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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
/X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [NO FEE REQUIRED]
for the fiscal year ended December 31, 1996
OR
/ / Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 [NO FEE REQUIRED]
for the transition period from __________ to __________.
Commission file number: 0-23804
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Simpson Manufacturing Co., Inc.
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(Exact name of registrant as specified in its charter)
California 94-3196943
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4637 Chabot Drive, Suite 200, Pleasanton, CA 94588
(Address of principal executive offices)
Registrant's telephone number, including area code: (510)460-9912
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Securities registered pursuant to Section 12(b) of the Act:
None None
(Title of each class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, without par value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. Yes X No
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Indicate by check if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
As of February 28, 1997, there were outstanding 11,456,196 shares of
the registrant's common stock, without par value, which is the only class
of common or voting stock of the registrant. As of that date, the aggregate
market value of the shares of common stock held by nonaffiliates of the
registrant (based on the closing price for the common stock on the Nasdaq
Stock Market on February 28, 1997) was approximately $108,264,815.
Documents Incorporated by Reference
The information called for by Part III is incorporated by reference to
the definitive Proxy Statement for the Annual Meeting of Stockholders of
the Company to be held May 15, 1997, which will be filed with the
Securities and Exchange Commission not later than 120 days after December
31, 1996.
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PART I
ITEM 1. BUSINESS.
Background
Simpson Manufacturing Co., Inc. ("Simpson Manufacturing" or 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 has developed and uses substantially
automated manufacturing processes in the production of its products. 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 and its affiliates' products
are marketed in all 50 states of the United States, Europe, Canada,
Australia, Mexico, Chile, Argentina and Japan and many are protected by
patents.
The Company was organized in 1994 as a holding company of Simpson Holdings,
Inc. ("Holdings"). The Company and Holdings together own all of the
outstanding stock of SST and SDV. See "Item 1 - Business - 1994
Reorganization." The Company's began to manufacture wood-to-wood connectors
in 1956 and acquired the SDV product line in 1982. The Company's principal
business offices are located at 4637 Chabot Drive, Suite 200, Pleasanton,
California 94588, telephone (510) 460-9912.
Strong-Tie(registered trademark), Dura-Vent(registered trademark),
Dura/Connect(registered trademark), Dura-Plus(registered trademark),
Dura/Liner(registered trademark), Pellet Vent(registered trademark), Direct
Vent G.S. (registered trademark), Engineered Excellence(registered
trademark) and There Is No Equal(registered trademark)(when used with the
registered design) are registered trademarks of the Company's subsidiaries.
1994 Reorganization
In 1994, a reorganization was effected to consolidate all ownership in
Holdings, Simpson Strong-Tie and Simpson Dura-Vent into one entity (the
"1994 Reorganization"). Under the Company's prior incentive stock purchase
plans, each of Holdings, SST and SDV had previously issued shares of its
common stock to certain of its key employees. The employees purchased
shares by delivering notes payable to Holdings, SST and SDV, in principal
amounts representing the fair value of the shares when issued. Until the
1994 Reorganization, Holdings was owned principally by Simpson Investment
Company (which is principally owned and is managed by Barclay Simpson, the
Company's Chairman) and Thomas J Fitzmyers, the Company's President and
Chief Executive Officer, and Holdings owned 92.4% of SST and 92.0% of SDV
(the remainder having been held by employee-shareholders).
To permit the employee-shareholders of SST and SDV to own shares of Common
Stock that were expected to be publicly traded (rather than shares in a
private company, most of the stock of which is held by Holdings), the
Company was formed and offered to all shareholders of Holdings, SST and SDV
(other than Holdings itself) the opportunity to exchange their Holdings,
SST and SDV shares for shares of Company Common Stock. The shareholders
exchanged their shares in exchange ratios that were determined on the basis
of an independent appraisal of the businesses of Holdings, SST and SDV. As
a result of these transactions, the Company owns directly or indirectly all
of the outstanding stock of Holdings, SST and SDV.
Under applicable accounting rules, the 1994 Reorganization resulted in the
Company recording a one-time, non-cash charge related to compensation
expense in the amount of approximately $6.4 million in the first quarter of
1994. After giving effect to all components of the 1994 Reorganization,
including this one-time, non-cash compensation charge, shareholders' equity
increased by $1.1 million. This charge and equity contribution reflect
principally the changes in the value of the shares between their original
sale date and the value of the shares issued in the 1994 Reorganization.
Neither this accounting charge nor this equity contribution resulted in the
payment of any cash by the Company and neither is expected to recur in the
future. See Note 2 to the Consolidated Financial Statements contained
elsewhere herein.
As part of the 1994 Reorganization, the employee-shareholders participated
as selling shareholders in the Company's initial public offering and used a
portion of the net proceeds received by them from the offering to repay all
notes payable to Holdings, SST or SDV previously incurred in connection
with incentive stock purchase plans or secured by the Company's Common
Stock. These debts aggregated approximately $4.3 million. In addition, on
completion of the offering, the Company granted under the Company's 1994
Stock Option Plan to most of the selling shareholders options to purchase
an aggregate of 497,471 shares of Common Stock (approximately equal to the
number of shares sold by them in the offering to pay debts described above
and related income taxes) at an exercise price equal to the $11.50 per
share initial public offering price. These options were immediately
exercisable.
Industry and Market Trends
Based on trade periodicals, participation in trade and professional
associations and communications with governmental and quasi-governmental
organizations and customers and suppliers, the Company believes that a
variety of events and trends have resulted in significant developments in
the markets that the Company serves. Some of these events and trends are
discussed below.
Recent natural disasters throughout the world have focused attention on
safety concerns relating to the structural integrity of homes and other
buildings. The January 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 "Item 1 - 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.
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 SST's engineered wood connector products
have increased significantly in 1995 and 1996.
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 houses heated with natural gas remained at
67%, the same as in 1994, but 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, SDV 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.
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 strategies. These operating strategies are customer-driven.
Information provided by customers has led to the development of many of the
Company's products, and the Company expects that customer needs will
continue to shape the Company's product development, marketing and
services.
Specification in architects' and engineers' plans and drawings generally
determines which products will be used for particular purposes and
therefore is key to the use of Simpson Strong-Tie's products in
construction projects. SST encourages architects and engineers to specify
the installation of SST's products in projects they design and supervise,
and encourages acceptance of SST'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. SST sponsors seminars to inform architects, engineers and
building officials on appropriate use and proper installation of SST's
products.
The Company sells its products through its four primary channels; dealer
distributors, contractor distributors, home centers, and OEM relationships.
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 promotions and other programs to
evaluate distributor product mix and to encourage distributors to add to
their product offerings Company products that complement that mix and 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.
The Company intends to continue to increase penetration of the DIY markets
by solicitation of home centers. The Company's Salespeople 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 aides and has concentrated a portion of its research efforts
into the development of DIY products. The Company's direct sales to home
centers increased nearly 19% from 1995 to 1996.
The Company works closely with manufacturers of engineered wood products
and OEMs in developing and expanding the application and sales of SST's
engineered wood connector products and SDV's gas, wood and pellet stove
venting products. SST has relationships with several of the largest
manufacturers of engineered wood products, and SDV has OEM relationships
with several major gas fireplace and gas stove manufacturers.
The Company is expanding its established facilities outside California to
increase its presence and sales in markets east of the Rocky Mountains.
During the last five years, the Company has expanded or is planning 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 three years, SST has commenced manufacturing in England,
opened a warehouse facility in Western Canada and made an equity investment
in Germany. Subsequent to December 31, 1996, SST has also purchased the
remaining equity of Patrick Bellion, S.A. in France and acquired the
Isometric Group in Eastern Canada, The European investments are intended to
establish a presence in the European Community through companies with
existing customer bases and through servicing U.S.-based customers
operating there. The Company intends to continue to pursue and expand
operations outside the United States.
The Company's long-term strategy is to develop, acquire or invest in
product lines or businesses that complement the Company's existing product
lines, that can be marketed through its existing distribution channels,
that might benefit from use of the Simpson Strong-Tie and Simpson Dura-Vent
brand names, and that are responsive to needs of the Company's customers.
Simpson Strong-Tie
Overview
Connectors produced by SST typically are steel devices that are used to
strengthen, support and connect joints in wood-frame construction. 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 SST products are
listed by recognized building standards agencies as complying with model
building codes and are specified by architects and engineers for use in
projects they are designing or supervising. The engineered wood products
industry is developing in response to concerns about the availability of
wood, and the Company believes that SST is the leading supplier of
connectors for use with engineered wood products.
Products
Simpson Strong-Tie is a recognized brand name in the markets it serves.
Over one 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 being constructed by
a homeowner to a multistory structure being designed by an engineer in an
earthquake zone.
Simpson Strong-Tie 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 revenues from sales of engineered wood connectors through
dealer and contractor distributors and engineered wood product
manufacturers has 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 64 U.S. and
nine foreign patents that SST owns, 55 cover products that SST currently
manufactures and markets. SST typically develops ten to 15 new products
each year. SST's research and development expense for the three years ended
December 31, 1996, 1995 and 1994, was $1,025,000, $922,000 and $713,000,
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 has developed, and in 1996 introduced, a line of
powder-coat painted shelf brackets to be marketed primarily to do-it-
yourselfers. The Company believes that existing distribution channels are
receptive to product line extensions, thereby enhancing SST's ability to
enter new markets.
Sales and Marketing
Simpson Strong-Tie's sales and marketing programs are implemented through
SST's branch system. SST currently maintains branches in Northern and
Southern California, Texas, Ohio and England. 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 branch is an independent profit center with a cash profit
sharing bonus program based on its own performance. At the same time, the
branches closely integrate their manufacturing activities to enhance
product availability. Branch sales forces 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.
Simpson Strong-Tie sells its products through an extensive distribution
system comprising dealer distributors supplying thousands of retail
locations nationwide, contractor distributors (primarily on the West
Coast), home centers (including more than 1,800 stores across the United
States), manufacturers of engineered wood products, and specialized
contractors such as roof framers. SST's 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, Canada and France.
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 Spanish-speaking users in the U.S.
and elsewhere, SST employs bilingual salespeople and prints some of its
publications in the Spanish language. Additionally, SST publishes a catalog
in French for the Canadian market.
Simpson Strong-Tie's engineers not only design and test products, but also
provide engineering support for customers. This support might range from
the discussion of a load value in a catalog to testing a unique application
for an existing product. SST's sales force communicates with customers in
each of its marketing channels, through its publications, through seminars
and through frequent calls.
Based on its communications with customers, Simpson Strong-Tie believes
that its products are essential to its customers' businesses, and it is
SST's policy to ship products ordered within a few days of receiving the
order. Many of SST's customers are contractors that require rapid delivery
of needed products. Home centers and dealers also require superior service,
because of fluctuating demand. To satisfy these requirements, SST maintains
high inventory levels, has redundant manufacturing capability and some
multiple dies to produce the same parts, and maintains computer sales and
inventory control and forecasting capability throughout its nationwide
network of factories and warehouses. The Company also has special programs
for contractors intended to ensure the prompt and reliable manufacture and
delivery of custom products.
Simpson Strong-Tie believes that dealer and home center sales of SST
products are significantly greater when the bins and racks at large dealer
and home center locations are adequately stocked with appropriate products.
Various retailers carry varying numbers of different SST products and SST's
Retail Specialists are engaged in ongoing efforts to inform retailers about
other SST products that can be used in their specific markets and to
encourage them to add these products to better meet their customers' needs.
Achieving these objectives requires teamwork and significant inventory
commitments between SST and the distributors and retailers. Retail
Specialists are playing a significant role in keeping the racks full and
extending the product lines at the large dealer and home center level. They
help retailers order product, set up merchandising systems, stock shelves,
hold product seminars and provide SST with daily information that is used
to improve service and product mix.
Simpson Dura-Vent
Overview
Simpson Dura-Vent's venting systems are used to vent gas furnaces and water
heaters, gas fireplaces and stoves, wood burning stoves and pellet stoves.
SDV's metal vents, chimneys and chimney liner systems exhaust the products
of combustion to the exterior of the building and have been designed for
ease of assembly and safe operation and to achieve a high level of
performance. SDV produces and markets several hundred different venting
products and systems.
In recent years, the abundant supply and clean burning characteristics of
natural gas have gained public recognition, resulting in increased market
share for gas appliances in the new construction and the appliance
replacement markets. SDV's sales of Type B Gas Vents grew in 1996, after a
decline of less than one percent during 1995. 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 channels of
distribution, 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 Northern 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"), a total of 4.8 million gas water heaters and
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, the 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. SDV 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.
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. Simpson Dura-Vent 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.
Simpson Strong-Tie has developed substantially automated manufacturing
processes. SST'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.
SST's development of specialized manufacturing processes also has permitted
increased operating flexibility and enhanced product design innovation.
Simpson Strong-Tie is committed to helping people build safer structures
economically through the design, engineering and manufacturing of
structural connector and related products. To this end, SST 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. In 1996, this quality management
system was 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 SST's products are produced with a high level of automation, using
progressive dies run in automatic presses making parts from coiled sheet
steel often in excess of 100 strokes per minute. SST produces 500 million
product pieces per year. Over half of SST's products are individually bar
coded, particularly the products which are sold to home centers. SST has
significant press capacity and has some multiple dies for its high volume
products because of the need to produce the product close to the customer
and to provide backup capacity. The balance of production is accomplished
through a combination of manual, blanking and numerically controlled (NC)
processes which include robotic welders, lasers and turret punches. SST
believes it is the only manufacturer in the connector industry using NC
turret punches to manufacture a large variety of standard and special
products. This capability allows SST to produce products with little
redesign or set-up time, facilitating rapid turnaround for customers. New
tooling is also highly automated. Dies are designed and produced using
computer aided design (CAD) and computer aided machinery (CAM) systems.
CAD/CAM capability enables SST to create rapidly multiple dies and design
them to high standards. SST is constantly reviewing its product line to
reduce manufacturing costs and increase automation.
Simpson Dura-Vent's plants located in Vacaville, California, and Vicksburg,
Mississippi, have been equipped with automated manufacturing machinery,
including high-speed automatic pipe lines and automatic elbow lines. SDV
bar codes all of its standard products. SDV believes it has developed
rigorous quality control systems and has creatively designed products and
shipping containers that limit product damage.
Regulation
The Company is committed to helping people build safer structures
economically. The Company's products must conform to certain quality
standards governing their design, installation and performance.
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. Minimum appliance efficiency standards might be adopted
that could negatively affect Type B Gas Vent sales. Although any standards,
if adopted, would probably be implemented over a period of years. While the
Company does not believe that the adoption of such standards is likely at
this time, if such standards were to be adopted, they could result in the
reduction or elimination of these sales, which could materially and
adversely affect SDV's and the Company's operating results and financial
condition.
The standards and regulations contained in the NFGC and NFPA 211 are
ultimately adopted by national building code organizations such as ICBO,
BOCA and SBCCI. In turn, the various building codes are adopted by local
municipalities, resulting in enforcement through the building permit
process. Safety, air quality and energy efficiency requirements are
enforced by local air quality districts and municipalities by requiring
proper UL, EPA and DOE labels on appliances and venting systems.
Competition
The Company faces a variety of competition in all of the markets in which
it participates. This competition ranges from subsidiaries of large
national corporations to small regional manufacturers.
SST 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. While price is an
important factor, SST competes primarily on the basis of high quality,
broad product line, technical support, service, field support and
innovative products.
The venting industry is highly competitive. Many of SDV's competitors have
greater financial and other resources than SDV. SDV's principal competitors
include the Selkirk Metalbestos Division of Eljer Industries Inc., American
Metal Products Co. (a subsidiary of Masco Corp.), Metal-Fab, Inc., Hart &
Cooley, Inc. and the Air Jet Division of General Products Co. The Company
believes that Metal-Fab, Inc., Hart & Cooley, Inc. and Air Jet tend to be
more regional than SDV, and that they have smaller shares of the national
market than SDV.
Raw Materials
The principal raw material used by the Company is steel, including
stainless steel, and is generally ordered to specific American Society of
Testing and Materials ("ASTM") standards. Other raw materials include
aluminum, aluminum alloys and ceramic and other insulation materials, which
are used by SDV, and cartons, which are used by both SST and SDV. The
Company purchases raw materials from a variety of commercial sources. The
Company's practice is to seek cost savings and enhanced quality by
purchasing from a limited number of suppliers. The loss of a major source
of raw materials might interrupt or delay the Company's manufacturing
operations, but the Company does not believe that any such interruption or
delay would be substantial, because all of the raw materials used by the
Company are available from other sources, and any such interruption would
be ameliorated by the Company's use of inventories of raw materials and
finished goods. 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. If material cost
increases occur, the Company might not be able to increase its product
prices in corresponding amounts without materially and adversely affecting
its sales and profits. See "Item 7 - Management's Discussion and Analysis
of Financial Condition and Results of Operations."
Patents and Proprietary Rights
The Company's subsidiaries own 76 U.S. and foreign patents, of which 58
cover products that they currently manufacture and market. Its subsidiaries
have filed ten U.S. and eight foreign patent applications that are
currently pending. These patents and patent applications cover various
design aspects of the subsidiaries' products as well as the processes used
in their manufacture.
The Company's subsidiaries are continuing to develop new potentially
patentable products, product enhancements and product designs. Although the
Company's subsidiaries do not intend to apply for additional foreign
patents covering existing products, the Company is developing an
international patent program to protect new products that its subsidiaries
may develop. The Company's ability to compete effectively with other
companies depends in part on its subsidiaries' ability to maintain the
proprietary nature of their technologies. Although the Company's
subsidiaries own patents in the United States and Canada, there can be no
assurance as to the degree of protection afforded by these patents, or the
likelihood that pending patent applications will be issued. 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 subsidiaries' products or proposed products, or otherwise obtain access
to the subsidiaries' proprietary technology.
The Company's subsidiaries have registered 49 trademarks in the U.S. and 30
in foreign countries, have nine trademark registration applications pending
in the U.S. and 22 such applications pending in foreign countries, and use
several other trademarks that they have not yet attempted to register.
Seasonality and Cyclicality
The Company's sales are seasonal, with peak sales activity normally
occurring in the second and third quarters. The fluctuation in sales
activity is attributable principally to the buying patterns of construction
contractors and retailers, which are influenced by weather conditions
affecting construction. More generally, the construction 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 are within the
Company's control. The Company's recent revenue trends have not followed
the pattern of the construction industry, but either seasonal or cyclical
declines in commercial and residential construction may 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 materially
adverse effects on the Company and its business and financial condition.
See "Item 7 - Management's Discussion and Analysis of Financial Condition
and Results of Operations."
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 "Item 1 - Business - Business Strategy" and "Item 1 - Business -
Industry and Market Trends." Therefore, the Company may in the future
pursue acquisitions of product lines or businesses. Acquisitions involve
numerous risks, including difficulties in the assimilation of the
operations and products of the acquired companies, the diversion of
management's attention from other business concerns, risks of entering
markets in which the Company has little or no direct prior experience, and
the potential loss of key employees of the acquired company. In addition,
future acquisitions by the Company may result in potentially dilutive
issuances of equity securities, the incurring of additional debt and
amortization expenses related to goodwill and intangible assets, which
could adversely affect the Company's profitability.
In addition, construction customs, standards, techniques and methods in
international markets differ from those in the United States. Laws and
regulations applicable in markets outside the United States 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 has
only recently begun marketing outside the United States and expects that
significant time will be required for it to generate substantial sales or
any profits in Canadian, European and other 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.
In 1996, Simpson Strong-Tie International, Inc. 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 SST and its subsidiaries have also completed two other 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. See "Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Sources of
Capital."
Environmental, Health, Safety and Regulatory Matters
The design, capacity and quality of most of the Company's products and
manufacturing processes are subject to numerous and extensive regulations
and standards promulgated by governmental, quasi-governmental and industry
organizations. Such regulations and standards are highly technical and
complex and are subject to frequent revision. The failure of the Company's
products or manufacturing processes to comply with any of such regulations
and standards could impair the Company's ability to manufacture and market
its products profitably and could materially and adversely affect the
Company's business and financial condition.
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, 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 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 materials used in the galvanizing
process). 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.
At the Company's facilities in San Leandro, California, the Company found
several underground tanks and soil contamination resulting from activities
of one or more prior owners. The Company removed the tanks and took
remedial action to correct the soil contamination in accessible areas,
although the Company did not excavate contaminated soil beneath a 7,000
square foot building and has not conducted ground water monitoring. These
actions were fully reported to cognizant authorities, which have not
required further action. The Company may be required at some future time to
take additional monitoring or remedial action at this site, but the Company
believes that the expense of taking such action is not likely to be
material.
Hydrocarbon contamination was found at the Company's leased facility in
Vicksburg, Mississippi. The Company has been informed by the owner,
Vicksburg Investors (see "Item 2 - Properties"), that appropriate remedial
action was taken by a prior owner pursuant to an agreement with the current
owner and that further remedial action is not required at this time.
The capital costs of future compliance with laws and regulations affecting
the ongoing operations of the Company's manufacturing facilities cannot be
reasonably estimated at this time, but based on available information and
the Company's understanding of environmental laws as currently interpreted
and enforced, the Company believes that any such costs are not likely to
have a material adverse effect on the Company's liquidity, results of
operations or financial position.
The Company has not been identified as a potentially responsible party
under the Federal Superfund law or comparable state laws in connection with
its shipments of waste to off-site disposal locations.
Product Liability
The Company has designed 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 and to supervise its quality control. 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 any 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 such a flaw is discovered after installation but before any
damage or injury occurs, the Company may be liable for any costs necessary
to retrofit the affected structures.
Manufacturing Capacity
Many of the Company's current and planned manufacturing facilities are
located in geographic regions that have experienced major natural
disasters, such as earthquakes, floods and hurricanes. For example, the
1989 Loma Prieta earthquake in Northern California destroyed a freeway and
caused other major damage within a few miles of the Company's facilities in
San Leandro, California, and the 1994 Northridge earthquake in Southern
California, 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.
Employees
As of February 28, 1997, the Company had 1,139 full-time employees, of whom
804 were hourly employees and 335 were salaried employees. 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 that will expire between 1998 and 2000.
The Company believes its overall compensation and benefits for the most
part exceed the industry averages and that its relations with its employees
are good. A significant work stoppage or interruption could, however, have
a material and adverse effect on the Company and its business and financial
condition. See "Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations."
ITEM 2. PROPERTIES.
Properties
The Company maintains its corporate offices in Pleasanton, California, and
other offices, manufacturing and warehouse facilities elsewhere in
California and in Texas, Ohio, Florida, Mississippi, Illinois, British
Columbia and England. As of February 28, 1997, the Company's facilities
were as follows:
Approximate
Square Owned or Lease
Location Footage Leased Lessee Expires Function
- --------------------------- ----------- ---------- -------- ------- --------------------------
Pleasanton, California 14,500 Leased Holdings 2000 Office
San Leandro, California 47,100 Leased(1) SST 2001 Office, Manufacturing and
Warehouse
San Leandro, California 71,000 Owned Office, Manufacturing and
Warehouse
San Leandro, California 57,000 Leased(2) SST 2001 Manufacturing and
Warehouse
San Leandro, California 48,000 Leased SST 2001 Office and Warehouse
San Leandro, California 27,000 Owned Manufacturing and
Warehouse
San Leandro, California 62,900 Leased SST 1997 Warehouse
Brea, California 50,700 Owned Office, Manufacturing and
Warehouse
Brea, California 78,000 Owned Office and Warehouse
Brea, California 30,500 Owned(3) Office, Manufacturing and
Warehouse
Fullerton, California 6,600 Leased Company 1997 Warehouse
McKinney, Texas 84,300 Owned Office, Manufacturing and
Warehouse
McKinney, Texas 117,100 Owned Office and Warehouse
Columbus, Ohio 153,500 Leased(4) SST 2005 Office, Manufacturing and
Warehouse
Jacksonville, Florida 74,600 Leased SST 2001 Office and Warehouse
Addison, Illinois 24,000 Leased SST(5) 2000 Office, Manufacturing and
Warehouse
Addison, Illinois 10,200 Leased SST(5) 1998 Warehouse
Cannock, Staffordshire, 26,900 Leased SST(6) 2000 Office, Manufacturing and
England Warehouse
Chelmsford, 25,000 Leased SST(6) 2002 Office, Manufacturing and
England Warehouse
Vacaville, California 125,000 Leased(7) SDV 2003 Office, Manufacturing and
Warehouse
Vacaville, California 120,300 Owned Office, Manufacturing and
Warehouse
Fontana, California 17,900 Leased SDV 1998 Warehouse
Vicksburg, Mississippi 172,000 Leased(8) SDV 2003 Office, Manufacturing and
Warehouse
Vancouver, British Columbia 6,000 Leased SST 1999 Warehouse
- --------------------
(1) Lessor is Simpson Investment Company, a related party. See Note 10 to
the Consolidated Financial Statements contained elsewhere herein.
(2) Lessor is Doolittle Investors, a related party. See Note 10 to the
Consolidated Financial Statements contained elsewhere herein.
(3) This property was purchased by the Company from a third party lessor
in January 1997.
(4) Lessor is Columbus Westbelt Investment Company, a related party. See
Note 10 to the Consolidated Financial Statements contained elsewhere
herein.
(5) Lessee is Ackerman Johnson Fastening Systems, Inc., a wholly-owned
subsidiary of SST.
(6) Lessee is Simpson Strong-Tie International, Inc., a wholly-owned
subsidiary of SST.
(7) Lessor is Vacaville Investors, a related party. See Note 10 to the
Consolidated Financial Statements contained elsewhere herein.
(8) Lessor is Vicksburg Investors, a related party. See Note 10 to the
Consolidated Financial Statements contained elsewhere herein.
The Company's manufacturing facilities are equipped with specialized
equipment and use extensive automation. The Company considers its existing
and planned facilities to be suitable and adequate for its operations as
currently conducted and as planned through 1997. The manufacturing
facilities currently are being operated with one full shift and at most
plants with at least a partial second shift. The Company anticipates that
it may require additional facilities in 1997 and 1998 or thereafter to
accommodate its growth.
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved in various legal proceedings and other matters
arising in the normal course of business. In the opinion of management,
none of such matters when ultimately resolved will have a material adverse
effect on the Company's financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's common stock has been traded on the Nasdaq National Market
tier of the Nasdaq Stock Market under the symbol "SMCO" since the Company's
initial public offering on May 26, 1994. The high and low closing prices
set forth below are as reported on the Nasdaq Stock Market for the periods
indicated.
Market Price
Quarter High Low
-------- --------
1996
Fourth............................. $ 24 $ 19 3/4
Third.............................. 21 18 1/2
Second............................. 20 3/4 15 1/8
First.............................. 15 3/4 13
1995
Fourth............................. $ 15 3/8 $ 11 1/2
Third.............................. 12 1/2 11 5/8
Second............................. 12 1/8 9 1/2
First.............................. 11 1/8 9 3/8
As of February 28, 1997, there were 231 holders of record of the Company's
common stock.
The Company currently intends to retain its future earnings, if any, to
finance operations, fund internal growth and repay outstanding debt, and
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, cash flow,
financial condition and other factors deemed relevant by the Board of
Directors. In addition, existing loan agreements require the Company to
maintain Tangible Net Worth of $50.0 million plus 50% of net profit after
taxes for each fiscal year ending after December 31, 1996. This requirement
may limit the amount that the Company may pay out as dividends on the
common stock. As of December 31, 1996, the Company had a Tangible Net Worth
of $99.9 million.
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected consolidated financial information
with respect to the Company for each of the five years ended December 31,
1996, 1995, 1994, 1993, and 1992, derived from the audited Consolidated
Financial Statements of the Company, the most recent three years of which
appear elsewhere herein. The data presented below should be read in
conjunction with the Consolidated Financial Statements and related Notes
thereto and "Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere herein.
Year Ended December 31,
(Dollars in thousands, except --------------------------------------------------------
per share data) 1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
STATEMENT OF OPERATIONS DATA:
Net sales $202,409 $167,958 $151,290 $113,923 $ 98,106
Cost of sales 124,394 109,368 96,984 72,387 65,342
-------- -------- -------- -------- --------
Gross profit 78,015 58,590 54,306 41,536 32,764
Selling expense 20,104 17,110 14,714 12,137 11,239
General and administrative expense 25,036 18,512 18,608 14,156 10,449
Compensation related to stock plans 180 61 6,909 693 120
-------- -------- -------- -------- --------
Income from operations 32,695 22,907 14,075 14,550 10,956
Interest (income) expense, net (595) (142) 559 997 1,113
-------- -------- -------- -------- --------
Income before income taxes
and minority interest 33,290 23,049 13,516 13,553 9,843
Provision for income taxes 13,569 8,927 8,098 5,517 3,762
Minority interest - - (33) 66 23
-------- -------- -------- -------- --------
Net income $ 19,721 $ 14,122 $ 5,451 $ 7,970 $ 6,058
======== ======== ======== ======== ========
Net income per share of common stock $ 1.68 $ 1.23 $ 0.51 $ 0.89 $ 0.69
======== ======== ======== ======== ========
Dividends per share of common stock $ - $ - $ - $ .055 $ .103
======== ======== ======== ======== ========
As of December 31,
--------------------------------------------------------
(Dollars in thousands) 1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
BALANCE SHEET DATA:
Working capital $ 70,676 $ 51,984 $ 44,127 $ 24,526 $ 19,667
Net plant, property and equipment 28,688 26,420 20,843 13,551 12,530
Total assets 122,521 96,642 80,311 58,325 44,558
Total debt - 20 - 14,998 12,306
Total liabilities 20,224 15,089 13,789 25,487 19,312
Total shareholders' equity 102,297 81,553 66,522 32,535 25,123
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
1996 1995
-------------------------------------------- --------------------------------------------
(Dollars in thousands, Fourth Third Second First Fourth Third Second First
except per share data) Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
-------- -------- -------- -------- -------- -------- -------- --------
Net sales $ 50,063 $ 57,129 $ 51,760 $ 43,457 $ 43,251 $ 47,070 $ 41,862 $ 35,775
Cost of sales 30,088 34,441 31,509 28,356 29,378 29,974 25,980 24,036
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit 19,975 22,688 20,251 15,101 13,873 17,096 15,882 11,739
Selling expense 5,202 4,929 5,463 4,510 5,235 4,002 4,014 3,859
General and
administrative expense 6,648 7,034 6,225 5,128 4,019 5,472 5,186 3,834
Compensation related to
stock plans 180 - - - 61 - - -
-------- -------- -------- -------- -------- -------- -------- --------
Income from operations 7,945 10,725 8,563 5,463 4,558 7,622 6,682 4,046
Interest (income) expense, net (269) (175) (97) (54) (65) (22) 12 (65)
-------- -------- -------- -------- -------- -------- -------- --------
Income before income taxes 8,214 10,900 8,660 5,517 4,623 7,644 6,670 4,111
Provision for income taxes 3,316 4,507 3,492 2,254 1,531 2,917 2,777 1,702
-------- -------- -------- -------- -------- -------- -------- --------
Net income $ 4,898 $ 6,393 $ 5,168 $ 3,263 $ 3,092 $ 4,727 $ 3,893 $ 2,409
======== ======== ======== ======== ======== ======== ======== ========
Net income per share of
common stock $ 0.41 $ 0.54 $ 0.44 $ 0.28 $ 0.27 $ 0.41 $ 0.34 $ 0.21
======== ======== ======== ======== ======== ======== ======== ========
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following is a discussion and analysis of the consolidated financial
condition and results of operations for the Company for the years ended
December 31, 1996, 1995 and 1994, 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
During the three-year period ended December 31, 1996, 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. Do-it-yourself ("DIY"), seismic
and high-wind products, and engineered wood related product sales increased
faster than the Company's other core products, as did sales from other
recently introduced products. In particular, SDV's Direct-Vent products, a
double walled venting system sold both to manufacturers and through
distributors, contributed significantly to SDV's sales. In addition, sales
of SST's epoxy products has experienced strong growth since 1994. 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 came down 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.
Sales continue to be somewhat seasonal, with the second and third quarters
usually having higher sales and profits than the first and fourth quarters.
The Company's working capital needs are greatest during the second and
third quarters, due primarily to the need to maintain high levels of
inventory and accounts receivable resulting from increased sales and
seasonal promotions that allow customers extended payment terms during this
period. Such working capital historically has been provided by the
Company's credit facilities or available cash.
Cash generated from operating activities during the three years in the
period ended December 31, 1996, totaled approximately $47.6 million and was
used to finance most of the $32.7 million in capital expenditures,
acquisitions and investments during that same period. Working capital needs
increased substantially, primarily due to the higher levels of inventory
and accounts receivable necessary to support the growth in sales.
Acquisitions made during the past three years in the United Kingdom
continue to report losses. While sales there have more than doubled since
1994, current gross margins are substantially lower than the rest of the
Company's operations. During 1996, Simpson Strong-Tie International, Inc.,
a subsidiary of the Company, completed the purchase of additional assets in
the UK. In connection with this acquisition, the Company is attempting to
reduce its operating costs by consolidating all of its UK facilities into a
single location. As part of this consolidation, the Company wrote off
approximately $1.1 million of intangible assets associated with the
separate UK operations. The Company cannot predict whether or when its
European operation will generate profits. As the size of the Company's
foreign investments grows, its foreign currency translation exposure
increases.
RESULTS OF OPERATIONS-COMPARISON OF THE YEARS ENDED DECEMBER 31, 1996 AND
1995
Net Sales
Net sales in 1996 increased by 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 increase in net sales at both
SST and SDV were primarily due to volume increases, with a relatively small
increase in average prices. The increase in net sales was spread 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 do-it-
yourself, epoxy and seismic products led Simpson Strong-Tie sales, and
sales of Direct-Vent products, now sold both to OEMs and through
distributors, continued to experience strong growth.
Gross Profit
Gross profit in 1996 increased 33.2% to $78.0 million from $58.6 million in
1995. Gross profit as a percentage of net sales increased to 38.5% in 1996
from 34.9% in 1995. The increase was primarily due to three factors. The
first factor was a substantial benefit attributable to the LIFO gain for
the year as compared to a LIFO loss in the prior year. Second, the
non-material component of cost of sales, which includes research and
development costs, direct and indirect labor, factory costs and shipping
and freight, decreased slightly as a percentage of 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. 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 craftsman 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, which was due to expire in July
1997, was extended in 1996 and now expires in July 2000. If replacement
agreements are not reached prior to the expiration of these contracts, the
Company may experience a work stoppage or interruption that could have a
material and adverse effect on the Company and its business and financial
condition.
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 spending for
advertising and sales promotion, a large portion of which was oriented
towards serving 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 increased 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
In December 1996, Simpson Strong-Tie International, Inc. ("SSTI"), a
subsidiary of the Company, completed the purchase of the assets, including
$675,000 in equipment, of the Builders Products Division of MiTek
Industries Ltd. for approximately $1,040,000. 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 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 costs of depreciation on purchased capital equipment,
administrative and other overhead costs incurred related to the growing
operations. The Company expects these losses to continue through at least
1997.
RESULTS OF OPERATIONS-COMPARISON OF THE YEARS ENDED DECEMBER 31, 1995 AND
1994
Net Sales
Net sales in 1995 increased by 11.0% to $168.0 million from $151.3 million
in 1994. Net sales of Simpson Strong-Tie products increased 14.4% to $127.0
million in 1995 while sales of Simpson Dura-Vent products increased by 1.7%
to $41.0 million in 1995. SDV accounted for 24.4% in 1995 of the Company's
total net sales, 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 was spread 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 do-it-yourself products led Simpson Strong-Tie sales,
and sales of Direct-Vent products for the OEM venting market continued to
experience strong growth. The increase in sales of Direct-Vent was largely
offset, however, by decreases in other Simpson Dura-Vent 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.
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
craftsman 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, which was due to expire in July 1997, was extended
in 1996 and now expires in July 2000. If replacement agreements are not
reached prior to the expiration of the contracts, the Company may
experience a work stoppage or interruption that could have a material and
adverse effect on the Company and its business and financial condition.
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 spending for
advertising and sales promotion, a large part of which was focused on the
enhancement of retail displays and product packaging. The Company also
hired several new Retail Specialists to better support 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 nondeductability 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. The Company's metal shapes business,
acquired in late 1993, was integrated into its existing branch operation in
Columbus, Ohio, to eliminate redundant overhead costs.
LIQUIDITY AND SOURCES OF CAPITAL
Cash and cash equivalents increased $12.9 million to $19.8 million at
December 31, 1996, from $6.9 million at December 31, 1995. 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. At December 31, 1996, working capital
was $70.7 million, as compared to $52.0 million at December 31, 1995. As of
December 31, 1996, the Company had no debt and had available to it unused
credit facilities of approximately $19.1 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. 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
assets and liability accounts.
Cash used in investing activities was $12.3 million, $13.1 million and
$11.1 million for 1996, 1995 and 1994, respectively, primarily for capital
expenditures and investments. Capital expenditures 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. The
Company plans additional expansion in 1997 of its manufacturing capacity.
Consequently, the Company expects to incur substantially higher capital
expenditures in 1997. In January 1997, the Company completed the purchase,
for approximately $1.8 million in cash, of a 30,500 square foot building
which it had previously leased from an unrelated party. The Company also
invested approximately $3.9 million in a six-month U.S. Treasury Bill,
maturing in March 1997.
In addition to the capital expenditures made in 1996, Simpson Strong-Tie
International, Inc., a subsidiary of the Company, purchased the assets of
the Builders Products Division of MiTek Industries Ltd. for approximately
$1,040,000 in cash. During the first quarter of 1997, the Company and its
subsidiaries completed two other acquisitions. The first is 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 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.
Currently, no other commitments or agreements are pending with respect to
any potential acquisitions. The Company is in discussions with several
companies in related businesses regarding possible acquisition or
investment by the Company. No assurance can be given whether any such
acquisition or investment will occur or, if so, regarding its effect on the
Company's business or operating results.
Financing activities provided net cash of $0.5 million 1996 primarily as a
result of the exercise of stock options by current and former employees of
the Company.
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
1997. Depending on the Company's future growth, it may become necessary to
secure additional sources of financing.
INFLATION
Management believes that the effect of inflation on the Company has not
been material in recent years, as inflation rates have remained low.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
SIMPSON MANUFACTURING CO., INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Statements
Report of Independent Accountants................................ 24
Consolidated Balance Sheets at December 31, 1996 and 1995........ 25
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994............................... 26
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1996, 1995 and 1994................... 27
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994............................... 28
Notes to the Consolidated Financial Statements................... 29
Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts.................. 40
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Simpson Manufacturing Co.,
Inc.:
We have audited the consolidated financial statements and the financial
statement schedule of Simpson Manufacturing Co., Inc. and subsidiaries
listed in the index on page 23 of this Form 10-K. These financial
statements and the financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements and the financial statement schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatements. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Simpson
Manufacturing Co., Inc. and subsidiaries as of December 31, 1996 and 1995,
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. In addition, in
our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
San Francisco, California
January 31, 1997, except for Note 15
for which the date is March 11, 1997
SIMPSON MANUFACTURING CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
----------------------------
1996 1995
------------ ------------
ASSETS
Current assets
Cash and cash equivalents $ 19,815,297 $ 6,955,788
Short-term investments 3,896,428 -
Trade accounts receivable, net 20,930,490 20,732,880
Inventories 42,247,777 34,471,250
Deferred income taxes 2,919,455 2,750,455
Other current assets 956,565 1,986,446
------------ ------------
Total current assets 90,766,012 66,896,819
Property, plant and equipment, net 28,687,635 26,420,004
Investments 1,382,578 1,357,457
Other noncurrent assets 1,684,548 1,967,779
------------ ------------
Total assets $122,520,773 $ 96,642,059
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Notes payable $ - $ 20,037
Trade accounts payable 10,063,828 7,375,014
Accrued liabilities 4,137,648 3,386,527
Accrued profit sharing trust 2,446,001 1,999,739
Accrued cash profit sharing and commissions 2,292,057 1,289,144
Accrued workers' compensation 809,272 842,125
Income taxes payable 341,626 -
------------ ------------
Total current liabilities 20,090,432 14,912,586
Deferred income taxes and
other long-term liabilities 133,333 176,783
------------ ------------
Total liabilities 20,223,765 15,089,369
------------ ------------
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, 11,451,018 and 11,358,227 at December
31, 1996 and 1995, respectively 31,233,648 30,415,716
Retained earnings 70,862,906 51,142,268
Cumulative translation adjustment 200,454 (5,294)
------------ ------------
Total shareholders' equity 102,297,008 81,552,690
------------ ------------
Total liabilities and shareholders'
equity $122,520,773 $ 96,642,059
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
SIMPSON MANUFACTURING CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
--------------------------------------------
1996 1995 1994
------------ ------------ ------------
Net sales $202,408,917 $167,957,955 $151,290,466
Cost of sales 124,394,086 109,368,027 96,983,987
------------ ------------ ------------
Gross profit 78,014,831 58,589,928 54,306,479
------------ ------------ ------------
Operating expenses:
Selling 20,104,344 17,109,325 14,714,528
General and administrative 25,035,874 18,512,003 18,607,985
Compensation related to stock plans
(Notes 2 and 14) 180,155 61,250 6,908,581
------------ ------------ ------------
45,320,373 35,682,578 40,231,094
------------ ------------ ------------
Income from operations 32,694,458 22,907,350 14,075,385
Interest (income) expense, net (595,180) (141,535) 559,249
------------ ------------ ------------
Income before income taxes and
minority interest 33,289,638 23,048,885 13,516,136
Provision for income taxes 13,569,000 8,927,000 8,098,000
Minority interest - - (32,628)
------------ ------------ ------------
Net income $ 19,720,638 $ 14,121,885 $ 5,450,764
============ ============ ============
Net income per common share:
Primary $ 1.68 $ 1.23 $ 0.51
Fully diluted $ 1.67 $ 1.22 $ 0.51
Number of shares outstanding
Primary 11,755,184 11,460,567 10,561,641
Fully diluted 11,838,658 11,532,872 10,569,055
The accompanying notes are an integral part of these consolidated financial
statements.
SIMPSON MANUFACTURING CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Notes
Common Stock Cumulative Receivable
---------------------------- Retained Translation from
Shares Amount Earnings Adjustment Shareholders Total
------------ ------------ ------------ ------------ ------------ ------------
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
============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
SIMPSON MANUFACTURING CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
--------------------------------------------
1996 1995 1994
------------ ------------ ------------
Cash flows from operating activities
Net income $ 19,720,638 $ 14,121,885 $ 5,450,764
Adjustments to reconcile net income
to net cash provided by operating
activities:
Loss (gain) on sale of capital
equipment (16,262) 11,558 3,427
Depreciation and amortization 7,197,718 5,291,466 3,972,907
Minority interest - - (32,628)
Deferred income taxes and other
long-term liabilities (212,450) 65,000 (678,000)
Equity in (income) losses of
affiliates (107,000) (24,554) 6,582
Noncash compensation related to
stock plans 35,100 61,250 6,771,873
Changes in operating assets and
liabilities, net of effects of
acquisitions:
Trade accounts receivable, net (190,608) (2,916,665) (2,746,477)
Inventories (7,500,960) (2,655,355) (6,578,213)
Other current assets 278,047 (951,314) 300,124
Other noncurrent assets (800,840) (256,380) (213,702)
Trade accounts payable 2,688,814 665,976 1,714,800
Accrued liabilities 751,120 307,968 981,116
Accrued profit sharing trust 446,262 279,135 234,811
Accrued cash profit sharing
and commissions 1,002,913 (45,982) 383,477
Accrued workers' compensation (32,853) (55,000) (280,403)
Income taxes payable 1,349,876 (500,661) 322,485
------------ ------------ ------------
Total adjustments 4,888,877 (723,558) 4,162,179
------------ ------------ ------------
Net cash provided by operating
activities $ 24,609,515 $ 13,398,327 $ 9,612,943
------------ ------------ ------------
Cash flows from investing activities
Capital expenditures (7,364,326) (10,049,629) (9,939,384)
Proceeds from sale of equipment 57,787 22,225 43,212
Asset acquisitions, net of cash acquired (1,041,780) (2,414,114) (1,199,733)
Purchase of short-term investment (3,896,428) - -
Equity investments (11,637) (667,002) -
------------ ------------ ------------
Net cash used in investing
activities (12,256,384) (13,108,520) (11,095,905)
------------ ------------ ------------
Cash flows from financing activities
Issuance of debt - 20,037 5,589,363
Repayment of debt (20,037) - (20,587,801)
Issuance of Company's common stock 526,415 835,351 16,163,180
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 506,378 855,388 5,483,860
------------ ------------ ------------
Net increase in cash and cash
equivalents 12,859,509 1,145,195 4,000,898
Cash and cash equivalents at beginning
of period 6,955,788 5,810,593 1,809,695
------------ ------------ ------------
Cash and cash equivalents at end of
period $ 19,815,297 $ 6,955,788 $ 5,810,593
============ ============ ============
Supplemental Disclosure of Cash Flow Information
Cash paid during the year for
Interest $ 31,311 $ 35,045 $ 562,246
============ ============ ============
Income taxes $ 13,036,713 $ 8,961,714 $ 8,455,237
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
SIMPSON MANUFACTURING CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Operations and Summary of Significant Accounting Policies
Nature of Operations
Simpson Manufacturing Co., Inc., through its subsidiaries Simpson
Strong-Tie Company Inc. and Simpson Dura-Vent Company, Inc. (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, where
inventories of approximately $1,483,000 and $1,028,000 at December 31, 1996
and 1995, respectively, are valued using the first-in, first-out (FIFO)
method.
Property, Plant and Equipment
Property, plant and equipment is carried at cost. Major renewals and
betterments are capitalized; maintenance and repairs are expensed on a
current basis. When assets are sold or retired, their costs and accumulated
depreciation are removed from the accounts; the resulting gains or losses
are reflected in the consolidated statements of operations.
Depreciation and Amortization
Depreciation of property, plant and equipment is provided for using
accelerated methods over the following estimated useful lives:
Factory machinery and equipment 5 to 10 years
Automobiles, trucks and other equipment 3 to 10 years
Office equipment 3 to 8 years
Buildings and site improvements 20 to 45 years
Leasehold improvements are amortized using the straight-line method over
the remaining term of the lease.
Product Research and Development Costs
Product research and development costs, which are included in cost of
sales, were charged against income as incurred and approximated $1,312,000,
$1,180,000 and $946,000 in 1996, 1995 and 1994, 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 currency 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.
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.
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
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:
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
============
3. Acquisitions
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.
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 1995 and 1994.
4. Trade Accounts Receivable
Trade accounts receivable consist of the following:
At December 31,
----------------------------
1996 1995
------------ ------------
Trade accounts receivable $ 22,242,827 $ 21,832,701
Allowance for doubtful accounts (1,108,950) (931,321)
Allowance for sales discounts (203,387) (168,500)
------------ ------------
$ 20,930,490 $ 20,732,880
============ ============
The Company sells product on credit and generally does not require
collateral.
5. Inventories The components of inventories consist of the following:
At December 31,
----------------------------
1996 1995
------------ ------------
Raw materials $ 15,107,660 $ 13,424,828
In-process products 3,763,634 3,180,416
Finished products 23,376,483 17,866,006
------------ ------------
$ 42,247,777 $ 34,471,250
============ ============
At December 31, 1996 and 1995, the replacement value of LIFO inventories
exceeded LIFO cost by approximately $1,186,000 and $4,178,000,
respectively.
6. Property, Plant and Equipment, net
Property, plant and equipment consists of the following:
At December 31,
----------------------------
1996 1995
------------ ------------
Land $ 2,065,682 $ 2,065,682
Buildings and site improvements 10,379,901 10,379,901
Leasehold improvements 2,869,612 2,688,430
Machinery and equipment 46,311,624 40,393,578
------------ ------------
61,626,819 55,527,591
Less accumulated depreciation and amortization (35,916,354) (30,419,484)
------------ ------------
25,710,465 25,108,107
Capital projects in progress 2,977,170 1,311,897
------------ ------------
$ 28,687,635 $ 26,420,004
============ ============
Included in property, plant and equipment at December 31, 1996 and 1995,
are fully depreciated assets with an original cost of approximately
$17,181,665 and $13,445,000, 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.
8. Accrued Liabilities
Accrued liabilities consist of the following:
At December 31,
----------------------------
1996 1995
------------ ------------
Sales incentive and advertising allowances $ 1,470,656 $ 1,235,061
Vacation liability 1,062,569 924,177
Other 1,604,423 1,227,289
------------ ------------
$ 4,137,648 $ 3,386,527
============ ============
9. Debt
The outstanding debt at December 31, 1996 and 1995, and the available
credit at December 31, 1996, consisted of the following:
Available
on Credit Debt Outstanding
Facility at at December 31,
December 31, ----------------------------
1996 1996 1995
------------ ------------ ------------
Revolving line of credit, interest
at bank's reference rate (at December
31, 1996, the bank's reference rate was
8.25%), matures June 1997, commitment
fees are paid at the annual rate of
0.125% on the unused portion of the
facility $ 11,118,635 $ - $ -
Revolving term commitment, interest at
bank's prime rate (at December 31, 1996,
the bank's prime rate was 8.25%),
matures June 1997, 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 at
bank's prime rate (at December 31, 1996,
the bank's prime rate was 8.25%),
matures June 1997, commitment fees are
paid at the annual rate of 0.125% on
the unused portion of the facility 3,583,715 - -
Revolving line of credit, interest rate at
the bank's base rate of interest plus 2%,
(at December 31, 1996, the bank's base
rate of interest plus 2% was 8.00%),
matures June 1997 422,800 - 20,037
Standby letter of credit facilities 1,297,650 - -
------------ ------------ ------------
20,422,800 $ - $ 20,037
Less standby letters of credit issued
and outstanding (1,297,650)
------------
Net credit available $ 19,125,150
============
The revolving lines of credit are guaranteed by the Company and its
subsidiaries. The Company has three outstanding standby letters of credit.
Two of these letters of credit, in the aggregate amount of $832,570, are
used to support the Company's self-insured workers' compensation insurance
requirements. These letters of credit mature in June 1997 and each have an
annual fee of 1.25% of the amount of the facility. The other one, in the
amount of $465,080 is used to support working capital needs of the
Company's European operations. It also matures in June 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 for the years ended
December 31, 1996, 1995 and 1994, are as follows:
1996 1995 1994
------------ ------------ ------------
Simpson Investment Company $ 185,100 $ 185,100 $ 185,100
Doolittle Investors 231,096 230,438 223,200
Vacaville Investors 437,640 437,640 478,428
Vicksburg Investors 329,017 322,289 302,534
Columbus Westbelt Investment Co. 581,064 418,525 351,600
McKinney Investors - 70,620 141,240
------------ ------------ ------------
$ 1,763,917 $ 1,664,612 $ 1,682,102
============ ============ ============
Rental expense for 1996, 1995 and 1994 with respect to all other leased
property was approximately $1,170,000, $1,120,000 and $971,000,
respectively.
At December 31, 1996, minimum rental commitments under all noncancelable
leases are as follows:
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
============
Substantially all 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.
Environmental
At two of the Company's operating facilities, evidence of contamination
resulting from activities of prior occupants has been 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
The Company is involved in various legal proceedings and other matters
arising in the normal course of business. In the opinion of management,
none of such matters when ultimately resolved will have a material adverse
effect on the Company's financial position or results of operations.
11. Income Taxes
The provision for income taxes consists of the following:
Year Ended December 31,
--------------------------------------------
1996 1995 1994
------------ ------------ ------------
Current:
Federal $ 11,989,000 $ 7,536,000 $ 6,981,000
State 2,353,000 1,526,000 1,795,000
Deferred (773,000) (135,000) (678,000)
------------ ------------ ------------
$ 13,569,000 $ 8,927,000 $ 8,098,000
============ ============ ============
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:
Year Ended December 31,
--------------------------
1996 1995 1994
------ ------ ------
Federal tax rate 35.0% 35.0% 35.0%
State taxes, net of federal benefit 4.7% 5.0% 5.3%
Non-deductible compensation related
to stock plans - - 19.0%
Other 1.1% (1.3%) 0.6%
------ ------ ------
Effective income tax rate 40.8% 38.7% 59.9%
====== ====== ======
The tax effects of the significant temporary differences that constitute
the deferred tax assets and liabilities at December 31, 1996, 1995 and
1994, are as follows:
Year Ended December 31,
--------------------------------------
1996 1995 1994
---------- ---------- ----------
Deferred tax assets:
State tax $ 795,671 $ 533,943 $ 495,013
Compensation related to stock plans 165,967 246,514 260,777
Workers' compensation 89,657 101,815 122,210
Health claims 213,476 198,333 172,810
Vacation 422,392 367,379 330,546
Accounts receivable allowance 464,681 456,977 498,694
Inventory allowance 257,983 154,878 184,585
Sales incentive and advertising allowances 237,050 508,457 404,164
Other 272,578 182,159 203,656
---------- ---------- ----------
$2,919,455 $2,750,455 $2,672,455
========== ========== ==========
Deferred tax liabilities (assets):
Depreciation $ (255,683) $ (222,355) $ (216,878)
Goodwill amortization (545,068) 6,866 38,158
Other 174,255 238,706 212,503
---------- ---------- ----------
$ (626,496) $ 23,217 $ 33,783
========== ========== ==========
No valuation allowance has been recorded for deferred tax assets for the
years ended December 31, 1996, 1995 and 1994, 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, 1996, 1995 and 1994, was
approximately $2,469,000, $2,036,000 and $1,722,000, 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 $667,000, $486,000 and $485,000 for
the years ended December 31, 1996, 1995 and 1994, respectively.
13. Related Party Transactions
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.
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.
Refer to Note 10 for details of related party transactions involving
Company leases.
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 1996 and 1995 would have been:
1996 1995
------------ ------------
Net Income as reported $ 19,720,638 $ 14,121,885
Pro forma 19,468,215 14,014,793
Earnings per share, as reported $ 1.68 $ 1.23
Pro forma 1.66 1.22
The fair value of each option granted in 1996 and 1995 was estimated on the
date of grant using the Black-Sholes option-pricing model with the
following assumptions for 1996 and 1995, respectively: risk-free interest
rate of 5.5 percent for both years; dividend yield of zero percent for both
years; expected lives of 6.0 and 5.5 years; and volatility of 24.1 percent
for both years. The weighted average fair value of options granted during
1996 and 1995 were $8.51 and $4.72, 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.
The following table summarizes the Company's stock option activity for the
three years ended December 31, 1996:
1996 1995 1994
------------------------ ------------------------ ------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Non-Qualified Stock Options Shares Price Shares Price Shares Price
- -------------------------------- ---------- ---------- ---------- ---------- ---------- ----------
Outstanding at beginning of year 904,114 $ 9.22 895,429 $ 8.77 1,828,358 $ 1.46
Granted 110,750 23.12 92,250 13.50 621,686 9.93
Granted in 1994 Reorganization - - - - 612,546 2.63
Exercised (90,191) 5.84 (82,231) 9.11 (2,167,161) 1.98
Forfeited (10,939) 13.30 (1,334) 10.25 - -
---------- ---------- ----------
Outstanding at end of year 913,734 $ 11.18 904,114 $ 9.22 895,429 $ 8.77
========== ========== ==========
Options exercisable at year-end 694,779 736,740 791,929
The following table summarizes information about the Company's stock
options outstanding at December 31, 1996:
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
- ---------------------------- ------------ ------------ ------------ ------------ ------------
$3.64 204,353 4.3 years $ 3.64 204,353 $ 3.64
$11.50 420,657 4.6 11.50 420,657 11.50
$10.00 to $11.28 98,382 5.1 10.23 47,871 10.21
$13.50 79,592 6.0 13.50 19,898 13.50
$23.00 to $29.25 110,750 7.0 23.12 2,000 29.25
------------ ------------
$3.64 to $29.25 913,734 5.0 years $ 11.19 694,779 $ 9.21
============ ============
The Company also maintains a Stock Bonus Plan whereas employees who reach
ten years of continuous employment with the Company and who do not
participate in the Company's stock options plans, receive 100 shares of
common stock. In 1996 and 1995, the Company committed to issue 4,500 and
2,600 shares resulting in compensation charges of $180,155 and $61,250,
respectively. The shares are issued in the year following the year in which
they are earned.
15. Subsequent Events
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.
SCHEDULE II
SIMPSON MANUFACTURING CO., INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Column A Column B Column C Column D Column E
Additions
----------------------------
Charged Charged
Balance at to Costs to Other Balance
Beginning and Accounts - at End
Classification of Year Expenses Write-offs Deductions of Year
- ------------------------------------ ------------ ------------ ------------ ------------ ------------
Year Ended December 31, 1996
Allowance for doubtful accounts $ 931,321 $ 607,354 $ - $ 429,725 $ 1,108,950
Allowance for obsolete inventory 389,611 60,000 270,994 71,724 648,881
Year Ended December 31, 1995
Allowance for doubtful accounts 1,269,587 443,000 - 781,266 931,321
Allowance for obsolete inventory 469,921 120,000 - 200,310 389,611
Year Ended December 31, 1994
Allowance for doubtful accounts 972,233 413,975 - 116,621 1,269,587
Allowance for obsolete inventory 365,037 104,884 - - 469,921
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information required by this Item will be contained in the Registrant's
proxy statement for the annual meeting of shareholders to be held on May
15, 1997, to be filed not later than 120 days following the end of the
Registrant's fiscal year ended December 31, 1996, which will set forth
certain information with respect to the directors and executive officers of
the Registrant and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
Information required by this Item will be contained in the Registrant's
proxy statement for the annual meeting of shareholders to be held on May
15, 1997, to be filed not later than 120 days following the end of the
Registrant's fiscal year ended December 31, 1996, which will set forth
certain information with respect to executive compensation of the
Registrant and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information required by this Item will be contained in the Registrant's
proxy statement for the annual meeting of shareholders to be held on May
15, 1997, to be filed not later than 120 days following the end of the
Registrant's fiscal year ended December 31, 1996, which will set forth
certain information with respect to security ownership of certain
beneficial owners and management of the Registrant and is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information required by this Item will be contained in the Registrant's
proxy statement for the annual meeting of shareholders to be held on May
15, 1997, to be filed not later than 120 days following the end of the
Registrant's fiscal year ended December 31, 1996, which will set forth
certain information with respect to certain relationships and related
transactions of the Registrant and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
a. Exhibits
EXHIBIT
NO DESCRIPTION
------- ---------------------------------------------------
10.1 Credit Agreement, dated January 15, 1997, between
Simpson Manufacturing Co., Inc. and Wells Fargo
Bank, National Association.
10.2 Amended and Restated Agreement to Loan Agreement
dated July 15, 1995, dated January 14, 1997,
between Simpson Manufacturing Co., Inc. and Union
Bank of California, N.A.
10.3 Collective Bargaining Agreement, dated December 30,
1996, between Simpson Strong-Tie Company Inc. and
Sheet Metal Workers' Local No. #371.
10.4 Stock Purchase Agreement, dated March 7, 1997,
between Simpson Strong-Tie Company Inc. and Simpson
Strong-Tie Canada, Limited and Robert Anthony
Cunningham, Diane Saroginie Cunningham, D. Cunningham,
Joan Phyllis Seetaram, Martin I. Silver and Tracey
Eichinger, as trustees of The Angela Cunningham Trust
dated May 17, 1985, D. Cunningham Holdings Inc. and
Joan Phyllis Seetaram.
11 Statement re computation of earnings per share
21 List of Subsidiaries of the Registrant
23 Consent of Independent Certified Public Accountants
27 Financial Data Schedule
b. No reports on Form 8-K were filed during the last quarter of the
period for which this report is filed.
SIGNATURES
Pursuant to the requirements Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: March 25, 1997 SIMPSON MANUFACTURING CO., INC.
-------------- --------------------------------
(Registrant)
By /s/ STEPHEN B. LAMSON
--------------------------------
Stephen B. Lamson
Chief Financial Officer
and Duly Authorized Officer
of the Registrant
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated below.
Signature Title Date
- ------------------------- --------------------------- --------------
Chief Executive Officer:
/s/ THOMAS J FITZMYERS President, Chief Executive March 26, 1997
- ------------------------- --------------------------- --------------
(Thomas J Fitzmyers) Officer and Director
Chief Financial Officer:
/s/ STEPHEN B. LAMSON Chief Financial Officer, March 25, 1997
- ------------------------- --------------------------- --------------
(Stephen B. Lamson) Secretary and Director
Directors:
/s/ BARCLAY SIMPSON Chairman of the Board March 26, 1997
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(Barclay Simpson)
/s/ EARL F. CHEIT Director March 26, 1997
- ------------------------- --------------------------- --------------
(Earl F. Cheit)
/s/ ALAN R. McKAY Director March 26, 1997
- ------------------------- --------------------------- --------------
(Alan R. McKay)
/s/ SUNNE WRIGHT McPEAK Director March 26, 1997
- ------------------------- --------------------------- --------------
(Sunne Wright McPeak)
/s/ BARRY LAWSON WILLIAMS Director March 26, 1997
- ------------------------- --------------------------- --------------
(Barry Lawson Williams)