growth in the
Midwestern and Northeastern markets. Expansion into overseas markets also
contributed to the sales growth over the last three years. During the year ended
December 31, 1996, gross profit margin increased to 38.5%, after decreasing from
35.9% in 1994 to 34.9% in 1995. The increase in 1996 was due primarily to lower
material costs, which declined after a substantial increase in 1995. Income from
operations as a percentage of sales, before stock compensation charges,
increased to 16.2% in 1996 from 13.9% in 1994, after a slight decrease in 1995.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage of net
sales of certain items in the Company's consolidated statements of operations.
<TABLE>
<CAPTION>
NINE MONTHS
Years Ended December 31, ENDED SEPTEMBER 30,
1994 1995 1996 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales 64.1% 65.1% 61.5% 61.9% 60.2%
----- ----- ----- ----- -----
Gross profit 35.9% 34.9% 38.5% 38.1% 39.8%
Selling expense 9.7% 10.2% 9.9% 9.8% 9.4%
General and administrative 12.3% 11.0% 12.4% 12.1% 12.3%
expense
Compensation related to stock plans 4.6% * 0.1% -- 0.2%
----- ----- ----- ----- -----
Income from operations 9.3% 13.6% 16.2% 16.2% 17.9%
Interest income (expense), net (0.4%) 0.1% 0.3% 0.2% 0.1%
----- ----- ----- ----- -----
Income before income taxes and 8.9% 13.7% 16.4% 16.5% 18.0%
minority interest
Provision for income taxes 5.4% 5.3% 6.7% 6.7% 7.3%
Minority interest * -- -- -- --
----- ----- ----- ----- -----
Net income 3.6% 8.4% 9.7% 9.7% 10.7%
===== ===== ===== ===== =====
</TABLE>
- ----------
* Less than 0.05%
17
<PAGE> 19
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Net Sales
Net sales in the first nine months of 1997 increased 22.3% to $186.3 million
from $152.3 million in the first nine months of 1996. The increase reflected
growth throughout the United States. The largest percentage increase was in the
Northeastern region of the country; California showed the next largest
percentage increase and the largest dollar increase in sales. Simpson Strong-
Tie's sales for the first nine months of 1997 increased 24.5% over the same
period last year while Simpson Dura-Vent's sales increased 14.4%. Home centers
and contractor distributors were the fastest growing connector sales channels.
The growth rate of SST's seismic, epoxy and engineered wood product sales also
remained strong, while SDV sales of Direct-Vent and chimney products experienced
above-average growth.
Gross Profit
Gross profit in the first nine months of 1997 increased 27.7% to $74.1 million
from $58.0 million in the first nine months of 1996. This increase resulted
primarily from lower overhead costs as a percentage of sales, despite an
increase in depreciation charges resulting principally from equipment purchased
during 1996.
Selling Expense
Selling expenses in the first nine months of 1997 increased 17.2% to $17.5
million from $14.9 million in the first nine months of 1996, but decreased
slightly as a percentage of sales. The increase was primarily due to higher
personnel costs related to the increase in the number of Sales Representatives
and Retail Specialists.
General and Administrative Expense
General and administrative expenses in the first nine months of 1997 increased
24.9% to $23.0 million from $18.4 million in the first nine months of 1996. The
increase was primarily due to increased cash profit sharing, as a result of
higher operating profit, as well as higher personnel costs, including those
associated with the acquisitions earlier in the year.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1996 AND 1995
Net Sales
Net sales in 1996 increased 20.5% to $202.4 million from $168.0 million in 1995.
Net sales of Simpson Strong-Tie products increased 19.8% to $152.1 million in
1996, while sales of Simpson Dura-Vent products increased by 22.8% to $50.3
million in 1996. SDV accounted for 24.9% of the Company's total net sales, up
from 24.4% in 1995. The increases in net sales at both SST and SDV were
primarily due to volume increases, with relatively small increases in average
prices. The increase in net sales occurred throughout the United States, but was
particularly strong in the Northeastern region of the country, primarily as a
result of increased home center and dealer distributor business. Sales in
California, however, grew at a rate substantially below the overall growth rate.
The Company also had above-average growth in export sales, a small but steadily
growing part of both the connector and venting businesses. The sales growth rate
of DIY, epoxy and seismic products led SST sales, and sales of Direct-Vent
products, now sold both to OEMs and through distributors, continued to
experience strong growth.
Gross Profit
Gross profit in 1996 increased 33.2% to $78.0 million from $58.6 million in
1995. Gross profit as a percentage of net sales increased to 38.5% in 1996 from
34.9% in 1995. The increase was primarily due to three factors. The first factor
was a substantial benefit attributable to the LIFO gain for the year as compared
to a LIFO loss in the prior year. Second, the non-material component of cost of
sales, which includes research and development costs, direct and indirect labor,
factory costs and shipping and freight, decreased slightly as a
18
<PAGE> 20
percentage of sales primarily due to the increased absorption of the fixed
components of these costs resulting from increased sales volume. Finally, raw
material costs decreased somewhat relative to 1995. Labor costs as a percentage
of sales remained relatively flat during 1996.
Selling Expense
In 1996, selling expense increased 17.5% to $20.1 million from $17.1 million in
1995. The increase was primarily due to higher advertising and sales promotion
expenses, a large percentage of which was targeted toward the retail business.
The Company also hired several new Retail Specialists to support the increased
home center and DIY business and added several sales people. In addition, the
increased sales at Simpson Dura-Vent resulted in proportionately higher
commissions and other related costs.
General and Administrative Expense
General and administrative expense increased 35.2% to $25.0 million in 1996 from
$18.5 million in 1995. The increase was primarily due to higher cash profit
sharing, as a result of higher operating profit, and the write-off of intangible
assets related to the Company's UK operations (see "Acquired Operations" below).
Also contributing to the increase in general and administrative expense were
increased personnel and overhead costs resulting from the addition of
administrative staff, including those at the businesses acquired in the second
half of 1995.
Interest Income (Expense), net
The Company had interest income of $595,180 in 1996 as compared to $141,535 in
1995. The increase resulted from the higher cash and short-term investment
balances during the year.
Provision for Taxes
The Company's effective tax rate increased to 40.8% in 1996 from 38.7% in 1995.
The lower 1995 tax rate was principally a result of the full recognition of
California investment tax credits on equipment purchased for manufacturing and
research and development.
Acquired Operations
The Company's United Kingdom operations continue to report losses. While sales
there have increased substantially since 1995, largely because of acquisitions,
current gross margins are substantially lower than those of the rest of the
Company's operations.
In December 1996, the Company completed the purchase of the assets, including
$675,000 in equipment, of the Builders Products Division of MiTek Industries
Ltd. for approximately $1.0 million. As a result of this acquisition, the
Company concluded that additional manufacturing space was needed and that the
consolidation of its UK facilities into a single location was advisable. In
connection with this consolidation, the Company wrote off approximately $1.1
million of intangible assets associated with the separate UK operations. The
Company recorded after-tax net losses in its European operations, including
intercompany interest charges and the $1.1 million charge discussed above, of
approximately $2.8 million in 1996 compared to after-tax net losses of $1.5
million in 1995. The losses were primarily due to depreciation on purchased
capital equipment and administrative and other overhead costs incurred as a
result of the growing operations. The Company expects these losses to continue
through at least 1998.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1995 AND 1994
Net Sales
Net sales in 1995 increased 11.0% to $168.0 million from $151.3 million in 1994.
Net sales of Simpson Strong-Tie products
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<PAGE> 21
increased 14.4% to $127.0 million in 1995, while net sales of Simpson Dura-Vent
products increased by 1.7% to $41.0 million in 1995. SDV accounted for 24.4% of
the Company's total net sales in 1995, down from 26.6% in 1994. The increase in
net sales at SST was primarily due to volume increases, with only a small
increase in average prices. SDV sales volume declined, but average sales price
increases of approximately five percent resulted in an overall sales increase.
The increase in net sales occurred throughout the United States but was
particularly strong in the Northeastern region of the country, primarily as a
result of increased home center and dealer distributor business. The Company
also had above-average growth in export sales, a small but steadily growing part
of both the connector and venting businesses. The sales growth rate of seismic
and DIY products led SST sales, and sales of SDV's Direct-Vent products for the
OEM venting market continued to experience strong growth. The increase in
Direct-Vent sales was largely offset, however, by decreases in other SDV
products.
Gross Profit
Gross profit in 1995 increased 7.9% to $58.6 million from $54.3 million in 1994.
Gross profit as a percentage of net sales decreased to 34.9% in 1995 from 35.9%
in 1994. The decrease was primarily due to higher raw material costs. Material
cost for galvanized and hot rolled sheet metal, the Company's primary raw
materials, increased compared to 1994. SDV experienced an increase of more than
30% in aluminum sheet metal prices in 1995. Overall, the Company's material
costs as a percentage of net sales increased slightly more than two percentage
points in 1995. In the aggregate, the non-material component of cost of sales,
which includes research and product development costs, direct and indirect
labor, factory costs and shipping and freight, increased at a rate that was
slightly less than the rate of increase in net sales.
Selling Expense
In 1995, selling expense increased 16.3% to $17.1 million from $14.7 million in
1994. The increase was due primarily to higher advertising and sales promotion
expenses, a large percentage of which was used to enhance retail displays and
product packaging. The Company also hired several new Retail Specialists to
provide additional support to the increased home center and DIY business and
added other key marketing personnel.
General and Administrative Expense
General and administrative expense decreased slightly to $18.5 million in 1995
from $18.6 million in 1994. The decrease was driven by lower expected losses on
delinquent accounts and lower professional service costs. The decrease was
partially offset by increased personnel and overhead costs as a result of the
addition of administrative staff, including those at the businesses acquired in
the second half of 1995.
Interest Income (Expense), net
The Company had interest income of $141,535 in 1995 as compared to interest
expense of $559,249 in 1994. This increase is primarily due to the repayment of
the Company's debt with proceeds from the initial public offering in the second
quarter of 1994 and the investment of excess cash in short-term instruments.
Provision for Taxes
The Company's effective tax rate decreased from 59.9% in 1994 to 38.7% in 1995
primarily due to the nondeductibility of approximately $6.4 million of the 1994
stock compensation charge. In addition, California investment tax credits on
equipment purchased for manufacturing and research and development contributed
to the lower effective tax rate in 1995.
Acquired Operations
The Company recorded after-tax net losses in its European operations, including
intercompany interest charges, of approximately $1.5 million in 1995 compared to
after-tax net losses of $858,000 in 1994. The losses were primarily due to costs
of new tooling, depreciation on purchased capital equipment and selling and
administrative and other overhead costs incurred related to the new operations.
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<PAGE> 22
QUARTERLY RESULTS
The following table sets forth unaudited consolidated statement of income data
for each quarter of 1995 and 1996 and the first three quarters of 1997. This
quarterly information has been prepared on the same basis as the annual
consolidated financial statements and, in the opinion of management, reflects
all adjustments, consisting only of normal recurring adjustments, necessary to
state fairly the information set forth herein. The operating results for any
quarter are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
1995 1996 1997
------------------------------------ ----------------------------------- ---------------------------
Dollars in thousands, FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH FIRST SECOND THIRD
except per share data QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 35,775 $ 41,862 $ 47,070 $ 43,251 $ 43,457 $ 51,760 $ 57,129 $ 50,063 $ 51,927 $ 65,555 $ 68,825
Cost of sales 24,036 25,980 29,974 29,378 28,356 31,509 34,441 30,088 32,609 39,228 40,364
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Gross profit 11,739 15,882 17,096 13,873 15,101 20,251 22,688 19,975 19,318 26,327 28,461
Selling expense 3,859 4,014 4,002 5,235 4,510 5,463 4,929 5,202 5,208 6,367 5,893
General and
administrative
expense 3,834 5,186 5,472 4,019 5,128 6,225 7,034 6,648 6,226 8,078 8,665
Compensation related to
stock plans -- -- -- 61 -- -- -- 180 -- -- 290
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Income from operations 4,046 6,682 7,622 4,558 5,463 8,563 10,725 7,945 7,884 11,882 13,613
Interest income
(expense), net 65 (12) 22 65 54 97 175 269 160 (18) 106
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Income before income
taxes 4,111 6,670 7,644 4,623 5,517 8,660 10,900 8,214 8,044 11,864 13,719
Provision for income
taxes 1,702 2,777 2,917 1,531 2,254 3,492 4,507 3,316 3,287 4,843 5,531
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net income $ 2,409 $ 3,893 $ 4,727 $ 3,092 $ 3,263 $ 5,168 $ 6,393 $ 4,898 $ 4,757 $ 7,021 $ 8,188
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
The Company's results of operations fluctuate from quarter to quarter. The
fluctuations are caused by various factors, primarily the increase in
construction activity during warmer months of the year. Historically, demand for
the Company's products has tended to be somewhat higher in the second and third
quarters and somewhat lower in the first and fourth quarters.
LIQUIDITY AND SOURCES OF CAPITAL
The Company's liquidity needs arise principally from working capital
requirements, capital expenditures and asset acquisitions. During the three
years ended December 31, 1996, the Company relied primarily on internally
generated funds, proceeds from the issuance of its Common Stock, and its credit
facilities to finance these needs. The Company's working capital requirements
are seasonal, with the highest working capital needs typically occurring in the
second and third quarters of the year. Cash and cash equivalents were $15.3
million, $19.8 million and $6.9 million at September 30, 1997, and December 31,
1996 and 1995, respectively. Working capital was $82.5 million, $70.7 million
and $52.0 million at September 30, 1997, and December 31, 1996 and 1995,
respectively. As of September 30, 1997, the Company had no significant debt and
had available to it unused credit facilities of approximately $22.9 million.
The Company had cash flows from operating activities of $24.6 million, $13.4
million and $9.6 million for 1996, 1995 and 1994, respectively. For the nine
months ended September 30, 1997, operating activities provided $10.4 million in
cash, which reflects both the seasonal nature of the business and increased
sales volumes as compared to the same period in the prior year. In 1996, cash
was provided by net income of $19.7 million, noncash expenses, such as
depreciation and amortization, of $7.2 million and increases in trade accounts
payable, accrued profit sharing and other liabilities totaling approximately
$4.9 million. In addition, income taxes payable increased by approximately $1.3
million. The Company's primary operating cash flow requirements resulted from
increased accounts receivable and inventory levels as the Company's sales
increased. In 1996, 1995 and 1994, the Company used cash of $7.7 million, $5.6
million and $9.3 million, respectively, to fund accounts receivable and
inventory requirements. The balance of the cash used in 1996 included increases
and decreases in other asset and liability accounts.
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<PAGE> 23
Cash used in investing activities was $12.3 million, $13.1 million and $11.1
million for 1996, 1995 and 1994, respectively. For the nine months ended
September 30, 1997, the Company used $15.0 million in its investing activities,
primarily for asset acquisitions and capital expenditures to expand capacity.
Capital expenditures, which again were primarily related to expanding capacity,
decreased in 1996 to $7.4 million from $10.0 million in 1995. Included in the
1995 expenditures was the purchase of two buildings acquired for $3.5 million in
cash. The Company also invested in machinery and equipment for use in production
throughout the United States and in its European operating units. Also included
in the investing activities is the purchase in 1996 of a short-term investment
that was sold in the first quarter of 1997.
In addition to the capital expenditures made in 1996, the Company purchased the
assets of the Builders Products Division of MiTek Industries Ltd. for
approximately $1.0 million in cash. In addition, asset purchases during the
first quarter of 1997 included two other acquisitions. The first was an equity
purchase of three Canadian companies and a related U.S. company, the Isometric
Group, which manufacture and distribute a line of mechanical anchors and related
products. The acquisition price was approximately $7.3 million plus an earnout
based on future sales increases. The second was the purchase, for approximately
$1.7 million, of the remaining 66% equity in Patrick Bellion, S.A., a French
manufacturer of connector products.
Financing activities provided net cash of $0.9 million and $0.5 million in 1995
and 1996, respectively, primarily as a result of the exercise of stock options
by current and former employees of the Company. In conjunction with the
Company's initial public offering in 1994, the Company received payment of
shareholder notes of $4.3 million and repaid $20.6 million of outstanding debt.
The Company believes that cash generated by operations and borrowings available
under its existing credit agreements, the majority of which have been renewed
through June 1998, will be sufficient for the Company's working capital needs
and planned capital expenditures through at least 1998.
INFLATION
The Company believes that the effect of inflation on the Company has not been
material in recent years, as inflation rates have remained low.
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<PAGE> 24
BUSINESS
OVERVIEW
The Company, through its subsidiary, Simpson Strong-Tie, designs, engineers and
is a leading manufacturer of wood-to-wood, wood-to-concrete and wood-to-masonry
connectors, and through its subsidiary, Simpson Dura-Vent, designs, engineers
and manufactures venting systems for gas and wood burning appliances. The
Company markets its products to the residential construction, light industrial
and commercial construction, remodeling and do-it-yourself ("DIY") markets. The
Company believes that SST benefits from strong brand name recognition among
architects and engineers who frequently specify in building plans the use of SST
products, and that SDV benefits from strong brand name recognition among
contractors, dealers, distributors and original equipment manufacturers ("OEMs")
to which SDV markets its products. The Company has continuously manufactured
structural connectors since 1956.
From 1992 through 1996, the Company's annual net sales grew from $98.1 million
to $202.4 million, a compound annual growth rate of 19.8%. During the same
period, the Company's annual net income grew from $6.1 million to $19.7 million,
a compound annual growth rate of 34.3%. In 1997, the Company has continued to
experience increases in sales and earnings. Growth has been derived primarily
from frequent new product introductions, expansion into new geographic markets
and growth of distribution channels.
Connectors produced by Simpson Strong-Tie typically are steel devices that are
used to strengthen, support and connect joints in residential and commercial
construction and DIY projects. These products enhance the safety and durability
of the structures in which they are installed and can save time and labor costs
for the contractor. SST's connector products increase structural integrity and
improve structural resistance to seismic, wind and other forces. Applications
range from building framing to deck construction to DIY projects. SST produces
and markets more than 1,300 standard connector products in addition to products
that it manufactures to custom specifications requested by architects and
engineers.
Simpson Dura-Vent's venting systems are used to vent gas furnaces and water
heaters, gas fireplaces and stoves, wood burning stoves and pellet stoves. SDV's
metal vents, chimneys and chimney liner systems exhaust the products of
combustion to the exterior of the building, and some products introduce outside
air into the appliance. SDV designs its products for ease of assembly and safe
operation and to achieve a high level of performance. SDV produces and markets
several hundred different venting products and systems.
The Company emphasizes continuous new product development and often obtains
patent protection for its new products. The Company's products are marketed in
all 50 states of the United States and in England, France, Germany, Canada,
Mexico, Japan and Australia. Both Simpson Strong-Tie and Simpson Dura-Vent
products are distributed through a contractor and dealer distributor network,
home centers and OEMs.
The Company has developed and uses automated manufacturing processes. Its
innovative manufacturing systems and techniques have allowed it to control
manufacturing costs, even while developing both new products and products that
meet customized requirements and specifications. The Company's development of
specialized manufacturing processes has also permitted increased operating
flexibility and enhanced product design innovation. The Company has developed a
quality management system that employs numerous quality-control procedures.
Since 1996, SST's quality management system has been registered under ISO 9001.
The Company has 11 manufacturing locations in the United States, Canada, France
and the United Kingdom.
The Company is a California corporation and was reorganized in 1994 as a holding
company for Simpson Strong-Tie and Simpson Dura-Vent.
INDUSTRY AND MARKET TRENDS
Based on trade periodicals, participation in trade and professional associations
and communications with governmental and quasi-governmental organizations and
customers and suppliers, the Company believes that
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<PAGE> 25
a variety of events and trends have resulted in significant developments in the
markets that the Company serves. Some of these events and trends are discussed
below.
Increased Awareness of Need for Building Safety
Recent natural disasters throughout the world have focused attention on safety
concerns relating to the structural integrity of homes and other buildings. The
1995 earthquake in Kobe, Japan, the 1994 earthquake in Northridge, California,
the 1989 Loma Prieta earthquake in Northern California, Hurricanes Hugo in 1989
and Andrew in 1992 in the Southeast, and other less cataclysmic natural
disasters damaged and destroyed innumerable homes and other buildings, resulting
in heightened consciousness of the fragility of some of those structures.
In recent years, architects, engineers, model code agencies, contractors,
building inspectors and legislators have continued efforts to improve structural
integrity and safety of homes and other buildings in the face of disasters of
various types, including seismic events, storms and fires. Based on ongoing
participation in trade and professional associations and communications with
governmental and quasi-governmental regulatory agencies (see
"Business--Regulation"), the Company believes that building codes are being
strengthened and that their enforcement is becoming more rigorous. The Company's
products are designed to respond to increasing demand resulting from these
trends.
Increased Environmental Awareness
The requirements of the Endangered Species Act, the Federal Lands Policy
Management Act and the National Forest Management Act have resulted in
increasingly limited amounts of timber available for harvest from public lands.
This has contributed to an increase in lumber prices and a concomitant increase
in the use of engineered wood products. Engineered wood products, which
substitute for strong, clear-grained lumber historically obtained from logging
older, large-diameter trees, have been developed to conserve lumber. Engineered
wood products frequently require specialized connectors. Sales of Simpson
Strong-Tie's engineered wood connector products increased significantly in 1995
and 1996 and the first nine months of 1997.
Concerns about energy conservation and air quality have led to increasing
recognition of the advantages of natural gas as a heating fuel, including its
abundance and clean burning characteristics. Use of natural gas for home heating
has been increasing in the United States. According to the Census Bureau, the
share of new single-family houses in 1996 heated with natural gas was 69%, a
slight increase from 67% in 1994. Sales of gas fireplaces have increased in
recent years relative to those of traditional wood burning fireplaces.
Traditional wood burning fireplaces negatively affect both indoor and outdoor
air quality. In contrast, direct vent gas fireplaces draw air for combustion
from outdoors (through the double wall venting system) and feature sealed glass
doors that reduce indoor air contamination. In the past, Simpson Dura-Vent
products have not been sold into the traditional masonry and manufactured
fireplace market. The recent trend from wood to gas fireplaces is viewed as a
significant opportunity for SDV's gas venting products.
Expanding Home Center Markets and DIY Activity
Throughout the United States, home centers have grown substantially. The
National Retail Hardware Association estimates that there are 44,500 home
centers and lumber and building material outlets in the United States, more than
twice the number estimated in 1993. The Company believes that at least in part
as a result of this trend, its direct sales to home centers increased
significantly in 1996 and in the first nine months of 1997.
BUSINESS STRATEGY
The Company designs, manufactures and sells products that are of high quality
and performance, easy to use and cost-effective for customers. The Company
provides rapid delivery of its products and prompt engineering and sales
support. Based on its communications with customers, engineers, architects,
contractors and other industry participants, the Company believes that its
products have strong brand name recognition, and the Company seeks to continue
to develop the value of its brand names through a variety of customer-driven
24
<PAGE> 26
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.
Increase Specification by Architects and Engineers
Specification in architects' and engineers' plans and drawings generally
determines which products will be used for particular purposes and therefore is
key to the use of the Company's products in construction projects. The Company
encourages architects and engineers to specify the installation of the Company's
products in projects they design and supervise, and encourages acceptance of the
Company's products by construction contractors. The Company maintains frequent
contacts with architects, engineers and contractors, as well as private
organizations that provide information to building code officials, both to
inform them regarding the quality, proper installation, capabilities and value
of the Company's products and to update them about product modifications and new
products that may be useful or needed. The Company sponsors seminars to inform
architects, engineers and building officials on appropriate use and proper
installation of the Company's products.
Expand Product and Distribution Coverage
The Company seeks to expand its product and distribution coverage through
several channels:
Distributors. The Company regularly evaluates its distribution coverage and
service levels provided by its distributors and from time to time modifies its
distribution strategy and implements changes to address weaknesses and
opportunities. The Company has various programs to evaluate distributor product
mix and conducts promotions to encourage distributors to add Company products
that complement their mix of product offerings in their markets.
Through its efforts to increase specifications by architects and engineers, and
through increasing the number of products sold to particular contractors, the
Company seeks to increase sales to distributors that serve building contractors.
The Company continuously seeks to expand the number of contractors served by
each distributor through such sales efforts as demonstrations of product
cost-effectiveness and information programs.
Home Centers. The Company intends to continue to increase penetration of the DIY
markets by solicitation of home centers. The Company's Sales Representatives and
Retail Specialists maintain on-going contact with home centers to provide timely
product availability. To satisfy specialized requirements of the home center
market, the Company has developed extensive bar coding and merchandising aids
and has concentrated a portion of its research efforts into the development of
DIY products.
OEM Relationships. The Company works closely with manufacturers of engineered
wood products and OEMs in developing and expanding the application and sales of
Simpson Strong-Tie's engineered wood connector products and Simpson Dura- Vent's
gas, wood and pellet stove venting products. SST has relationships with several
of the largest manufacturers of engineered wood products, and SDV has OEM
relationships with several major gas fireplace and gas stove manufacturers.
Continue Geographic Expansion of Customer Base
The Company is expanding its established facilities outside California to
increase its presence and sales in markets east of the Rocky Mountains. During
the last five years, the Company has expanded or has planned to expand nearly
all of its manufacturing and warehouse facilities. Sales in the 37 states east
of the Rocky Mountains grew approximately 34% from 1994 to 1996 and represented
approximately 49% of the Company's 1996 domestic sales. In the last four years,
the Company commenced manufacturing in England, opened a warehouse facility in
Western Canada, purchased manufacturers in Eastern Canada and in France, made an
equity investment in a product design and distribution company in Germany and
entered into a distribution arrangement in Japan. The European investments are
intended to establish a presence in the European
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<PAGE> 27
Community through companies with existing customer bases and through servicing
U.S.-based customers operating there. The Company intends to continue to pursue
and expand operations outside the United States.
Provide Rapid Delivery of High Quality Products to Customers
The Company's goal is to manufacture and warehouse its products in geographic
proximity to its markets to provide availability and rapid delivery of products
to customers and prompt response to customer requests for specially designed
products and services. With respect to the DIY and dealer markets, the Company's
strategy is to keep the customer's retail stores continuously stocked with
adequate supplies of the full line of the Company's products that those stores
carry. The Company manages its inventory to assure continuous product
availability. Most customer orders are filled within a few days. High levels of
manufacturing automation and flexibility allow the Company to maintain its
quality standards while continuing to provide prompt delivery. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Create New Proprietary Products Responsive to Customer Needs
The Company's product research and development is based largely on needs that
customers communicate to the Company. The Company typically has developed 10 to
15 new products annually (some of which may be produced in a range of sizes).
The Company's strategy is to develop new products on a proprietary basis where
possible. Of more than 80 patents that the Company owns, 67 cover products that
the Company currently manufactures and markets. The Company has filed 23 patent
applications that are pending.
Acquire Complementary Product Lines
The Company's long-term strategy is to develop, acquire or invest in product
lines or businesses that (a) complement the Company's existing product lines,
(b) can be marketed through its existing distribution channels, (c) might
benefit from use of the Simpson Strong-Tie and Simpson Dura-Vent brand names,
and (d) are responsive to needs of the Company's customers.
SIMPSON STRONG-TIE
Overview
Connectors produced by Simpson Strong-Tie typically are steel devices that are
used to strengthen, support and connect joints in residential and commercial
construction and DIY projects. These products enhance the safety and durability
of the structures in which they are installed and can save time and labor costs
for the contractor. SST's connector products increase structural integrity and
improve structural resistance to seismic, wind and other forces. Applications
range from building framing to deck construction to DIY projects. SST produces
and markets more than 1,300 standard connector products in addition to products
that it manufactures to custom specifications requested by architects and
engineers.
In the United States, connector usage developed faster in the West than
elsewhere due to the low cost and abundance of timber and to local construction
practices. Increasingly, the market has been influenced both by a growing
awareness that the devastation caused by seismic, wind and other disasters can
be reduced through improved building codes and construction practices and by
environmental concerns that contribute to the increasing cost and reduced
availability of wood. Most Simpson Strong-Tie products are listed by recognized
building standards agencies as complying with model building codes and are
specified by architects and engineers for use in projects they are designing or
supervising. The engineered wood products industry is developing in response to
concerns about the availability of wood, and the Company believes that SST is
the leading supplier of connectors for use with engineered wood products. SST
operates manufacturing and warehouse facilities in California, Texas, Ohio,
Florida, Illinois, British Columbia, Ontario, England and France.
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<PAGE> 28
Products
Simpson Strong-Tie is a recognized brand name in the markets it serves. Over a
quarter of SST's 1996 revenues are derived from products that are protected by
patents. SST manufactures and markets three primary categories of connector
products: wood-to-wood, wood-to-concrete and wood-to-masonry. In addition,
Simpson Strong-Tie manufactures a line of connectors for steel frame
construction, the demand for which is likely to increase if the cost of steel
frame construction declines relative to the cost of wood frame construction. SST
also markets specialty screws and nails for proper installation of certain of
its connector products. For tying wood members to the foundation, SST has
designed and currently markets a line of anchor bolts and the associated parts
for aligning the anchor bolts, as well as threaded rod, epoxy and mechanical
anchors, which have seismic, retrofit and remodeling applications for both new
construction and DIY markets.
Almost all of Simpson Strong-Tie's products are listed by recognized model
building code agencies. To achieve such listings, SST conducts extensive product
testing, which is witnessed and certified by independent testing engineers. The
tests also provide the basis for publication of load ratings for SST structural
connectors, and this information is used by architects, engineers, contractors
and homeowners. The information is useful across the range of applications of
SST's products, from the deck constructed by a homeowner to a multi-story
structure designed by an engineer in an earthquake zone.
Simpson Strong-Tie also manufactures connector products specifically designed
for use with engineered wood products, such as wood I-joists. With increased
timber costs and reduced availability of trees suitable for making traditional
solid sawn lumber, construction with engineered wood products has increased
substantially in the last three years. Over the same period, SST's net sales of
engineered wood connectors through dealer and contractor distributors and
engineered wood product manufacturers have also increased significantly.
New Product Development
Simpson Strong-Tie commits substantial resources to engineering and new product
development. The majority of SST's products have been developed through SST's
internal research and development program. Of the 62 U.S. and 15 foreign patents
that SST owns, 64 cover products that SST currently manufactures and markets.
SST typically has developed 10 to 15 new products each year. SST's research and
development expense for the three years ended December 31, 1994, 1995 and 1996,
and for the nine-month periods ended September 30, 1996 and 1997, was $713,000,
$922,000, $1,025,000, $794,000 and $732,000, respectively. As part of the new
product development process, SST engineers, in cooperation with sales and
marketing staff, meet regularly with architects, engineers, building inspectors,
code officials and customers. Several new products derived from existing product
lines are developed annually. SST recently developed and introduced a line of
powder-coat painted shelf brackets primarily for the DIY market, high-strength
chemical epoxy anchor systems, and reduced deflection hold-downs and associated
fasteners. The Company believes that existing distribution channels are
receptive to product line extensions, thereby enhancing SST's ability to enter
new markets.
Sales and Marketing
Sales Organization. Simpson Strong-Tie's sales and marketing programs are
implemented through SST's branch system. SST currently maintains branches in
Northern and Southern California, Texas, Ohio, England and France. Each branch
is served by its own sales force as well as manufacturing, warehouse and office
facilities. Each branch is responsible for a broad geographic area. Branch
managers have significant autonomy, which includes setting sales and marketing
strategies. Each domestic branch is an independent profit center with a cash
profit sharing bonus program based on its own performance. At the same time, the
domestic branches closely integrate their manufacturing activities to enhance
product availability. Branch sales forces in the U.S. are supported by sales and
marketing managers in the home office in Pleasanton, California. The sales force
maintains close working relationships with customers, develops new business,
calls on architects, engineers and building officials and participates in a
range of educational seminars.
Distribution Channels. Simpson Strong-Tie sells its products through an
extensive distribution system comprising dealer distributors supplying thousands
of retail locations nationwide, contractor distributors
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<PAGE> 29
(primarily on the West Coast), home centers (including more than 1,800 stores
across the United States), manufacturers of engineered wood products, and
specialized contractors such as roof framers. SST's sales in 1996 through dealer
distributors and contractor distributors amounted to approximately 60% of its
total sales. SST's DIY and dealer products are used to build projects such as
decks, patio covers and shelf and bench systems. In 1996, SST completed an
agreement with a Japanese trading partner to distribute its products in Japan.
SST has also received C-Mark equivalency clearance from the Japanese building
code authorities, which is expected to facilitate acceptance of its products
into that market. The Company believes that SST's increasing diversification
into new and growing markets has reduced its vulnerability to construction
industry cycles. In addition to its branches, SST operates manufacturing and/or
warehouse facilities in Florida, Illinois and Canada.
Customer Service. Simpson Strong-Tie dedicates substantial resources to customer
service. Every year, SST produces numerous publications and point-of-sale
marketing aids to serve specifiers, distributors, retailers and users. These
publications include SST's general catalog, as well as various specific
catalogs, such as those for its epoxy products and the engineered wood and
plated truss industries. The catalogs and publications describe the products and
provide load and installation information. SST publishes a newsletter, Connector
Update, providing technical, installation and other information, as well as
publications addressing seismic and hurricane conditions and the DIY market. To
serve users in the U.S. and elsewhere who do not speak English, SST employs
bilingual sales people and prints some of its publications in other languages.
Simpson Strong-Tie's engineers not only design and test products, but also
provide engineering support for customers. This support might range from the
discussion of a load value in a catalog to testing a unique application for an
existing product. SST's sales force communicates with customers in each of its
marketing channels, through its publications, through seminars and through
frequent calls.
Prompt Delivery of Products. Based on its communications with customers, Simpson
Strong-Tie believes that its products are essential to its customers'
businesses, and it is SST's policy to ship products ordered within a few days of
receiving the order. Many of SST's customers are contractors that require rapid
delivery of needed products. Home centers and dealers also require superior
service, because of fluctuating demand. To satisfy these requirements, SST
maintains high inventory levels, has redundant manufacturing capability and some
multiple dies to produce the same parts, and maintains computer sales and
inventory control and forecasting capability throughout its nationwide network
of factories and warehouses. The Company also has special programs for
contractors intended to ensure the prompt and reliable manufacture and delivery
of custom products.
Keeping the Racks Full. Simpson Strong-Tie believes that dealer and home center
sales of SST products are significantly greater when the bins and racks at large
dealer and home center locations are adequately stocked with appropriate
products. Various retailers carry varying numbers of different SST products and
SST's Retail Specialists are engaged in ongoing efforts to inform retailers
about other SST products that can be used in their specific markets and to
encourage them to add these products to better meet their customers' needs.
Achieving these objectives requires teamwork and significant inventory
commitments between SST and the distributors and retailers. Retail Specialists
are playing a significant role in keeping the racks full and extending the
product lines at the large dealer and home center level. They help retailers
order product, set up merchandising systems, stock shelves, hold product
seminars and provide SST with daily information that is used to improve service
and product mix.
SIMPSON DURA-VENT
Overview
Simpson Dura-Vent's venting systems are used to vent gas furnaces and water
heaters, gas fireplaces and stoves, wood burning stoves and pellet stoves. SDV's
metal vents, chimneys and chimney liner systems exhaust the products of
combustion to the exterior of the building and have been designed for ease of
assembly and safe operation and to achieve a high level of performance. SDV
produces and markets several hundred different venting products and systems.
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<PAGE> 30
In recent years, the abundant supply and clean burning characteristics of
natural gas have gained public recognition, resulting in increased market share
for gas appliances in the new construction and the appliance replacement
markets. In addition, concern over energy conservation and environmental air
quality has resulted in increased use of gas stoves and fireplaces rather than
the traditional wood burning stoves and fireplaces. As a result, new venting
systems, such as Direct-Vent, have been developed to address changes in
appliance technology.
Simpson Dura-Vent's objective is to expand market share in all of its
distribution channels, by entering expanding markets that address energy and
environmental concerns. SDV's strategy is to capitalize on its strengths in new
product development and its established distribution network and to continue its
commitment to superior quality and service. SDV operates manufacturing and
warehouse facilities in California and Mississippi.
Products
Simpson Dura-Vent is a leading supplier of double-wall Type B Gas Vent systems,
used for venting gas furnaces, water heaters, boilers and decorative gas
fireplaces. According to the Gas Appliance Manufacturers' Association ("GAMA"),
approximately 4.9 million gas water heaters and approximately 2.9 million gas
furnaces were sold in 1996. SDV believes that there is significant potential in
the gas fireplace market, because of the large number of fireplaces sold in the
new construction market, the relative ease of installing side-wall vented gas
fireplaces for the remodeling market and the trend from wood to gas as a result
of environmental concerns and ease of operation.
Simpson Dura-Vent's Type B Gas Vent product line features heavy-duty quality
construction and a twist-lock design that provides for fast and easy job-site
assembly compared to conventional snap together designs. The twist-lock design
has broader applications and has been incorporated into SDV's gas, pellet and
direct vent product lines.
Simpson Dura-Vent has introduced a patented flexible vent connector,
Dura/Connect, for use between the gas appliance flue outlet and the connection
to the Type B Gas Vent installed in the ceiling. Dura/Connect eliminates the
difficult and time consuming process of cutting, crimping and fitting galvanized
steel vent connectors. Marketed to home centers and hardware stores,
Dura/Connect offers a simple twist, bend and connect installation for water
heaters and gas furnaces.
The wood stove industry has responded to air quality concerns with substantial
reductions in wood stove particulate emissions. In 1985, Simpson Dura-Vent
introduced Dura-Plus, a patented chimney system for use with wood burning
stoves. The Dura-Plus chimney is used with Environmental Protection Agency
("EPA") approved wood stoves. The Dura-Plus safety valve design provides
enhanced fire safety in the event of a creosote chimney fire. Dura-Plus chimney
is available in kits, and is sold through retail fireplace specialty shops and
home centers. The growing gas fireplace market has evolved into two basic types
of fireplace: top-vent fireplaces that are vented with the standard Type B Gas
Vent and direct-vent fireplaces that use a special double-wall venting system.
Since 1993, SDV has provided direct-vent gas fireplace venting systems under OEM
contracts with several major fireplace manufacturers in the United States. SDV's
direct-vent system is designed not only to exhaust the flue products, but also
to draw in outside air for combustion, an important feature in modern
energy-efficient home construction. The direct-vent gas fireplace systems
provide ease of installation, permitting horizontal through-the-wall venting or
standard vertical through-the-roof venting. Sales of Direct-Vent have been
robust. In 1996, SDV expanded its Direct-Vent product line to include both
co-axial and co-linear direct vent systems for venting gas stoves and gas
inserts into existing masonry chimneys or existing factory-built metal chimneys.
Since early 1995, nearly all wood stove manufacturers have introduced direct
vent gas stoves. Simpson Dura-Vent has entered into OEM and distribution
relationships with several of these manufacturers to supply Direct Vent venting
products. In 1994, SDV introduced Direct Vent G.S., a decorative direct vent
system for venting free standing gas stoves. The recent trend from wood to gas
stoves, while increasing competition for wood and pellet appliance venting
products, is viewed as a significant opportunity for SDV's gas venting products.
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<PAGE> 31
New Product Development
Simpson Dura-Vent has gained industry recognition by offering innovative new
products that meet changing needs of customers. SDV representatives serve on
industry committees concerned with issues such as new appliance standards and
government regulations. SDV also maintains working relationships with research
and development departments of major appliance manufacturers, providing
prototypes for field testing and conducting tests in SDV's testing laboratory.
SDV believes that such relationships provide competitive advantages. For
example, several years ago, SDV introduced the first special vent for the newly
invented pellet stoves, and more recently, SDV introduced the first direct vent
system for the increasingly popular direct vent gas appliances.
Sales and Marketing
Simpson Dura-Vent's sales organization consists of a director of sales and
marketing, a marketing communications manager, regional sales managers, and
independent representative agencies. SDV markets venting systems for both gas
and wood burning appliances through wholesale distributors in the United States,
Canada and Australia to the HVAC (heating, ventilating and air conditioning) and
PHC (plumbing, heating and cooling) contractor markets, and to fireplace
specialty shop distributors. These customers sell to contractor and DIY markets.
SDV also markets venting products to home center and hardware store chains. SDV
has entered into OEM relationships with several major gas fireplace and gas
stove manufacturers, which SDV believes are leaders in the direct-vent gas
appliance market. Approximately 56% of SDV's sales in 1996 were through HVAC and
PHC distributors, with most of the balance through fireplace specialty shop
distributors, OEMs and home centers.
Simpson Dura-Vent responds to technological changes occurring in the industry
through new product development and has developed a reputation for quality and
service to its customers. To reinforce the image of quality, SDV produces
extensive sales support literature and advertising materials. Recognizing the
difficulty that customers and users may have in understanding new, complex
venting requirements, SDV publishes a venting handbook to assist contractors,
building officials and retail outlets with the science of proper venting.
Advertising and promotional literature has been designed to be used by
distributors and their customers, as well as home centers and hardware chains.
MANUFACTURING PROCESS
The Company has concentrated on making its manufacturing processes as efficient
as possible without sacrificing the flexibility necessary to service the needs
of its customers.
The Company has developed and uses automated manufacturing processes. The
Company's innovative manufacturing systems and techniques have allowed it to
control manufacturing costs, even while developing both new products and
products that meet customized requirements and specifications. The Company's
development of specialized manufacturing processes also has permitted increased
operating flexibility and enhanced product design innovation.
The Company is committed to helping people build safer structures economically
through the design, engineering and manufacturing of structural connector and
related products. To this end, the Company has developed a quality management
system that employs numerous quality-control procedures, such as
computer-generated work orders, constant review of parts as they are produced
and frequent quality testing. Since 1996, Simpson Strong-Tie's quality
management system has been registered under ISO 9001, an internationally
recognized set of quality-assurance standards. ISO registration is a significant
asset in doing business with European companies, and it is becoming increasingly
important to U.S. companies as well.
Most of Simpson Strong-Tie's products are produced with a high level of
automation, using progressive dies run in automatic presses making parts from
coiled sheet steel often in excess of 100 strokes per minute. SST produces 500
million product pieces per year. Over half of SST's products are individually
bar coded, particularly the products which are sold to home centers. SST has
significant press capacity and has some
30
<PAGE> 32
multiple dies for its high volume products because of the need to produce the
product close to the customer and to provide backup capacity. The balance of
production is accomplished through a combination of manual, blanking and
numerically controlled (NC) processes which include robotic welders, lasers and
turret punches. SST believes it is the only manufacturer in the connector
industry using NC turret punches to manufacture a large variety of standard and
special products. This capability allows SST to produce products with little
redesign or set-up time, facilitating rapid turnaround for customers. New
tooling is also highly automated. Dies are designed and produced using computer
aided design (CAD) and computer aided machinery (CAM) systems. CAD/CAM
capability enables SST to create multiple dies rapidly and design them to high
standards. The Company is constantly reviewing its product line to reduce
manufacturing costs and increase automation.
Simpson Dura-Vent produces component parts for venting systems using NC-
controlled punch presses equipped with high-speed progressive and compound
tooling. SDV's vent pipe and elbow assembly lines are automated, to produce
finished products efficiently from large coils of steel and aluminum. UPC bar
coding and computer tracking systems provide SDV's industrial engineers and
production supervisors with real-time productivity tools to measure and evaluate
current production rates, methods and equipment.
REGULATION
Simpson Strong-Tie's product lines are subject to Federal, state, county,
municipal and other governmental and quasi-governmental regulations that affect
product design, development, testing, applications, marketing, sales,
installation and use. Most SST products are recognized by building code and
standards agencies. Agencies that recognize Company products include the
International Conference of Building Officials ("ICBO"), Building Officials and
Code Administrators International ("BOCA"), Southern Building Code Congress
International ("SBCCI"), The National Evaluation Service, the City of Los
Angeles, Dade County, Florida, and the California Division of Architecture.
These and other code agencies adopt various testing and design standards and
incorporate them into their related building codes. For example, ICBO
requirements are codified in the Uniform Building Code. The Uniform Building
Code generally applies to construction in the Western United States. To be
recognized by ICBO, SST products must conform to Uniform Building Code
requirements. SST considers this recognition to be a significant marketing tool
and devotes considerable effort to obtaining appropriate approvals for its
products. SST believes that architects, engineers, contractors and other
customers are less likely to purchase structural products that lack the
appropriate code approval or acceptance, at least if code-accepted competitive
products are available. SST's management actively participates in industry
related professional associations to keep abreast of regulatory changes and to
provide information to regulatory agencies.
Simpson Dura-Vent operates under a complex regulatory environment that includes
appliance and venting performance standards related to safety, energy efficiency
and air quality. Gas venting regulations are contained in the National Fuel Gas
Code ("NFGC"), while safety and performance regulations for wood burning
appliances and chimney systems are contained in a National Fire Protection
Association standard ("NFPA 211"). Standards for testing gas vents and chimneys
are developed by testing laboratories such as Underwriter's Laboratories ("UL")
in compliance with the American National Standards Institute. Clean air
standards for both gas and wood burning appliances are regulated by the EPA.
Energy efficiency standards are regulated by the Department of Energy ("DOE")
under the authority of the National Appliance Energy Conservation Act. See "Risk
Factors--Regulatory Matters." The standards and regulations contained in the
NFGC and NFPA 211 are ultimately adopted by national building code organizations
such as ICBO, BOCA and SBCCI. In turn, the various building codes are adopted by
local municipalities, resulting in enforcement through the building permit
process. Safety, air quality and energy efficiency requirements are enforced by
local air quality districts and municipalities by requiring proper UL, EPA and
DOE labels on appliances and venting systems.
COMPETITION
The Company faces a variety of competition in all of the markets in which it
participates. This competition ranges from subsidiaries of large national
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.
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<PAGE> 33
Simpson Strong-Tie competes with numerous companies and its competitors
generally are privately held businesses. Most of the competitors tend to be more
regional than SST, but one distributes its products nationally.
The venting industry is highly competitive. Many of Simpson Dura-Vent's
competitors have greater financial and other resources than SDV. SDV's principal
competitors include the Selkirk Metalbestos Division of Eljer Industries Inc. (a
subsidiary of Zurn Industries), American Metal Products Co. (a subsidiary of
Masco Corp.), Metal-Fab, Inc., Hart & Cooley, Inc. and the Air Jet Division of
General Products Co. The Company believes that Metal-Fab, Inc., Hart & Cooley,
Inc. and Air Jet tend to be more regional than SDV, and that they have smaller
shares of the national market than SDV. See "Risk Factors-Competition."
RAW MATERIALS
The principal raw material used by the Company is steel, including stainless
steel, and is generally ordered to specific American Society of Testing and
Materials ("ASTM") standards. Other raw materials include aluminum, aluminum
alloys and ceramic and other insulation materials, which are used by Simpson
Dura-Vent, and cartons, which are used by both SST and SDV. The Company
purchases raw materials from a variety of commercial sources. The Company's
practice is to seek cost savings and enhanced quality by purchasing from a
limited number of suppliers. See "Risk Factors--Effect of Increased Raw
Materials Costs" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
PATENTS AND PROPRIETARY RIGHTS
The Company's subsidiaries own more than 80 U.S. and foreign patents, of which
67 cover products that they currently manufacture and market. Its subsidiaries
have filed 11 U.S. and 12 foreign patent applications that are currently
pending. These patents and patent applications cover various design aspects of
the subsidiaries' products as well as processes used in their manufacture. The
Company's subsidiaries are continuing to develop new potentially patentable
products, product enhancements and product designs. Although the Company's
subsidiaries do not intend to apply for additional foreign patents covering
existing products, the Company is developing an international patent program to
protect new products that its subsidiaries may develop. See "Risk
Factors--Dependence on Intellectual Property Protection."
The Company's subsidiaries hold 81 trademark registrations in the U.S. and
foreign countries covering 48 trademarks, have 35 trademark registration
applications pending in the U.S. and foreign countries covering six trademarks,
and use several other trademarks that they have not yet attempted to register.
ACQUISITIONS AND STRATEGIC INVESTMENTS
The Company's future growth, if any, may depend to a some extent on its ability
to penetrate new markets, both domestically and internationally. See
"Business--Business Strategy" and "Business--Industry and Market Trends."
Therefore, the Company may in the future pursue acquisitions of product lines or
businesses. See "Risk Factors--Dependence on New Markets; Expansion Outside the
United States" and "Risk Factors--Ability to Assimilate Acquisitions."
In 1996, the Company purchased for approximately $1.0 million the assets of the
Builders Products Division of MiTek Industries Ltd. ("MiTek") and entered into
an agreement to supply MiTek with connector products in the UK. In addition,
during the first quarter of 1997, the Company purchased three Canadian companies
and a related U.S. company, the Isometric Group, which manufacture and
distribute a line of mechanical anchors and related products, for approximately
$7.3 million plus an earnout based on future sales increases. Also during the
first quarter of 1997, the Company purchased, for approximately $1.7 million,
the remaining 66% equity in Patrick Bellion, S.A., a French manufacturer of
connector products. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Sources of Capital."
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<PAGE> 34
EMPLOYEES AND LABOR RELATIONS
As of September 30, 1997, the Company had 1,243 full-time employees, of whom 875
were hourly employees and 368 were salaried employees. The Company believes that
its overall compensation and benefits for the most part exceed industry averages
and that its relations with its employees are good.
A significant number of the Company's employees at two of the Company's major
manufacturing facilities are represented by labor unions and are covered by
collective bargaining agreements. Three of the Company's collective bargaining
agreements at two of its California facilities were renegotiated in 1995. These
agreements cover sheetmetal workers in Brea, California, and the Company's tool
and die craftsmen in both Brea and San Leandro, California. These three
contracts were extended into 1998 and 1999. A fourth contract, covering
sheetmetal workers in San Leandro, expires in July 2000.
The Company maintains several profit sharing, stock option and bonus plans to
provide incentives to its employees. The Company's cash profit sharing bonus
plan gives participating employees the opportunity to benefit from the Company's
operating profits above certain minimum levels established by the Board of
Directors. The Company's subsidiaries maintain defined contribution profit
sharing plans for their U.S.-based salaried employees and nonunion hourly
employees, and the Company contributes annually to these plans from 10% to 15%
of eligible earnings, as defined in the plans. The Company's 1994 Stock Option
Plan provides for the grant of options to employees, directors and consultants
of the Company and currently authorizes the grant of stock options to purchase
up to an aggregate of 1,500,000 shares of Common Stock; options to purchase an
aggregate of 853,218 shares were outstanding under this Option Plan as of
September 30, 1997. In addition, employees who have been employed by the Company
for more than ten years and who the Company determines are not eligible to
participate in the 1994 Stock Option Plan may be awarded stock and cash bonuses
under the Company's 1994 Employee Stock Bonus Plan, based on their years of
service with the Company.
PROPERTIES
The Company maintains its home office in Pleasanton, California, and other
offices, manufacturing and warehouse facilities elsewhere in California and in
Texas, Ohio, Florida, Mississippi, Illinois, British Columbia, Ontario, England
and France. As of September 30, 1997, the Company owned or leased office,
manufacturing and warehouse facilities occupying an aggregate of approximately
1,700,000 square feet. See Notes 10 and 15 to the Consolidated Financial
Statements.
The Company's manufacturing facilities are equipped with specialized equipment
and use extensive automation. The Company considers its existing and planned
facilities to be suitable and adequate for its operations as currently conducted
and as planned through 1998. The manufacturing facilities currently are being
operated with two shifts at most plants. The Company anticipates that it may
require additional facilities to accommodate its growth in later years.
LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation that it considers to be
in the normal course of its business. No such litigation within the last five
years resulted in any material loss. The Company is not engaged in any legal
proceedings as of the date hereof, which the Company expects individually or in
the aggregate to have a material adverse effect on the Company's financial
condition or results of operations.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY AND ITS SUBSIDIARIES
The name, age, and current position(s) of each director and executive officer of
the Company are as follows:
<TABLE>
<CAPTION>
NAME Age Present Principal Position and Offices with the Company and Its Subsidiaries
- ---- --- ----------------------------------------------------------------------------
<S> <C> <C>
Barclay Simpson(1)(4) 76 Chairman of the Board and Director of the Company, SST
and SDV
Thomas J Fitzmyers 57 President, Chief Executive Officer and Director of the
Company and SST; Director of SDV
Stephen B. Lamson 45 Chief Financial Officer, Treasurer, Secretary and
Director of the Company, SST and SDV
Donald M. Townsend 50 President, Chief Executive Officer and Director of SDV
Earl F. Cheit(2)(4) 71 Director of the Company
Alan R. McKay(2)(4) 71 Director of the Company
Sunne Wright McPeak(1)(3)(4) 49 Director of the Company
Barry Lawson Williams(1)(2)(3)(4) 53 Director of the Company
</TABLE>
- ----------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
(3) Member of 1994 Stock Option Plan Committee
(4) Member of the Growth Committee
The Board of Directors has not established a nominating committee. The Board of
Directors currently comprises seven members. All directors hold office until the
next annual meeting of the shareholders or until their successors are elected.
Barclay Simpson has been the Chairman of the Board of Directors and a director
of the Company since 1956. Since 1982, Mr. Simpson and his wife have owned
Barclay Simpson Fine Arts Gallery, a commercial art gallery in Lafayette,
California. Mr. Simpson is also a member of the Boards of Directors of Civic
Bancorp, Calender Robinson Insurance, the University Art Museum of the
University of California at Berkeley, the California College of Arts and Crafts
and other charitable and educational institutions.
Thomas J Fitzmyers has served as President and a director of the Company since
1978, as the President and a director of Simpson Strong-Tie since 1983 and as a
director of Simpson Dura-Vent since 1982. He was appointed as the Company's
Chief Executive Officer in 1994. Mr. Fitzmyers was employed by Union Bank from
1971 to 1978. He was a Regional Vice President when he left Union Bank to join
the Company in 1978.
Stephen B. Lamson has served as the Company's, Simpson Strong-Tie's and Simpson
Dura-Vent's Chief Financial Officer and Treasurer since 1989, as the Company's
and SDV's Secretary since 1989, as SST's Secretary since 1992, as a director of
the Company since 1990, as a director of SST since 1992 and as a director of SDV
since 1989. From 1980 to 1989, Mr. Lamson was with Coopers & Lybrand. He was an
audit manager when he left that firm to join the Company in 1989.
Earl F. Cheit has been a Senior Advisor to the Asia Foundation on Asia-Pacific
Economic Affairs since 1984 and became Dean Emeritus of the Haas School of
Business at the University of California, Berkeley, in 1992. He is currently a
director of The Shaklee Corporation and CNF Transportation, Inc. and a Trustee
of Mills College.
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<PAGE> 36
Alan R. McKay has been the President of Alan R. McKay & Associates, an
engineering consulting firm based in Lafayette, California, since 1959. He is a
registered civil, structural and geotechnical engineer in the State of
California with extensive experience in connector applications.
Sunne Wright McPeak is the President and Chief Executive Officer of the Bay Area
Council, a business sponsored organization founded in 1945 that promotes
economic activity and environmental quality in the region. Prior to this
position, she was the President and Chief Executive Officer of the Bay Area
Economic Forum, a partnership of government, business, academic and foundation
sectors of the nine San Francisco Bay Area counties. From 1979 through 1994, she
served on the Board of Supervisors of Contra Costa County, California, including
several terms as Chair. Her most recent term as Chair concluded in 1992. In
addition, Ms. McPeak served as President of the California State Association of
Counties and has been a member of the advisory boards of the Urban Land
Institute and California State University, Hayward. She is currently a director
of the California Foundation for the Environment and the Economy.
Barry Lawson Williams has been President of Williams Pacific Ventures Inc., a
venture capital and real estate investment and consulting firm, since 1987.
From 1989 until its sale in 1992, he was also Chief Executive Officer and
owner of C.N. Flagg Power Inc. He is a director of PG&E Corporation, American
President Companies, Ltd., Tenera Inc., CH2M HILL Companies, Ltd., The U.S.A.
Group, Inc., Newhall Land and Farming Co. Inc., Northwestern Mutual Life
Insurance Co. and Lucas Arts/Lucas Digital Companies.
Donald M. Townsend has been employed by the Company since 1981 and has served as
a director of Simpson Dura-Vent since 1984 and as its President and Chief
Operating Officer since 1991. He was appointed as SDV's Chief Executive Officer
in 1994. From 1984 to 1991, he was the Vice President and General Manager of
SDV.
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<PAGE> 37
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information, as of December 31, 1997, and
as adjusted to reflect the sale of shares offered hereby, with respect to the
beneficial ownership of the Company's Common Stock by (1) each Selling
Shareholder and each shareholder known by the Company to be the beneficial owner
of more than 5% of the Company's Common Stock, (2) each director of the Company,
(3) each person currently serving as an executive officer of the Company, and
(4) all current executive officers and directors of the Company as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
---------------------------------------------------------------------------------------
NUMBER OF
NAME AND, FOR EACH 5% PERCENT SHARES TO PERCENT
BENEFICIAL OWNER, PRIOR TO PRIOR TO BE SOLD IN AFTER
ADDRESS OFFERING (1) OFFERING OFFERING OFFERING
------------------------------ -------------------- ------------ -------------- ----------
<S> <C> <C> <C> <C>
Barclay Simpson (2) 3,700,872 32.1% -- 32.1%
4637 Chabot Drive, Suite 200
Pleasanton, CA 94588
Simpson PSB Fund 1,400,000 12.2% 1,200,000(3) 1.7%
3669 Mount Diablo Blvd.
Lafayette, CA 94549
Thomas J Fitzmyers (4) 783,242 6.7% 50,000 6.3%
4637 Chabot Drive, Suite 200
Pleasanton, CA 94588
Scudder, Stevens & Clark, Inc. (5) 651,900 5.7% -- 5.7%
Two International Place
Boston, MA 02110-4103
Stephen B. Lamson (6) 251,000 2.2% -- 2.2%
Donald M. Townsend (7) 118,947 1.0% -- 1.0%
Alan R. McKay (8) 4,500 * -- *
Earl F. Cheit (8) 2,500 * -- *
Sunne Wright McPeak (8) 2,500 * -- *
Barry Lawson Williams (9) 500 * -- *
All current executive 4,564,061 38.5% 50,000 38.2%
officers and directors as a
group (10)
</TABLE>
* Less than one percent
(1)The information in this table is based on information supplied by the Selling
Shareholders and officers and directors, and, with respect to other principal
shareholders, statements on Schedule 13D or 13G filed with the Securities and
Exchange Commission. Unless otherwise indicated below, the persons named in the
table had sole voting and sole investment power with respect to all shares
beneficially owned, subject to community property laws where applicable.
(2) Includes 150,000 shares owned by the Company's profit sharing trusts, of
which Messrs. Simpson, Fitzmyers and Lamson are the trustees and share voting
and dispositive power, as to which shares such trustees disclaim beneficial
ownership except to the extent of their participation as beneficiaries of one of
such trusts.
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<PAGE> 38
Includes 500 shares subject to options granted under the 1994 Stock Option Plan
that are exercisable within 60 days.
(3) Assumes the Underwriters' overallotment option will not be exercised. See
"Underwriting."
(4)Includes 211,610 shares subject to options granted under the 1994 Stock
Option Plan that are exercisable within 60 days. Includes 150,000 shares owned
by the Company's profit sharing trusts, of which Messrs. Simpson, Fitzmyers and
Lamson are the trustees and share voting and dispositive power, as to which
shares such trustees disclaim beneficial ownership except to the extent of their
participation as beneficiaries of one of such trusts.
(5) As of December 31, 1996, Scudder, Stevens & Clark, Inc. ("Scudder")
beneficially owned 651,900 shares of the Company's Common Stock. Scudder has
sole power to vote or to direct the vote of 179,300 shares and shared power to
vote or direct the vote of 318,600 shares.
(6) Includes 54,548 shares subject to options granted under the 1994 Stock
Option Plan that are exercisable within 60 days. Includes 150,000 shares owned
by the Company's profit sharing trusts, of which Messrs. Simpson, Fitzmyers and
Lamson are the trustees and share voting and dispositive power, as to which
shares such trustees disclaim beneficial ownership except to the extent of their
participation as beneficiaries of one of such trusts.
(7) Includes 51,169 shares subject to options granted under the 1994 Stock
Option Plan that are exercisable within 60 days.
(8) Includes 2,500 shares subject to options granted under the Company's 1995
Independent Director Stock Option Plan that are exercisable within 60 days.
(9) Includes 500 shares subject to options granted under the Company's 1995
Independent Director Stock Option Plan that are exercisable within 60 days.
(10) Includes 325,827 shares subject to options exercisable within 60 days,
including the options described in the above notes, and 150,000 shares owned by
the Company's profit sharing trusts as described in notes 3, 4 and 6 above.
Of the shares offered hereby, 1,200,000 shares (1,387,500 shares if the
Underwriters' overallotment option is exercised in full) are being offered by
Simpson PSB Fund, a California nonprofit public benefit corporation, which is
the Principal Selling Shareholder. The Board of Directors of the Principal
Selling Shareholder comprises Charles A. Lee and Jules F. Bonjour, Jr. The
Principal Selling Shareholder is qualified as an organization exempt from
federal and California income taxation under section 501(c)(3) of the Internal
Revenue Code of 1986, as amended. In September 1997, Barclay Simpson donated
1,400,000 shares of Common Stock to the Principal Selling Shareholder.
DESCRIPTION OF CAPITAL STOCK
The total number of shares of capital stock that the Company is authorized to
issue is 25,000,000 shares, consisting of 20,000,000 shares of Common Stock
without par value, of which 11,501,006 shares were issued and outstanding as of
September 30, 1997, and 5,000,000 shares of Preferred Stock without par value,
none of which is outstanding. The Company had approximately 253 shareholders of
record as of that date.
COMMON STOCK
Subject to the rights of holders of any Preferred Stock that may be issued in
the future, holders of Common Stock are entitled to receive such dividends, if
any, as may be declared from time to time by the Board of
37
<PAGE> 39
Directors out of funds legally available therefor (see "Dividend Policy") and in
the event of liquidation, dissolution or winding-up of the Company, to share
ratably in all assets available for distribution. The holders of Common Stock
have no preemptive or conversion rights. Subject to the rights of holders of any
Preferred Stock that may be issued in the future, the holders of Common Stock
are entitled to one vote per share on any matter submitted to a vote of the
shareholders, except that, on giving notice as required by law and subject to
compliance with other statutory conditions, shareholders may cumulate their
votes in an election of directors, and each shareholder may give one candidate a
number of votes equal to the number of directors to be elected multiplied by the
number of shares held by such shareholder or may distribute such shareholder's
votes on the same principle among as many candidates as such shareholder thinks
fit. All shares of Common Stock offered hereby are outstanding and fully paid
and are not subject to further calls or assessments by the Company. There are no
redemption or sinking fund provisions applicable to the Common Stock.
PREFERRED STOCK
The Board of Directors has the authority to issue the authorized and unissued
Preferred Stock in one or more series with such designations, rights and
preferences as may be determined from time to time by the Board of Directors.
Accordingly, the Board of Directors is empowered, without shareholder approval,
to issue Preferred Stock with dividend, liquidation, conversion, voting or other
rights that could adversely affect the voting power or other rights of the
holders of the Company's Common Stock. In the event of issuance, the Preferred
Stock could be used under certain circumstances, as a method of discouraging,
delaying or preventing an acquisition or change in control of the Company. The
Company does not currently have any plan to issue any shares of its Preferred
Stock.
LIMITATIONS ON DIRECTORS' LIABILITIES AND INDEMNIFICATION
As authorized by the California General Corporation Law ("GCL"), the Company's
Articles of Incorporation include provisions limiting the liability of directors
of the Company for monetary damages. The effect of these provisions is to
eliminate the rights of the Company and its shareholders (through shareholders'
derivative suits on behalf of the Company) to recover monetary damages against a
director for breach of the fiduciary duty of care as a director (including
breaches resulting from negligence) except in certain limited situations. This
provision does not limit or eliminate the rights of the Company or any
shareholder to seek nonmonetary relief such as an injunction or rescission in
the event of a breach of a director's duty of care. The Company's Bylaws require
that the Company indemnify its directors and officers, and any employee who
serves as a director or officer of any corporation at the Company's request, to
the fullest extent permitted under and in accordance with the GCL. The Company
has entered into agreements to indemnify the directors and officers of the
Company, Simpson Strong-Tie and Simpson Dura-Vent, in addition to
indemnification provided in the Company's and its subsidiaries' Bylaws. These
agreements, among other things, require that the Company indemnify the directors
and officers for certain expenses, including attorneys' fees, judgments, fines
and settlement amounts incurred by any such person in any action or proceeding
or any threatened action or proceeding, whether civil or criminal, arising out
of such person's actions as a director or officer of the Company or any of its
subsidiaries or as a trustee of a Company profit-sharing plan. The Company
believes that these provisions and agreements will assist the Company in
attracting and retaining qualified individuals to serve as directors and
officers.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is BankBoston, N.A., c/o
Boston EquiServe, L.P.
38
<PAGE> 40
UNDERWRITING
Under the terms and subject to the conditions of an Underwriting Agreement dated
the date of this prospectus (the "Underwriting Agreement"), the Selling
Shareholders have agreed to sell to the Underwriters named below, and each of
such Underwriters, for whom J.P. Morgan Securities Inc., Merrill Lynch, Pierce,
Fenner & Smith Incorporated and BancAmerica Robertson Stephens are acting as
representatives, has severally agreed to purchase from the Selling Shareholders,
the respective number of shares of Common Stock set forth opposite its name
below:
<TABLE>
<CAPTION>
Number
UNDERWRITERS of Shares
- ------------ ---------
<S> <C>
J.P. Morgan Securities Inc...........................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.........................
BancAmerica Robertson Stephens.......................
---------
Total......................................... 1,250,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase shares of Common Stock are subject to the approval of
certain legal matters by counsel and certain other conditions. Under the terms
and conditions of the Underwriting Agreement, the Underwriters are obligated to
take and pay for all such shares, if any are taken.
The Underwriters propose initially to offer the shares of Common Stock directly
to the public at the price set forth on the cover page of this Prospectus and to
certain dealers at such price less a concession not in excess of $___ per share.
The Underwriters may allow, and such dealers may reallow, a concession not in
excess of $____ per share to certain other dealers. After the initial public
offering of the Common Stock, the public offering price and such concession may
be changed.
The Principal Selling Shareholder has granted to the Underwriters an option,
expiring at the close of business on the 30th day after the date of this
Prospectus, to purchase up to an additional 187,500 shares of Common Stock from
the Principal Selling Shareholder, at the initial public offering price, less
the underwriting discount. The Underwriters may exercise such option solely for
the purpose of covering overallotments, if any. To the extent that the
Underwriters exercise the option, each Underwriter will have a firm commitment,
subject to certain conditions, to purchase approximately the same proportion of
option shares as the number of shares of Common Stock to be purchased by each
Underwriter shown in the foregoing table bears to the total number of shares of
Common Stock initially offered hereby.
The Company and each of the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act.
The Company and certain of its shareholders, including the Selling Shareholders,
have agreed that they will not, without the prior written consent of J.P. Morgan
Securities Inc., issue, sell, offer, agree to sell or otherwise dispose of,
directly or indirectly, any shares of Common Stock, any options, rights or
warrants to purchase Common Stock or any securities convertible into or
exchangeable or exercisable for Common Stock until the 90th day after the date
of this Prospectus, except for stock options issued under the 1994 Stock Option
Plan or the 1995 Independent Director Stock Option Plan, and issuances of shares
of Common Stock pursuant to the exercise of stock options granted under the 1994
Stock Option Plan or the 1995 Independent Director Stock Option Plan or pursuant
to the Company's 1994 Employee Stock Bonus Plan. J.P. Morgan Securities Inc. may
39
<PAGE> 41
in its exclusive discretion and at any time without notice, release all or a
portion of the securities subject to these restrictions.
In connection with the offering, the Underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of the Common Stock.
Specifically, the Underwriters may overallot the offering, creating a syndicate
short position. In addition, the Underwriters may bid for, and purchase, shares
of Common Stock in the open market to cover syndicate shorts or to stabilize the
price of the Common Stock. Finally, the underwriting syndicate may reclaim
selling concessions allowed for distributing the Common Stock in the offering,
if the syndicate repurchases previously distributed Common Stock in syndicate
covering transactions, in stabilizing transactions or otherwise. Any of these
activities may stabilize or maintain the market price of the Common Stock above
independent market levels. The Underwriters are not required to engage in these
activities, and may end any of these activities at any time.
LEGAL MATTERS
The validity of the shares of Common Stock offered by the Company hereby will be
passed on for the Selling Shareholders by Shartsis, Friese & Ginsburg LLP, San
Francisco, California. Partners and associates of Shartsis, Friese & Ginsburg
LLP and members of their immediate families own an aggregate of 6,041 shares of
Common Stock. Certain legal matters will be passed on for the Underwriters by
Cahill Gordon & Reindel (a partnership including a professional corporation),
New York, New York.
EXPERTS
The consolidated balance sheets as of December 31, 1995 and 1996, and the
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1996, included in this
Prospectus, have been audited by Coopers & Lybrand L.L.P., independent
accountants. These consolidated financial statements audited by Coopers &
Lybrand L.L.P. have been included herein in reliance on the reports given on the
authority of that firm as experts in accounting and auditing.
40
<PAGE> 42
SIMPSON MANUFACTURING CO., INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Financial Statements
Report of Independent Accountants...................................................F-2
Consolidated Balance Sheets at December 31, 1995 and 1996, and September 30, 1997...F-3
Consolidated Statements of Operations for the years ended December 31,
1994, 1995 and 1996, and for the nine months ended September 30, 1996
and 1997...........................................................................F-4
Consolidated Statements of Shareholders' Equity for the years ended December 31,
1994, 1995 and 1996, and for the nine months ended September 30, 1997..............F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1994,
1995 and 1996, and for the nine months ended September 30, 1996 and 1997...........F-6
Notes to the Consolidated Financial Statements......................................F-7
</TABLE>
F-1
<PAGE> 43
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Simpson Manufacturing Co., Inc.:
We have audited the consolidated balance sheets of Simpson Manufacturing Co.,
Inc. as of December 31, 1995 and 1996, and the consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Simpson
Manufacturing Co., Inc. and subsidiaries as of December 31, 1995 and 1996, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
San Francisco, California
January 31, 1997, except for Note 15
for which the date is March 11, 1997
F-2
<PAGE> 44
SIMPSON MANUFACTURING CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------- SEPTEMBER 30,
1995 1996 1997
------------- ------------- -------------
ASSETS (UNAUDITED)
<S> <C> <C> <C>
Current assets
Cash and cash equivalents $ 6,955,788 $ 19,815,297 $ 15,336,889
Short-term investments -- 3,896,428 --
Trade accounts receivable, net 20,732,880 20,930,490 36,272,399
Inventories 34,471,250 42,247,777 54,342,293
Deferred income taxes 2,750,455 2,919,455 3,462,455
Other current assets 1,986,446 956,565 1,055,616
------------- ------------- -------------
Total current assets 66,896,819 90,766,012 110,469,652
Property, plant and equipment, net 26,420,004 28,687,635 37,358,613
Investments 1,357,457 1,382,578 537,509
Other noncurrent assets 1,967,779 1,684,548 3,270,224
------------- ------------- -------------
Total assets $ 96,642,059 $122,520,773 $151,635,998
============= ============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Notes payable $ 20,037 $ -- $ 29,943
Trade accounts payable 7,375,014 10,063,828 12,650,774
Accrued liabilities 3,386,527 4,137,648 5,845,211
Accrued profit sharing trust contributions 1,999,739 2,446,001 2,251,234
Accrued cash profit sharing and commissions 1,289,144 2,292,057 4,770,529
Accrued workers' compensation 842,125 809,272 809,272
Income taxes payable -- 341,626 1,582,591
------------- ------------- -------------
Total current liabilities 14,912,586 20,090,432 27,939,554
------------- ------------- -------------
Deferred income taxes and
other long-term liabilities 176,783 133,333 905,183
------------- ------------- -------------
Total liabilities 15,089,369 20,223,765 28,844,737
------------- ------------- -------------
Commitments and contingencies (Note 10)
Shareholders' equity
Preferred Stock, without par value; authorized
shares, 5,000,000; issued and outstanding
shares, none -- -- --
Common Stock, without par value; authorized
shares, 20,000,000; issued and outstanding
shares, 11,358,227 and 11,451,018, and
11,501,006 at December 31, 1995 and 1996,
and September 30, 1997, respectively 30,415,716 31,233,648 32,044,605
Retained earnings 51,142,268 70,862,906 90,829,387
Cumulative translation adjustment (5,294) 200,454 (82,731)
------------- ------------- -------------
Total shareholders' equity 81,552,690 102,297,008 122,791,261
------------- ------------- -------------
Total liabilities and shareholders' equity $ 96,642,059 $122,520,773 $ 151,635,998
============ ============ =============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-3
<PAGE> 45
SIMPSON MANUFACTURING CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------- -----------------------------
1994 1995 1996 1996 1997
------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales $ 151,290,466 $167,957,955 $202,408,917 $152,345,631 $186,306,707
Cost of sales 96,983,987 109,368,027 124,394,086 94,305,621 112,200,433
------------- ------------ ------------ ------------ ------------
Gross profit 54,306,479 58,589,928 78,014,831 58,040,010 74,106,274
------------- ------------ ------------ ------------ ------------
Operating expenses:
Selling 14,714,528 17,109,325 20,104,344 14,902,126 17,467,520
General and administrative 18,607,985 18,512,003 25,035,874 18,387,692 22,969,505
Compensation related to
stock plans (Notes 2 and 14) 6,908,581 61,250 180,155 -- 290,000
------------- ------------ ------------ ------------ ------------
40,231,094 35,682,578 45,320,373 33,289,818 40,727,025
------------- ------------ ------------ ------------ ------------
Income from operations 14,075,385 22,907,350 32,694,458 24,750,192 33,379,249
Interest income (expense), net (559,249) 141,535 595,180 325,931 248,233
------------- ------------ ------------ ------------ ------------
Income before income taxes
and minority interest 13,516,136 23,048,885 33,289,638 25,076,123 33,627,482
Provision for income taxes 8,098,000 8,927,000 13,569,000 10,253,000 13,661,001
Minority interest (32,628) -- -- -- --
------------- ------------ ------------ ------------ ------------
Net income $ 5,450,764 $ 14,121,885 $ 19,720,638 $ 14,823,123 $ 19,966,481
============= ============ ============ ============ ============
Net income per common share:
Primary $ 0.51 $ 1.23 $ 1.68 $ 1.26 $ 1.67
Fully diluted $ 0.51 $ 1.22 $ 1.67 $ 1.26 $ 1.66
Number of shares outstanding
Primary 10,561,641 11,460,567 11,755,184 11,727,496 11,946,675
Fully diluted 10,569,055 11,532,872 11,838,658 11,788,732 12,055,519
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-4
<PAGE> 46
SIMPSON MANUFACTURING CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND
1996, AND THE NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
NOTES
COMMON STOCK CUMULATIVE RECEIVABLE
-------------------------- RETAINED TRANSLATION FROM
SHARES AMOUNT EARNINGS ADJUSTMENT SHAREHOLDERS TOTAL
----------- ---------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994 8,965,390 $ 3,647,912 $ 31,569,619 $ - $ (2,682,788) $ 32,534,743
Options granted below fair value - 193,892 - - - 193,892
Effect of 1994 reorganization 719,906 9,358,781 - - (1,607,264) 7,751,517
Payments received on notes - - - - 3,940,052 3,940,052
Common stock issued at $10.69
to $12.00 per share, net of
offering costs of $639,045 1,589,900 16,379,780 - - - 16,379,780
Loan to officer - - - - 350,000 350,000
Translation adjustment - - - (78,715) - (78,715)
Net income - - 5,450,764 - - 5,450,764
----------- ---------- ----------- ------------ ------------ -----------
Balance, December 31, 1994 11,275,196 29,580,365 37,020,383 (78,715) -
66,522,033
Options exercised 82,231 749,156 - - - 749,156
Tax benefit of options
exercised - 78,395 - - - 78,395
Common stock issued at
$9.75 per share 800 7,800 - - - 7,800
Translation adjustment - - - 73,421 - 73,421
Net income - - 14,121,885 - - 14,121,885
----------- ---------- ----------- ------------ ------------ -----------
Balance, December 31, 1995 11,358,227 30,415,716 51,142,268 (5,294) -
81,552,690
Options exercised 90,191 526,415 - - - 526,415
Tax benefit of options
exercised - 256,417 - - - 256,417
Common stock issued at
$13.50 per share 2,600 35,100 - - - 35,100
Translation adjustment - - - 205,748 - 205,748
Net income - - 19,720,638 - - 19,720,638
----------- ---------- ----------- ------------ ------------ -----------
Balance, December 31, 1996 11,451,018 31,233,648 70,862,906 200,454 - 102,297,008
Options exercised 45,488 252,704 - - - 252,704
Tax benefit of options
exercised - 454,753 - - - 454,753
Common stock issued at
$23.00 per share 4,500 103,500 - - - 103,500
Translation adjustment - - - (283,185) - (283,185)
Net income - - 19,966,481 - - 19,966,481
------------ ------------ ------------ ------------ ------------ ------------
Balance, September 30,
1997 (Unaudited) 11,501,006 $ 32,044,605 $ 90,829,387 $ (82,731) $ - $122,791,261
============ ============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-5
<PAGE> 47
SIMPSON MANUFACTURING CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------ --------------------------
1994 1995 1996 1996 1997
------------ ----------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 5,450,764 $14,121,885 $19,720,638 $14,823,123 $19,966,481
------------ ----------- ----------- ----------- -----------
Adjustments to reconcile net income to net
cash provided by operating activities:
Loss (gain) on sale of capital equipment 3,427 11,558 (16,262) (18,054) (15,368)
Depreciation and amortization 3,972,907 5,291,466 7,197,718 4,413,034 5,459,743
Minority interest (32,628) - - - -
Deferred income taxes and
other long-term liabilities (678,000) 65,000 (212,450) (227,667) (790,798)
Equity in (income) losses of affiliates 6,582 (24,554) (107,000) (33,000) (110,000)
Noncash compensation related to stock plans 6,771,873 61,250 35,100 - 160,000
Changes in operating assets and
liabilities, net of effects of acquisitions:
Trade accounts receivable, net (2,746,477) (2,916,665) (190,608) (7,325,900) (14,187,289)
Inventories (6,578,213) (2,655,355) (7,500,960) (1,494,307) (6,000,885)
Other current assets 300,124 (951,314) 278,047 331,014 (32,566)
Other noncurrent assets (213,702) (256,380) (800,840) (60,083) (46,878)
Trade accounts payable 1,714,800 665,976 2,688,814 2,839,549 1,342,138
Accrued liabilities 981,116 307,968 751,120 542,193 664,000
Accrued profit sharing trust contributions 234,811 279,135 446,262 (86,281) (194,767)
Accrued cash profit sharing and commissions 383,477 (45,982) 1,002,913 2,674,524 2,478,472
Accrued workers' compensation (280,403) (55,000) (32,853) (32,853) -
Income taxes payable 322,485 (500,661) 1,349,876 2,697,696 1,695,718
------------ ----------- ----------- ---------- -----------
Total adjustments 4,162,179 (723,558) 4,888,877 4,219,865 (9,578,480)
------------ ----------- ----------- ----------- -----------
Net cash provided by operating activities $ 9,612,943 $13,398,327 $24,609,515 $19,042,988 $10,388,001
============ =========== =========== =========== ===========
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (9,939,384) (10,049,629) (7,364,326) (4,291,456) (9,679,324)
Proceeds from sale of equipment 43,212 22,225 57,787 44,041 56,021
Asset acquisitions, net of cash acquired
and equity interest already owned (1,199,733) (2,414,114) (1,041,780) - (9,334,340)
Purchase of short-term investment - - (3,896,428) - -
Proceeds from sale of short-term investments - - - - 3,995,333
Equity investments - (667,002) (11,637) (11,637) -
------------ ----------- ----------- ---------- -----------
Net cash provided by (used in) investing
activities (11,095,905) (13,108,520) (12,256,384) (4,259,052) (14,962,310)
------------ ----------- ----------- ---------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of debt 5,589,363 20,037 - - -
Repayment of debt (20,587,801) - (20,037) (20,037) (260,304)
Issuance of Company's common stock 16,163,180 835,351 526,415 393,034 356,205
Collections on notes receivable from shareholders 3,940,052 - - - -
Collections on notes receivable from subsidiaries'
minority shareholders 29,066 - - - -
Loan to officer 350,000 - - - -
------------ ------------ ------------ ------------ ------------
Net cash provided by financing activities 5,483,860 855,388 506,378 372,997 95,901
------------ ------------ ------------ ------------ ------------
Net increase in cash and cash equivalents 4,000,898 1,145,195 12,859,509 15,156,933 (4,478,408)
Cash and cash equivalents at beginning of period 1,809,695 5,810,593 6,955,788 6,955,788 19,815,297
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents at end of period $ 5,810,593 $ 6,955,788 $19,815,297 $ 22,112,721 $ 15,336,889
============ ============ ============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
CASH PAID DURING THE YEAR FOR
Interest $ 562,246 $ 35,045 $ 31,311
============ ============ ============
Income taxes $ 8,455,237 $ 8,961,714 $ 13,036,713
============ ============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-6
<PAGE> 48
SIMPSON MANUFACTURING CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Operations and Summary of Significant Accounting Policies
Nature of Operations
Simpson Manufacturing Co., Inc., through its subsidiaries Simpson Strong-Tie
Company Inc. and Simpson Dura-Vent Company, Inc. and its other subsidiaries
(collectively, the "Company"), designs, engineers and manufactures wood-to-wood,
wood-to-concrete and wood-to-masonry connectors and venting systems for gas and
wood burning appliances and markets its products to the residential
construction, light industrial and commercial construction, remodeling and
do-it-yourself markets.
The Company operates exclusively in the building products industry segment. The
Company's products are sold primarily throughout the United States of America.
Revenues have some geographic market concentration on the west coast. A portion
of the Company's business is therefore dependent upon economic activity within
this region and market.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of Simpson
Manufacturing Co., Inc., and its subsidiaries, Simpson Holdings, Inc., Simpson
Dura-Vent Company, Inc. and Simpson Strong-Tie Company Inc. Investments in less
than 50 percent-owned affiliates are accounted for using the equity method. All
significant intercompany transactions have been eliminated.
Cash Equivalents
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents.
Short-term Investments
The Company considers investments with an original maturity of more than three
months but less than one year to be short-term investments, which are
categorized as "held-to-maturity" and carried at amortized cost, which
approximates market value.
Inventory Valuation
Inventories are valued at the lower of cost or market, with cost determined
under the last-in, first-out (LIFO) method, except in Europe and Canada, where
inventories of approximately $1,028,000 and $1,483,000 at December 31, 1995 and
1996, respectively, are valued using the first-in, first-out (FIFO) method.
Property, Plant and Equipment
Property, plant and equipment is carried at cost. Major renewals and betterments
are capitalized; maintenance and repairs are expensed on a current basis. When
assets are sold or retired, their costs and accumulated depreciation are removed
from the accounts; the resulting gains or losses are reflected in the
consolidated statements of operations.
F-7
<PAGE> 49
Depreciation and Amortization
Depreciation of property, plant and equipment is provided for using accelerated
methods over the following estimated useful lives:
Factory machinery and equipment 5 to 10 years
Automobiles, trucks and other equipment 3 to 10 years
Office equipment 3 to 8 years
Buildings and site improvements 20 to 45 years
Leasehold improvements are amortized using the straight-line method over the
remaining term of the lease.
Product Research and Development Costs
Product research and development costs, which are included in cost of sales,
were charged against income as incurred and approximated $946,000, $1,180,000
and $1,312,000 in 1994, 1995 and 1996, 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 European
branches. Assets and liabilities denominated in foreign currencies are
translated using the exchange rate on the balance sheet date. Revenues and
expenses are translated using average exchange rates prevailing during the year.
The translation adjustment resulting from this process is shown separately as a
component of shareholders' equity. Foreign currency transaction gains or losses
are included in the determination of net income.
Reorganization
The Company completed a reorganization in March 1994 (see Note 2). All
references to the number of common shares and per common share amounts in these
consolidated financial statements have been restated to reflect the revised
capital structure.
Initial Pubic Offering
On May 25, 1994, the Company completed an initial public offering of 1,572,500
shares of its common stock at a price per share of $11.50. The Company received
proceeds of approximately $20.5 million from the offering, including $4.3
million in notes receivable collected from its shareholders.
Net Income per Common Share
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 per-share calculations for all periods when the
effect of their inclusion is dilutive. Pursuant to the Securities and Exchange
Commission Staff Accounting Bulletins, common and common equivalent shares
issued during the 12 month period prior to May 25, 1994, the date of the
Company's initial public offering, have been included in the calculation as if
they were outstanding for all periods presented using the treasury stock method.
Included in these amounts are common stock options granted or committed to be
granted in 1993 and certain of the shares issued in March 1994 in conjunction
with the 1994 reorganization discussed above.
The difference in primary and fully diluted net income per common share results
from the application of the treasury stock method for common equivalent shares.
F-8
<PAGE> 50
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 March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for Long-Lived Assets and
for Long-Lived Assets to be Disposed of" ("SFAS 121"). SFAS 121 requires that
long-lived assets, certain identifiable intangibles, and goodwill be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. Impairment would be recorded if the
expected future undiscounted cash flows were less than the carrying amount of
the asset. SFAS 121 is effective for fiscal years beginning after December 15,
1995, with earlier adoption permitted. The Company adopted SFAS 121 effective
for its fiscal year ended December 31, 1996.
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), was issued and is
effective for the Company's 1996 fiscal year. The Company will continue to
account for employee stock options in accordance with APB Opinion No. 25 and,
accordingly, will comply with the pro forma disclosure requirements of SFAS 123.
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share" and No. 129, "Disclosure of Information about Capital Structure." SFAS
No. 128 establishes standards for computing and presenting earnings per share
("EPS"), replacing the presentation of primary EPS with a presentation of basic
EPS. SFAS No. 129 consolidates the existing disclosure requirements regarding an
entity's capital structure. SFAS No. 128 and 129 are effective for financial
statements issued for periods ending after December 15, 1997, and accordingly,
management has not determined the effect, if any, on the Company's financial
statements for the nine months ended September 30, 1997.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income",
and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." SFAS No. 130 established standards for reporting and display of
comprehensive income and its components. SFAS No. 131 specifies revised
guidelines for determining an entity's operating segments and the type and level
of financial information to be disclosed. SFAS No. 130 and 131 are effective for
financial statements issued for periods beginning after December 15, 1997, and
accordingly, management has not determined the effect, if any, on the Company's
financial statements for the nine months ended September 30, 1997.
Interim Reporting Periods
The unaudited interim period consolidated financial statements have been
prepared on the same basis as the audited annual consolidated financial
statements, and in the opinion of management, contain all adjustments
(consisting of only normal recurring adjustments) necessary to present fairly
the financial information set forth therein, in accordance with generally
accepted accounting principles. The Company's interim period results may be
subject to fluctuations. The results of operations for the interim periods are
not necessarily indicative of the results to be expected for any future period.
Reclassifications
Certain prior year amounts have been reclassified to conform to the 1996
presentation with no effect on net income as previously reported.
2. 1994 Reorganization and Employee Benefits
In February and March 1994, a new holding company was organized and a
reorganization was effected to consolidate shareholdings into one entity. The
new holding company took the name Simpson Manufacturing Co., Inc. and the former
Simpson Manufacturing Co., Inc. was renamed Simpson Holdings, Inc. The new
holding company offered to all shareholders of Simpson Holdings, Inc., Simpson
Strong-Tie Company Inc. and Simpson Dura-Vent Company, Inc. (other than Simpson
Holdings, Inc. itself) the opportunity to exchange their shares on the basis of
agreed exchange ratios. As a result of this transaction, the new holding company
owns directly or indirectly
F-9
<PAGE> 51
all of the outstanding stock of Simpson Holdings, Inc., Simpson Strong-Tie
Company Inc. and Simpson Dura-Vent Company, Inc.
Under the terms of this exchange, the Company issued to minority shareholders of
Simpson Strong-Tie Company Inc. and Simpson Dura-Vent Company, Inc. 719,906
shares of common stock, which, at a value of $13 per share, resulted in a gross
increase to common stock of $9,358,781. In connection with such exchange, notes
receivable from the former minority shareholders of the subsidiaries of
$1,607,264, previously shown as a reduction of minority interest, are presented
as a reduction of shareholders' equity. Thus, the net non-cash capital
contribution as a result of the exchange was $7,751,517. This capital
contribution reflects principally the excess value of the shares received over
the original sales price of the shares exchanged. Some of the shares exchanged
were deemed to be options. Under generally accepted accounting principles, the
exchange of shares for deemed options in subsidiaries is considered a
modification of such deemed options, and accordingly, the Company recorded a
one-time, non-cash compensation charge of $6,355,841 in 1994. The remaining
$1,395,676 represents the acquisition of fully paid minority shares of which
$1,095,414 was allocated to plant, property and equipment, and the balance of
$300,262 was reflected in the elimination of minority interest.
The agreed exchange ratio as between Simpson Holdings, Inc. and the newly
organized holding company used in the reorganization had the effect of a 14 for
1 split of the Simpson Holdings, Inc. common stock. Accordingly, all references
to the number of common shares and per common share amounts in these
consolidated financial statements have been restated to reflect the revised
capital structure as well as the authorized number of shares of common stock of
the new company (20,000,000). Additionally, the new holding company has
5,000,000 shares of preferred stock authorized.
The Company recorded an aggregate pretax compensation charge in 1994 of
$6,908,581. In addition to the $6,355,841 non-cash compensation charge referred
to above, the aggregate charge reflected two additional elements. In March 1994,
the Company adopted a bonus plan, pursuant to which it granted bonuses
aggregating $358,848 in 1994. The bonuses were paid partly by issuance of shares
of its common stock and partly by payment in cash. The noncash portion totaled
$208,800, including 16,400 shares of common stock issued to employees under this
plan and 1,000 shares issued to a consultant of the Company. Under this bonus
plan, 800 shares committed to be issued to employees in 1994 were issued in
1995. In addition, the Company granted fully exercisable below market stock
options under its option plan to purchase up to an aggregate of 20,715 shares of
common stock at an exercise price of $3.64 per share, which resulted in a
compensation charge of $193,892.
The components of the 1994 pretax compensation charges are as follows:
<TABLE>
<S> <C>
Non-cash compensation charge related to 1994 Reorganization $ 6,355,841
1994 bonus plan compensation charge 358,848
1994 stock option compensation charge 193,892
------------
$ 6,908,581
============
</TABLE>
3. Acquisitions
In September 1995, the Company acquired the remaining 75% of the equity of a
U.S. company, Ackerman Johnson Fastening Systems, Inc., for $800,000 in cash and
$200,000 for an agreement not to compete for three years (see Note 7). In
addition, in October 1995, the Company purchased for approximately $1,450,000 in
cash the assets of Truline, a manufacturer and distributor of wall starter
systems located in Chelmsford, England. Approximately $1,100,000, $725,000 of
which was written off during 1996, of the costs of these two acquisitions
represents the excess of the purchase price over the fair value of the assets
acquired and is being amortized over ten years using the straight-line method.
Both of these acquisitions have been accounted for under the purchase method of
accounting. The pro forma effect on the Company's consolidated revenue, net
income and net income per share, as if these acquisitions occurred at the
beginning of the period, is immaterial in 1994 and 1995.
F-10
<PAGE> 52
In December 1996, Simpson Strong-Tie International, Inc. ("SSTI"), a subsidiary
of the Company, purchased the assets, including $675,000 in equipment, of the
Builders Products Division of MiTek Industries Ltd. ("MiTek") for approximately
$1,040,000. The remaining $365,000 of the purchase price represents the excess
of the purchase price over the fair value of the assets acquired. In conjunction
with the purchase of the assets, SSTI also agreed to supply MiTek and its
customers with connector products. As a result of this acquisition, the Company
believes that additional manufacturing space is needed and has determined that
the consolidation of its UK facilities into a single location is advisable. In
connection with this consolidation, the intangible assets associated with the
MiTek acquisition, the Truline Group Ltd. ("Truline") acquisition in 1995, and
the Stokes of Cannock Ltd. acquisition in 1994, were written off during 1996.
4. Trade Accounts Receivable
Trade accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- SEPTEMBER 30,
1995 1996 1997
----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Trade accounts receivable $21,832,701 $22,242,827 $ 38,189,407
Allowance for doubtful accounts (931,321) (1,108,950) (1,622,209)
Allowance for sales discounts (168,500) (203,387) (294,799)
----------- ----------- ------------
$20,732,880 $20,930,490 $ 36,272,399
=========== =========== ============
</TABLE>
The Company sells product on credit and generally does not require collateral.
5. Inventories
The components of inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- SEPTEMBER 30,
1995 1996 1997
----------- ---------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials $13,424,828 $15,107,660 $ 17,980,381
In-process products 3,180,416 3,763,634 6,092,749
Finished products 17,866,006 23,376,483 30,269,163
----------- ----------- ------------
$34,471,250 $42,247,777 $ 54,342,293
=========== =========== ============
</TABLE>
At December 31, 1995 and 1996, and September 30, 1997, the replacement value of
LIFO inventories exceeded LIFO cost by approximately $4,178,000, $1,186,000 and
$386,000, respectively.
F-11
<PAGE> 53
6. Property, Plant and Equipment, net
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- SEPTEMBER 30,
1995 1996 1997
----------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Land $ 2,065,682 $ 2,065,682 $ 2,785,668
Buildings and site improvements 10,379,901 10,379,901 13,027,998
Leasehold improvements 2,688,430 2,869,612 3,050,405
Machinery and equipment 40,393,578 46,311,624 54,486,765
----------- ------------ ------------
55,527,591 61,626,819 73,350,836
Less accumulated depreciation and
amortization (30,419,484) (35,916,354) (40,937,929)
----------- ------------ ------------
25,108,107 25,710,465 32,412,907
Capital projects in progress 1,311,897 2,977,170 4,945,706
----------- ------------ ------------
$26,420,004 $ 28,687,635 $ 37,358,613
=========== ============ ============
</TABLE>
Included in property, plant and equipment at December 31, 1995 and 1996, are
fully depreciated assets with an original cost of approximately $13,445,000 and
$17,181,665, respectively. These fully depreciated assets are still in use in
the Company's operations.
7. Investments
In 1995, Simpson Strong-Tie Company Inc. acquired a 34% interest in Patrick
Bellion S.A., a French manufacturer and distributor of connector products, for
approximately $850,000 in cash. The Company has an option to purchase the
remaining 66% prior to May 1997, which the Company intends to exercise.
Approximately $503,000 of the aggregate acquisition cost represents the excess
of the purchase price over the net book value of the equity acquired and is
being amortized over ten years. This investment and the 49% investment in
Bulldog-Simpson GmbH acquired in 1993 have been accounted for using the equity
method. The Company's equity in the earnings or losses of these companies was
not material in any of the three years in the period ended December 31, 1996.
In 1995, Simpson Strong-Tie Company Inc. acquired the remaining 75% interest in
Ackerman-Johnson Fastening Systems Inc. (see Note 3) and no longer accounts for
this investment under the equity method.
F-12
<PAGE> 54
8. Accrued Liabilities
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- SEPTEMBER 30,
1995 1996 1997
----------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Sales incentive and advertising allowances $ 1,235,061 $1,470,656 $ 2,310,523
Vacation liability 924,177 1,062,569 1,134,781
Other 1,227,289 1,604,423 2,399,907
----------- ---------- -----------
$ 3,386,527 $4,137,648 $ 5,845,211
=========== ========== ===========
</TABLE>
9. Debt
The outstanding debt at December 31, 1995 and 1996, and September 30, 1997, and
the available credit at September 30, 1997, consisted of the following:
<TABLE>
<CAPTION>
AVAILABLE DEBT OUTSTANDING
ON CREDIT -------------------------------------
FACILITY AT AT DECEMBER 31,
SEPTEMBER 30, ---------------------- SEPTEMBER 30,
1997 1995 1996 1997
------------ --------- ---------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revolving line of credit, interest at bank's reference rate (at September
30, 1997, the bank's reference rate was 8.50%), matures June 1998,
commitment fees are paid at the annual rate of 0.125% on the unused portion
of the facility $13,537,128 $ - $ - $ -
Revolving line of credit, interest at bank's prime rate (at September 30,
1997, the bank's prime rate was 8.50%), matures June 1998, commitment fees
are paid at the annual rate of
0.125% on the unused portion of the facility 4,937,129 - - -
Revolving term commitment, interest at bank's prime rate (at September 30,
1997, the bank's prime rate was 8.50%), matures June 1998, commitment fees
are paid at the annual rate of
0.125% on the unused portion of the facility 4,000,000 - - -
Revolving line of credit, interest rate at the bank's base rate of interest
plus 2% (at September 30, 1997, the bank's base rate of
interest plus 2% was 9.0%), matures June 403,400 20,037 - -
1998, has an annual commission charge of
0.45% and is guaranteed by the Company
Standby letter of credit facilities 525,744 - - -
Other notes payable - - - 29,943
----------- --------- ---------- --------
23,403,401 $ 20,037 $ - $ 29,943
========= ========== ========
Less standby letters of credit issued and outstanding (525,744)
-----------
Net credit available $22,877,657
===========
</TABLE>
F-13
<PAGE> 55
The revolving lines of credit are guaranteed by the Company and its
subsidiaries. The Company has two outstanding standby letters of credit. These
letters of credit, in the aggregate amount of $525,744, are used to support the
Company's self-insured workers' compensation insurance requirements. These
letters of credit mature in June 1998 and each has an annual fee of 1.25% of the
amount of the facility. Other notes payable represent debt associated with
foreign businesses acquired in March 1997.
10. Commitments and Contingencies
Leases
Certain properties occupied by the Company are leased. The leases expire at
various dates through 2005 and generally require the Company to assume the
obligations for insurance, property taxes, and maintenance of the facilities.
Some of the properties are leased from partnerships formed by certain current
and former Company shareholders, directors, officers and employees. Rental
expenses under these related party leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1994 1995 1996
----------- ---------- -----------
<S> <C> <C> <C>
Simpson Investment Company $ 185,100 $ 185,100 $ 185,100
Doolittle Investors 223,200 230,438 231,096
Vacaville Investors 478,428 437,640 437,640
Vicksburg Investors 302,534 322,289 329,017
Columbus Westbelt Investment Co. 351,600 418,525 581,064
McKinney Investors 141,240 70,620 -
----------- ---------- -----------
$ 1,682,102 $1,664,612 $ 1,763,917
=========== ========== ===========
</TABLE>
Rental expense for 1994, 1995 and 1996 with respect to all other leased property
was approximately $971,000, $1,120,000 and $1,170,000, respectively.
At December 31, 1996, minimum rental commitments under all noncancelable leases
are as follows:
<TABLE>
<S> <C>
1997 $ 3,183,392
1998 3,024,522
1999 2,981,187
2000 2,988,233
2001 2,455,194
Thereafter 3,922,723
-----------
$18,555,251
===========
</TABLE>
Some of these minimum rental commitments involve the related parties described
above, contain renewal options, and provide for periodic rental adjustments
based on changes in the consumer price index or current market rental rates.
During 1995, the lease between the Company and Columbus Westbelt Investment Co.
was amended to include additional building and improvements and was extended ten
years to 2005. Future rent adjustments are based on prevailing market conditions
at the time of the adjustment.
F-14
<PAGE> 56
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 has been informed by the
lessor of the other facility, Vicksburg Investors, that appropriate remedial
action has been taken. Accordingly, the Company does not believe that these
matters will have a material adverse effect on its financial position or results
of operations.
Litigation
From time to time, the Company is involved in various legal proceedings and
other matters arising in the normal course of business.
11. Income Taxes
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1994 1995 1996
----------- ------------ ------------
<S> <C> <C> <C>
Current:
Federal $6,981,000 $ 7,536,000 $11,989,000
State 1,795,000 1,526,000 2,353,000
Deferred (678,000) (135,000) (773,000)
----------- ------------ ------------
$8,098,000 $ 8,927,000 $13,569,000
========== =========== ===========
</TABLE>
Reconciliations between the statutory federal income tax rate and the Company's
effective income tax rate as a percentage of income before income taxes and
minority interest are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Federal tax rate 35.0% 35.0% 35.0%
State taxes, net of federal benefit 5.3% 5.0% 4.7%
Non-deductible compensation related to stock plans 19.0% - -
Other 0.6% (1.3)% 1.1%
------- ------ -------
Effective income tax rate 59.9% 38.7% 40.8%
======= ======= =======
</TABLE>
F-15
<PAGE> 57
The tax effects of the significant temporary differences that constitute the
deferred tax assets and liabilities at December 31, 1994, 1995 and 1996, are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1994 1995 1996
--------- --------- ----------
<S> <C> <C> <C>
Deferred tax assets:
State tax $ 495,013 $ 533,943 $ 795,671
Compensation related to stock plans 260,777 246,514 165,967
Workers' compensation 122,210 101,815 89,657
Health claims 172,810 198,333 213,476
Vacation 330,546 367,379 422,392
Accounts receivable allowance 498,694 456,977 464,681
Inventory allowance 184,585 154,878 257,983
Sales incentive and advertising allowances 404,164 508,457 237,050
Other 203,656 182,159 272,578
--------- --------- ---------
$2,672,455 $2,750,455 $2,919,455
========== ========== ==========
Deferred tax liabilities (assets):
Depreciation $(216,878) $(222,355) $(255,683)
Goodwill amortization 38,158 6,866 (545,068)
Other 212,503 238,706 174,255
--------- --------- ---------
$ 33,783 $ 23,217 $(626,496)
========= ========= ==========
</TABLE>
No valuation allowance has been recorded for deferred tax assets for the years
ended December 31, 1994, 1995 and 1996, due to the Company's taxable income in
1996 and prior years.
12. Profit Sharing and Pension Plans
The Company has four profit sharing plans covering substantially all salaried
employees and nonunion hourly employees. Two of the plans, covering U.S.
employees, provide for annual contributions in amounts the Board of Directors
may authorize, subject to certain limitations, but in no event more than the
amount permitted under the Internal Revenue Code as deductible expense. The
other two plans, covering the Company's European employees, require the Company
to make contributions ranging from three to ten percent of the employee's
compensation. The total cost for all profit sharing plans for the years ended
December 31, 1994, 1995 and 1996, was approximately $1,722,000, $2,036,000 and
$2,469,000, 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 $485,000, $486,000 and $667,000 for the years ended
December 31, 1994, 1995 and 1996, respectively.
13. Related Party Transactions
In 1994, the Company spent $42,569 to purchase artwork from Barclay Simpson Fine
Arts Gallery for display in the Pleasanton headquarters. This Gallery is owned
and operated by Barclay Simpson, the Chairman of the Board and majority
shareholder of the Company.
During 1994, a loan to the Company's President and Chief Executive Officer in
the amount of $350,000 was repaid in full.
The Chairman and the President and Chief Executive Officer of the Company, who
are directors and principal shareholders of the Company, also serve as directors
and officers of the Simpson PSB Fund (a charitable organization). The Company
contributed $50,000 to this organization in 1996.
Refer to Note 10 regarding related party transactions involving Company leases.
F-16
<PAGE> 58
14. Stock Bonus and Stock Options Plans
The Company applies APB 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 FASB Statement 123, the
pro forma effect on the Company's net income and earnings per share in 1995 and
1996 would have been:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Net Income as reported $14,121,885 $19,720,638
Pro forma 14,014,793 19,468,215
Earnings per share, as reported $ 1.23 $ 1.68
Pro forma 1.22 1.66
</TABLE>
The fair value of each option granted in 1995 and 1996 was estimated on the date
of grant using the Black-Sholes option-pricing model with the following
assumptions for 1995 and 1996, respectively: risk-free interest rate of 5.5% for
both years; no dividend yield for both years; expected lives of 5.5 and 6.0
years; and volatility of 24.1% for both years. The weighted average fair value
per share of options granted during 1995 and 1996 were $4.72 and $8.51,
respectively.
Under the terms of the 1994 Reorganization (see Note 2), employee shareholders
who had participated in the Company's terminated stock purchase plans were
granted options, exercisable at the initial public offering price, to purchase
the number of shares which they had sold in the offering. Accordingly, the
Company issued options to purchase 497,471 shares of the Company's common stock
with an exercise price of $11.50 per share. These options are fully vested and
expire in the year 2001.
In 1994, the Company met some of its operating goals established for its ongoing
stock option plans, and accordingly options to purchase 95,000 shares at an
exercise price of $10.25 per share and 500 shares at an exercise price of $11.28
per share were granted to employees participating in the plan. These options
vest equally over a four-year period and expire in the year 2002. Also, because
the Company met its operating goals, the Company granted to each of its four
outside directors options to purchase 2,000 shares at an exercise price of
$10.00 per share. These options are fully vested at the date of grant and expire
in the year 2002.
In 1995, the Company met most of its operating goals established for its ongoing
stock option plans, and accordingly options to purchase 92,250 shares at an
exercise price of $13.50 per share were granted to employees participating in
the plan. These options will vest equally over a four-year period and expire in
the year 2003.
In 1996, the Company met most of its operating goals established for its ongoing
stock option plans, and accordingly options to purchase 108,250 shares at an
exercise price of $23.00 per share and 500 shares at an exercise price of $25.30
per share were to be granted to employees participating in the plan. These
options will vest equally over a four-year period and expire in the year 2004.
In addition, the Company granted to each of its four outside directors options
to purchase 500 shares at an exercise price of $29.25 per share. These options
are fully vested at the date of grant and expire in the year 2004.
F-17
<PAGE> 59
The following table summarizes the Company's stock option activity for the three
years ended December 31, 1996:
<TABLE>
<CAPTION>
1994 1995 1996
-------------------- ---------------------- ---------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
NON-QUALIFIED STOCK OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE
- ---------------------------- --------- ---------- ---------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 1,828,358 $ 1.46 895,429 $ 8.77 904,114 $ 9.22
Granted 621,686 9.93 92,250 13.50 110,750 23.12
Granted in 1994 Reorganization 612,546 2.63 - - - -
Exercised (2,167,161) 1.98 (82,231) 9.11 (90,191) 5.84
Forfeited - - (1,334) 10.25 (10,939) 13.30
---------- --------- -------
Outstanding at end of year 895,429 8.77 904,114 9.22 913,734 11.18
========== ========= =======
Options exercisable at year-end 791,929 736,740 694,779
</TABLE>
The following table summarizes information about the Company's stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
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, 1996 LIFE PRICE 31, 1996 PRICE
- --------------------------- ----------- ---------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C>
$3.64 204,353 4.3 years $ 3.64 204,353 $ 3.64
$11.50 420,657 4.6 years 11.50 420,657 11.50
$10.00 to $11.28 98,382 5.1 years 10.23 47,871 10.21
$13.50 79,592 6.0 years 13.50 19,898 13.50
$23.00 to $29.25 110,750 7.0 years 23.12 2,000 29.25
------- -------
$3.64 to $29.25 913,734 5.0 years 11.19 694,779 9.21
======= =======
</TABLE>
The Company also maintains a Stock Bonus Plan whereby for each ten years of
continuous employment with the Company each employee who does not participate in
the Company's stock option plans receives 100 shares of common stock. In 1995
and 1996, the Company committed to issue 2,600 and 4,500 shares resulting in
compensation charges of $61,250 and $180,155, respectively. The shares are
issued in the year following the year in which they are earned.
15. Recent Acquisitions
In January 1997, the Company purchased for $1,825,000 in cash a building at its
Brea facility, which it had leased from a third party. The lease, which was
scheduled to expire in May 1997, was terminated with no additional cost to the
Company. The effect of this change on the Company's future minimum rental
commitments is to reduce the 1997 commitments by $62,662.
During the first quarter of 1997, the Company and its subsidiaries completed two
acquisitions. The first, is a purchase of three Canadian companies and a related
U.S. company, the Isometric Group, which manufacture and distribute a line of
mechanical anchors and related products. The acquisition price is approximately
$7.3 million plus an earnout based on future sales increases. The second is the
purchase, for approximately $1.7 million, of the remaining 66% equity in Patrick
Bellion, S.A., a French manufacturer of connector products.
F-18
<PAGE> 60
16. Subsequent Events (Unaudited)
In June 1997, Simpson Strong-Tie International, Inc. ("SSTI"), signed an
agreement to lease a facility in the United Kingdom. The facility is
approximately 78,000 square feet and will be used for SSTI's UK operations. The
term of the lease is for 25 years with the option to terminate in year 15 or in
year 20 upon one year written notice by SSTI. SSTI expects to occupy this
facility in the fourth quarter of this year. In July 1997, the Company amended
its lease with Vacaville Investors to extend the term an additional four years
to November 2007, with an option to extend the lease for an additional five or
ten year period.
The effect of these, the commitments associated with the recently acquired
businesses (see Note 15) and other changes on the Company's future minimum
rental commitments is as follows:
<TABLE>
<CAPTION>
Minimum Rental
Commitments at Revised Future
December 31, Effect of Minimum Rental
1996 Modifications Commitments
---------- ---------- ----------
<S> <C> <C> <C>
1997 $ 3,183,392 $ 749,943 $ 3,933,335
1998 3,024,522 1,508,832 4,533,354
1999 2,981,187 1,091,361 4,072,548
2000 2,988,233 989,957 3,978,190
2001 2,455,194 1,027,871 3,483,065
Thereafter 3,922,723 8,790,536 12,713,259
----------- ----------- -----------
$18,555,251 $14,158,500 $32,713,751
=========== =========== ===========
</TABLE>
The Company has a commitment to purchase a 48,000 square foot building which it
currently leases in San Leandro, California, for approximately $1,975,000. This
purchase is expected to close in the third quarter of 1998 and future minimum
rental payments associated with this property have been excluded from the
revised minimum rental commitment in the above table after the expected purchase
date. In the fourth quarter of 1997, the Company purchased for cash a building
located adjacent to its Brea, California, facility for approximately $2,516,000.
In addition, the Company has committed to continue to lease its facility in
Addison, Illinois, that the lessor is currently expanding. The Company also
plans to build and occupy a new facility in Vicksburg, Mississippi.
F-19
<PAGE> 61
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14 Other Expenses of Issuance and Distribution
The expenses (other than underwriting discounts and commissions) in connection
with the distribution of the securities being registered, which will be paid by
the Selling Shareholders (except that the Registrant has agreed to donate to
Simpson PSB Fund an amount in cash equal to the lesser of $250,000 and one-half
of such expenses payable by Simpson PSB Fund), are as follows:
<TABLE>
<S> <C>
SEC Registration Fee $13,941
NASD Filing Fee 5,226
Blue Sky Expenses *
Printing Fees *
Registrar and Transfer Agent Fees *
Legal Fees and Expenses *
Accounting Fees and Expenses *
Miscellaneous *
-------
Total *
=======
</TABLE>
- -----------
* Estimate.
ITEM 15 Indemnification of Directors and Officers
As permitted by the California General Corporation Law ("GCL"), the Articles of
Incorporation ("Articles") of the Registrant provide that the liability of the
directors of the Registrant for monetary damages shall be eliminated to the
fullest extent permissible under California law, except (a) for acts or
omissions that involve intentional misconduct or a knowing and culpable
violation of law, (b) for acts or omissions that a director believes to be
contrary to the best interests of the Registrant or its shareholders or that
involve the absence of good faith on the part of the director, (c) for any
transaction from which a director derived an improper personal benefit, (d) for
acts or omissions that show a reckless disregard for the director's duty to the
Registrant or its shareholders in circumstances in which the director was aware,
or should have been aware, in the ordinary course of performing a director's
duties, of a risk of serious injury to the Registrant or its shareholders, (e)
for acts or omissions that constitute an unexcused pattern of inattention that
amounts to an abdication of the director's duty to the Registrant or its
shareholders, (f) under GCL section 310 or (g) under GCL section 316. While the
Articles provide protection from awards of monetary damages for breaches of the
duty of care, they do not eliminate the directors' duty of care. The Articles do
not affect the availability of equitable remedies, such as injunctions, based on
a director's breach of the duty of care. These provisions apply to officers of
the Registrant only if they are also directors of the Registrant acting in their
capacity as directors, and do not apply to officers who are not directors of the
Company.
In addition, the Bylaws of the Registrant require that the Registrant indemnify
its officers and directors to the maximum extent permissible under the GCL,
including indemnification against any claims, damages or liabilities in
connection with any acts or omissions other than those for which a director may
not be relieved of liability as described in the preceding paragraph and other
than in circumstances in which indemnity is expressly prohibited by GCL section
317.
The Registrant has entered into agreements to indemnify the directors and
officers of the Registrant and its subsidiaries, in addition to indemnification
provided in the Registrant's Bylaws. These agreements, among other
II-1
<PAGE> 62
things, require that the Registrant indemnify the directors and officers for
certain expenses, including attorney's fees, judgments, fines and settlement
amounts incurred by any such person in any action or proceeding or any
threatened action or proceeding, whether civil or criminal, arising out of such
person's actions as a director or officer of the Registrant of any of its
subsidiaries or as a trustee of a profit-sharing trust of the Registrant or any
of its subsidiaries.
The Underwriters named in the Prospectus have agreed to indemnify the Registrant
and its directors and officers against certain liabilities as set forth in
section 9 of the Underwriting Agreement appearing as Exhibit 1.1 to this
Registration Statement.
ITEM 16 Exhibits
The following exhibits are filed herewith and made a part hereof:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER Description
- ------ -----------
<S> <C>
1.1 Underwriting Agreement among the Registrant, the Selling
Shareholders and the Underwriters (to be filed by amendment).
5.1 Opinion of Shartsis, Friese & Ginsburg LLP (to be filed by
amendment).
23.1 Consent of Independent Certified Public Accountants.
23.2 Consent of Shartsis, Friese & Ginsburg LLP (to be included in
Exhibit 5.1)
24.1 Power of Attorney (included on page II-3 of this Registration
Statement).
</TABLE>
ITEM 17 Undertakings
The undersigned Registrant hereby undertakes that, for purposes of determining
any liability under the Securities Act of 1933, each filing of the Registrant's
annual report pursuant to section 13(a) or section 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance on Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-2
<PAGE> 63
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Pleasanton, State of California, on January 21, 1998.
SIMPSON MANUFACTURING CO., INC.
By /s/ THOMAS J FITZMYERS
------------------------------------------
Thomas J Fitzmyers, President
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Barclay Simpson, Thomas J Fitzmyers and
Stephen B. Lamson, jointly and severally, his or her attorneys-in-fact, each
with the power of substitution, for him or her in any and all capacities, to
sign any amendments to this Registration Statement, and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his substitute or substitutes, may do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated:
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
PRINCIPAL EXECUTIVE OFFICER:
/s/ THOMAS J FITZMYERS President, Chief Executive January 21, 1998
- ------------------------------------------ Officer and Director
Thomas J Fitzmyers
PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER:
/s/ STEPHEN B. LAMSON Chief Financial Officer, January 21, 1998
- ------------------------------------------ Secretary and Director
Stephen B. Lamson
OTHER DIRECTORS:
/s/ BARCLAY SIMPSON Chairman of the Board and January 21, 1998
- ------------------------------------------ Director
Barclay Simpson
/s/ EARL F. CHEIT Director January 21, 1998
- ------------------------------------------
Earl F. Cheit
/s/ ALAN R. MCKAY Director January 21, 1998
- ------------------------------------------
Alan R. McKay
/s/ SUNNE WRIGHT MCPEAK Director January 21, 1998
- ------------------------------------------
Sunne Wright McPeak
/s/ BARRY LAWSON WILLIAMS Director January 21, 1998
- ------------------------------------------
Barry Lawson Williams
</TABLE>
II-3
<PAGE> 64
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------ ----------- ----
<S> <C> <C>
1.1 Underwriting Agreement among the Registrant,
the Selling Shareholders and the Underwriters
(to be filed by amendment)
5.1 Opinion of Shartsis, Friese & Ginsburg LLP
(to be filed by amendment)
23.1 Consent of Independent Certified Public
Accountants
23.2 Consent of Shartsis, Friese & Ginsburg LLP
(to be included in Exhibit 5.1)
24.1 Power of Attorney (included on page II-3 of
the Registration Statement)
</TABLE>
II-4
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-3 of our
report dated January 31, 1997, except the date for Note 15 is March 11, 1997, on
our audits of the financial statements and financial statement schedule of
Simpson Manufacturing Co., Inc. We also consent to the reference to our Firm
under the caption "Experts".
/s/ COOPERS & LYBRAND L.L.P.
San Francisco, California
January 20, 1998
