-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BMZF2UJqyG8dZN2mj3tP2jwmutPyQMYDQDfeZEOS0RY4JPdDVp54A7EuXBDll+Bn tRdwEAx9OTRHbP7WPe2G6Q== 0000920371-97-000007.txt : 19970328 0000920371-97-000007.hdr.sgml : 19970328 ACCESSION NUMBER: 0000920371-97-000007 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970327 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SIMPSON MANUFACTURING CO INC /CA/ CENTRAL INDEX KEY: 0000920371 STANDARD INDUSTRIAL CLASSIFICATION: CUTLERY, HANDTOOLS & GENERAL HARDWARE [3420] IRS NUMBER: 943196943 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-23804 FILM NUMBER: 97564202 BUSINESS ADDRESS: STREET 1: 4637 CHABOT DR STREET 2: STE 200 CITY: PLEASANTON STATE: CA ZIP: 94588 BUSINESS PHONE: 5106099912 MAIL ADDRESS: STREET 1: 4637 CHABOT DR STREET 2: STE 200 CITY: PLEASANTON STATE: CA ZIP: 94588 10-K 1 1996 ANNUAL REPORT ON FORM 10K =========================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) /X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [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 - --------------------------------------------------------------------------- Simpson Manufacturing Co., Inc. ------------------------------------------------------ (Exact name of registrant as specified in its charter) California 94-3196943 -------------------------------- ---------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 4637 Chabot Drive, Suite 200, Pleasanton, CA 94588 (Address of principal executive offices) Registrant's telephone number, including area code: (510)460-9912 - --------------------------------------------------------------------------- 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 ----- ----- 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. =========================================================================== 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 - ------------------------- --------------------------- -------------- (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) EX-10 2 CREDIT AGREEMENT EXHIBIT 10.1 ------------ CREDIT AGREEMENT THIS AGREEMENT is entered into as of January 15, 1997, by and between SIMPSON MANUFACTURING CO., INC, a California corporation ("Borrower"), and WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank"). RECITAL Borrower has requested from Bank the credit accommodations described below (each, a "Credit" and collectively, the "Credits"), and Bank has agreed to provide the Credits to Borrower on the terms and conditions contained herein. NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Bank and Borrower hereby agree as follows: ARTICLE I THE CREDITS SECTION 1.1. LINE OF CREDIT. (a) Line of Credit. Subject to the terms and conditions of this Agreement, Bank hereby agrees to make advances to Borrower from time to time up to and including June 1, 1998, not to exceed at any time the aggregate principal amount of Five Million Two Hundred Thousand Dollars ($5,200,000.00) ("Line of Credit"), the proceeds of which shall be used to finance Borrower's working capital requirements. Borrower's obligation to repay advances under the Line of Credit shall be evidenced by a promissory note substantially in the form of Exhibit A attached hereto ("Line of Credit Note"), all terms of which are incorporated herein by this reference. (b) Letter of Credit Subfeature. As a subfeature under the Line of Credit, Bank agrees from time to time during the term thereof to issue Standby Letters of Credit for the account of Borrower to finance Borrower's workers' compensation insurance requirements (each, a "Letter of Credit" and collectively, "Letters of Credit"); provided however, that the form and substance of each Letter of Credit shall be subject to approval by Bank, in its sole discretion. Each Letter of Credit shall be issued for a term not to exceed one (1) year, as designated by Borrower; provided however, that no Letter of Credit shall have an expiration date subsequent to the maturity date of the Line of Credit. The undrawn amount of all Letters of Credit shall be reserved under the Line of Credit and shall not be available for borrowings thereunder. Each Letter of Credit shall be subject to the additional terms and conditions of the Letter of Credit Agreement and related documents, if any, required by Bank in connection with the issuance thereof (each, a "Letter of Credit Agreement" and collectively, "Letter of Credit Agreements"). Each draft paid by Bank under a Letter of Credit shall be deemed an advance under the Line of Credit and shall be repaid by Borrower in accordance with the terms and conditions of this Agreement applicable to such advances; provided however, that if advances under the Line of Credit are not available, for any reason, at the time any draft is paid by Bank, then Borrower shall immediately pay to Bank the full amount of such draft, together with interest thereon from the date such amount is paid by Bank to the date such amount is fully repaid by Borrower, at the rate of interest applicable to advances under the Line of Credit. In such event Borrower agrees that Bank, in its sole discretion, may debit any demand deposit account maintained by Borrower with Bank for the amount of any such draft. (c) Borrowing and Repayment. Borrower may from time to time during the term of the Line of Credit borrow, partially or wholly repay its outstanding borrowings, and reborrow, subject to all of the limitations, terms and conditions contained herein or in the Line of Credit Note; provided however, that the total outstanding borrowings under the Line of Credit shall not at any time exceed the maximum principal amount available thereunder, as set forth above. SECTION 1.2. TERM COMMITMENT. (a) Term Commitment. Subject to the terms and conditions of this Agreement, Bank hereby agrees to make advances to Borrower from time to time up to and including June 1, 1998, not to exceed the aggregate principal amount of Four Million Dollars ($4,000,000.00) ("Term Commitment"), the proceeds of which shall be used to finance equipment purchases and/or business acquisitions, and which shall be converted on June 1, 1998, to a term loan, as described more fully below. Borrower's obligation to repay advances under the Term Commitment shall be evidenced by a promissory note substantially in the form of Exhibit B attached hereto ("Term Commitment Note"), all terms of which are incorporated herein by this reference. (b) Borrowing and Repayment. Borrower may from time to time during the period in which Bank will make advances under Term Commitment borrow and partially or wholly repay its outstanding borrowings, and reborrow, subject to all the limitations, terms and conditions contained herein; provided however, that the total outstanding borrowings under the Term Commitment shall not exceed the maximum principal amount available thereunder, as set forth above. The outstanding principal balance of the Term Commitment shall be due and payable in full on June 1, 1998; provided however, that so long as Borrower is in compliance on said date with all terms and conditions contained herein and in any other documents evidencins the Credits, Bank agrees to restructure repayment of said outstanding principal balance so that principal shall be amortized over five (5) years and shall be repaid in sixty equal monthly installments, as set forth in the promissory note executed by Borrower on said date to evidence the new repayment schedule. (c) Prepayment. Borrower may prepay principal on the Term Commitment solely in accordance with the provisions of the Term Commitment Note. SECTION 1.3. INTEREST/FEES. (a) Interest. The outstanding principal balance of the Line of Credit and the Term Commitment shall bear interest at the rate of interest set forth in the Line of Credit Note and the Term Commitment Note, respectively. (b) Computation and Payment. Interest shall be computed on the basis of a 360-day year, actual days elapsed. Interest shall be payable at the times and place set forth in the Line of Credit Note and the Term Commitment Note (collectively, the "Notes"). (c) Commitment Fee. Borrower shall pay to Bank nonrefundable commitment fees for the Line of Credit and the Term Commitment equal to one-eighth percent (1/8%) per annum of the amounts by which Bank's commitments under the Line of Credit and the Term Commitment exceed the average daily outstanding principal balances of the Line of Credit and the Term Commitment, respectively, which commitment fees shall be due and payable in full on the first day of each month. (d) Letter of Credit Fees. Borrower shall pay to Bank fees upon the issuance of each Letter of Credit, upon the payment or negotiation by Bank of each draft under any Letter of Credit and upon the occurrence of any other activity with respect to any Letter of Credit (including without limitation, the transfer, amendment or cancellation of any Letter of Credit) determined in accordance with Bank's standard fees and charges then in effect for such activity. SECTION 1.4. COLLECTION OF PAYMENTS. Borrower authorizes Bank to collect all interest and fees due under each Credit by charging Borrower's demand deposit account number 4103-117438 with Bank, or any other demand deposit account maintained by Borrower with Bank, for the full amount thereof. Should there be insufficient funds in any such demand deposit account to pay all such sums when due, the full amount of such deficiency shall be immediately due and payable by Borrower. SECTION 1.5. GUARANTIES. All indebtedness of Borrower to Bank shall be guaranteed by Simpson Dura Vent Company, Inc. ("SDV") and Simpson Strong-Tie company Inc. ("SST") (each, a "Guarantor") in the principal amount of Eight Million Four Hundred Thousand Dollars ($8,400,000.00) each, as evidenced by and subject to the terms of guaranties in form and substance satisfactory to Bank. ARTICLE II REPRESENTATIONS AND WARRANTIES Borrower makes the following representations and warranties to Bank, which representations and warranties shall survive the execution of this Agreement and shall continue in full force and effect until the full and final payment, and satisfaction and discharge, of all obligations of Borrower to Bank subject to this Agreement. SECTION 2.1. LEGAL STATUS. Borrower is a corporation, duly organized and existing and in good standing under the laws of the state of California, and is qualified or licensed to do business (and is in good standing as a foreign corporation, if applicable) in all jurisdictions in which such qualification or licensing is required or in which the failure to so qualify or to be so licensed could have a material adverse effect on Borrower. SECTION 2.2. AUTHORIZATION AND VALIDITY. This Agreement, the Notes, and each other document, contract and instrument required hereby or at any time hereafter delivered to Bank in connection herewith (collectively, the "Loan Documents") have been duly authorized, and upon their execution and delivery in accordance with the provisions hereof will constitute legal, valid and binding agreements and obligations of Borrower or the party which executes the same, enforceable in accordance with their respective terms. SECTION 2.3. NO VIOLATION. The execution, delivery and performance by Borrower of each of the Loan Documents do not violate any provision of any law or regulation, or contravene any provision of the Articles of Incorporation or By-Laws of Borrower, or result in any breach of or default under any contract, obligation, indenture or other instrument to which Borrower is a party or by which Borrower may be bound. SECTION 2.4. LITIGATION. There are no pending, or to the best of Borrower's knowledge threatened, actions, claims, investigations, suits or proceedings by or before any governmental authority, arbitrator, court or administrative agency which could have a material adverse effect on the financial condition or operation of Borrower other than those disclosed by Borrower to Bank in writing prior to the date hereof. SECTION 2.5. CORRECTNESS OF FINANCIAL STATEMENT. The financial statement of Borrower dated September 30, 1996, a true copy of which has been delivered by Borrower to Bank prior to the date hereof, (a) is complete and correct and presents fairly the financial condition of Borrower, (b) discloses all liabilities of Borrower that are required to be reflected or reserved against under generally accepted accounting principles, whether liquidated or unliquidated, fixed or contingent, and (c) has been prepared in accordance with generally accepted accounting principles consistently applied. Since the date of such financial statement there has been no material adverse change in the financial condition of Borrower, nor has Borrower mortgaged, pledged, granted a security interest in or otherwise encumbered any of its assets or properties except in favor of Bank or as otherwise permitted by Bank in writing. SECTION 2.6. INCOME TAX RETURNS. Borrower has no knowledge of any pending assessments or adjustments of its income tax payable with respect to any year. SECTION 2.7. NO SUBORDINATION. There is no agreement, indenture, contract or instrument to which Borrower is a party or by which Borrower may be bound that requires the subordination in right of payment of any of Borrower's obligations subject to this Agreement to any other obligation of Borrower. SECTION 2.8. PERMITS, FRANCHISES. Borrower possesses, and will hereafter possess, all permits, consents, approvals, franchises and licenses required and rights to all trademarks, trade names, patents, and fictitious names, if any, necessary to enable it to conduct the business in which it is now engaged in compliance with applicable law. SECTION 2.9. ERISA. Borrower is in compliance in all material respects with all applicable provisions of the Employee Retirement Income Security Act of 1974, as amended or recodified from time to time ("ERISA"); Borrower has not violated any provision of any defined employee pension benefit plan (as defined in ERISA) maintained or contributed to by Borrower (each, a "Plan"); no Reportable Event as defined in ERISA has occurred and is continuing with respect to any Plan initiated by Borrower; Borrower has met its minimum funding requirements under ERISA with respect to each Plan; and each Plan will be able to fulfill its benefit obligations as they come due in accordance with the Plan documents and under generally acceDted accounting principles. SECTION 2.10. OTHER OBLIGATIONS. Borrower is not in default on any obligation for borrowed money, any purchase money obligation or any other material lease, commitment, contract, instrument or obligation. SECTION 2.11. ENVIRONMENTAL MATTERS. Except as disclosed by Borrower to Bank in writing prior to the date hereof, Borrower is in compliance in all material respects with all applicable federal or state environmental, hazardous waste, health and safety statutes, and any rules or regulations adopted pursuant thereto, which govern or affect any of Borrower's operations and/or properties, including without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, the Superfund Amendments and Reauthorization Act of 1986, the Federal Resource Conservation and Recovery Act of 1976, and the Federal Toxic Substances Control Act, as any of the same may be amended, modified or supplemented from time to time. None of the operations of Borrower is the subject of any federal or state investigation evaluating whether any remedial action involving a material expenditure is needed to respond to a release of any toxic or hazardous waste or substance into the environment. Borrower has no material contingent liability in connection with any release of any toxic or hazardous waste or substance into the environment. ARTICLE III CONDITIONS SECTION 3.1. CONDITIONS OF INITIAL EXTENSION OF CREDIT. The obligation of Bank to grant any of the Credits is subject to the fulfillment to Bank's satisfaction of all of the following conditions: (a) Approval of Bank Counsel. All legal matters incidental to the granting of each of the Credits shall be satisfactory to Bank's counsel. (b) Documentation. Bank shall have received, in form and substance satisfactory to Bank, each of the following, duly executed: (i) This Agreement and the Notes. (ii) Corporate Borrowing Resolution. (iii) Corporate Resolution Authorizing Execution of Guaranty from SDV and SST. (iv) All guaranties required by Secticn 1.5 hereof. (v) Foreign Exchange Agreement. (vi) Continuing Standby Letter of Credit Agreement. (vii) Such other documents as Bank may require under any other Section of this Agreement. (c) Financial Condition. There shall have been no material adverse change, as determined by Bank, in the financial condition or business of Borrower or any guarantor hereunder, nor any material decline, as determined by Bank, in the market value of any collateral required hereunder or a substantial or material portion of the assets of Borrower or any such guarantor. (d) Insurance. Borrower shall have delivered to Bank evidence of insurance coverage on all Borrower's property, in form, substance, amounts, covering risks and issued by companies satisfactory to Bank, and where required by Bank, with loss payable endorsements in favor of Bank. SECTION 3.2. CONDITIONS OF EACH EXTENSION OF CREDIT. The obligation of Bank to make each extension of credit requested by Borrower hereunder shall be subject to the fulfillment to Bank's satisfaction of each of the following conditions: (a) Compliance. The representations and warranties contained herein and in each of the other Loan Documents shall be true on and as of the date of the signing of this Agreement and on the date of each extension of credit by Bank pursuant hereto, with the same effect as though such representations and warranties had been made on and as of each such date, and on each such date, no Event of Default as defined herein, and no condition, event or act which with the giving of notice or the passage of time or both would constitute such an Event of Default, shall have occurred and be continuing or shall exist. (b) Documentation. Bank shall have received all additional documents which may be required in connection with such extension of credit. ARTICLE IV AFFIRMATIVE COVENANTS Borrower covenants that so long as Bank remains committed to extend credit to Borrower pursuant hereto, or any liabilities (whether direct or contingent, liquidated or unliquidated) of Borrower to Bank under any of the Loan Documents remain outstanding, and until payment in full of all obligations of Borrower subject hereto, Borrower shall, unless Bank otherwise consents in writing: SECTION 4.1. PUNCTUAL PAYMENTS. Punctually pay all principal, interest, fees or other liabilities due under any of the Loan Documents at the times and place and in the manner specified therein. SECTION 4.2. ACCOUNTING RECORDS. Maintain adequate books and records in accordance with generally accepted accounting principles consistently applied, and permit any representative of Bank, at any reasonable time, to inspect, audit and examine such books and records, to make copies of the same, and to inspect the properties of Borrower. SECTION 4.3. FINANCIAL STATEMENTS. Provide to Bank all of the following, in form and detail satisfactory to Bank: (a) not later than 120 days after and as of the end of each fiscal year, an unqualified, audited consolidated financial statement of Borrower, prepared by an independent certified public accountant acceptable to Bank, to include balance sheet, income statement, statement of cash flow and consolidating schedules for Simpson Holdings, Inc. ("SHI"), SDV and SST, prepared by Borrower; (b) not later than 45 days after and as of the end of each fiscal quarter, a consolidated, unconsolidated and consolidating financial statement of Borrower, SHI, SDV and SST, prepared by Borrower, to include balance sheet and income statement; (c) from time to time such other information as Bank may reasonably request. SECTION 4.4. COMPLIANCE. Preserve and maintain all licenses, permits, governmental approvals, rights, privileges and franchises necessary for the conduct of its business; and comply with the provisions of all documents pursuant to which Borrower is organized and/or which govern Borrower's continued existence and with the requirements of all laws, rules, regulations and orders of any governmental authority applicable to Borrower and/or its business. SECTION 4.5. INSURANCE. Maintain and keep in force insurance of the types and in amounts customarily carried in lines of business similar to that of Borrower, including but not limited to fire, extended coverage, public liability, flood, property damage and workers' compensation, with all such insurance carried with companies and in amounts satisfactory to Bank, and deliver to Bank from time to time at Bank's request schedules setting forth all insurance then in effect. SECTION 4.6. FACILITIES. Keep all properties useful or necessary to Borrower's business in good repair and condition, and from time to time make necessary repairs, renewals and replacements thereto so that such properties shall be fully and efficiently preserved and maintained. SECTION 4.7. TAXES AND OTHER LIABILITIES. Pay and discharge when due any and all indebtedness, obligations, assessments and taxes, both real or personal, including without limitation federal and state income taxes and state and local property taxes and assessments, except such (a) as Borrower may in good faith contest or as to which a bona fide dispute may arise, and (b) for which Borrower has made provision, to Bank's satisfaction, for eventual payment thereof in the event Borrower is obligated to make such payment. SECTION 4.8. LITIGATION. Promptly give notice in writing to Bank of any litigation pending or threatened against Borrower with a claim in excess of $1,000,000.00. SECTION 4.9. FINANCIAL CONDITION. Maintain Borrower's financial condition as follows using generally accepted accounting principles consistently applied and used consistently with prior practices (except to the extent modified by the definitions herein): (a) Tangible Net Worth not at any time less than $50,000,000.00 plus an amount equal to 50% of net profit after taxes at each fiscal year end on a cumulative basis, with "Tangible Net Worth" defined as the aggregate of total stockholders' equity plus subordinated debt less any intangible assets. (b) Total Liabilities divided by Tangible Net Worth not at any time greater than 1.5 to 1.0 as of each fiscal quarter end, with "Total Liabilities" defined as the aggregate of current liabilities and non-current liabilities less subordinated debt, and with "Tangible Net Worth" as defined above. (c) Net income after taxes not less than $1.00 on an annual basis, determined as of each fiscal year end. (d) EBITDA Coverage Ratio not less than 1.5 to 1.0 as of each fiscal year end, with "EBITDA" defined as net profit before tax plus interest expense (net of capitalized interest expense), depreciation expense and amortization expense, and with "EBITDA Coverage Ratio" defined as EBITDA divided by the aggregate of total interest expense plus the prior period current maturity long-term debt and the prior period current maturity of subordinated debt. SECTION 4.10. NOTICE TO BANK. Promptly (but in no event more than five (5) days after the occurrence of each such event or matter) give written notice to Bank in reasonable detail of: (a) the occurrence of any Event of Default, or any condition, event or act which with the giving of notice or the passage of time or both would constitute an Event of Default; (b) any change in the name or the organizational structure of Borrower; (c) the occurrence and nature of any Reportable Event or Prohibited Transaction, each as defined in ERISA, or any funding deficiency with respect to any Plan; or (d) any termination or cancellation of any insurance policy which Borrower is required to maintain, or any uninsured or partially uninsured loss through liability or property damage, or through fire, theLt or any other cause affecting Borrowerls property in excess of an aggregate of $10,000,000.00. ARTICLE V NEGATIVE COVENANTS Borrower further covenants that so long as Bank remains committed to extend credit to Borrower pursuant hereto, or any liabilities (whether direct or contingent, liquidated or unliquidated) of Borrower to Bank under any of the Loan Documents remain outstanding, and until payment in full of all obligations of Borrower subject hereto, Borrower will not without Bank's prior written consent: SECTION 5.1. USE OF FUNDS. Use any of the proceeds of any of the Credits except for the purposes stated in Article I hereof. SECTION 5.2. OTHER INDEBTEDNESS. Create, incur, assume or permit to exist any indebtedness or liabilities resulting from borrowings, loans or advances, whether secured or unsecured, matured or unmatured, liquidated or unliquidated, joint or several, except (a) the liabilities of Borrower to Bank, and (b) any other liabilities of Borrower existing as of, and disclosed to Bank prior to, the date hereof. SECTION 5.3. MERGER, CONSOLIDATION, TRANSFER OF ASSETS. Merge into or consolidate with any other entity; make any substantial change in the nature of Borrower's business as conducted as of the date hereof; acquire all or substantially all of the assets of any other entity, except acquisitions not to exceed $15,000,000.00 per fiscal year when aggregated by SHI, SDV and SST; nor sell, lease, transfer or otherwise dispose of all or a substantial or material portion of Borrower's assets except in the ordinary course of its business. SECTION 5.4. GUARANTIES. Guarantee or become liable in any way as surety, endorser (other than as endorser of negotiable instruments for deposit or collection in the ordinary course of business), accommodation endorser or otherwise for, nor pledge or hypothecate any assets of Borrower as security for, any liabilities or obligations of any other person or entity in an aggregate amount at any time in excess of $1,000,000.00, except any of the foregoing in favor of Bank. SECTION 5.5. PLEDGE OF ASSETS. Mortgage, pledge, grant or permit to exist a security interest in, or lien upon, all or any portion of Borrower's assets now owned or hereafter acquired, except any of the foregoing in favor of Bank or which is existing as of, and disclosed to Bank in writing prior to, the date hereof. ARTICLE VI EVENTS OF DEFAULT SECTION 6.1. The occurrence of any of the following shall constitute an "Event of Default" under this Agreement: (a) Borrower shall fail to pay when due any principal, interest, fees or other amounts payable under any of the Loan Documents. (b) Any financial statement or certificate furnished to Bank in connection with, or any representation or warranty made by Borrower or any other party under this Agreement or any other Loan Document shall prove to be incorrect, false or misleading in any material respect when furnished or made. (c) Any default in the performance of or compliance with any obligation, agreement or other provision contained herein or in any other Loan Document (other than those referred to in subsections (a) and (b) above), and with respect to any such default which by its nature can be cured, such default shall continue for a period of twenty (20) days from its occurrence. (d) Any default in the payment or performance of any obligation, or any defined event of default, under the terms of any contract or instrument (other than any of the Loan Documents) pursuant to which Borrower or any guarantor hereunder has incurred any debt or other liability to any person or entity, including Bank. (e) The filing of a notice of judgment lien against Borrower or any guarantor hereunder; or the recording of any abstract of judgment against Borrower or any guarantor hereunder in any county in which Borrower or such guarantor has an interest in real property; or the service of a notice of levy and/or of a writ of attachment or execution, or other like process, against the assets of Borrower or any guarantor hereunder; or the entry of a judgment against Borrower or any guarantor hereunder. (f) Borrower or any guarantor hereunder shall become insolvent, or shall suffer or consent to or apply for the appointment of a receiver, trustee, custodian or liquidator of itself or any of its property, or shall generally fail to pay its debts as they become due, or shall make a general assignment for the benefit of creditors; Borrower or any guarantor hereunder shall file a voluntary petition in bankruptcy, or seeking reorganization, in order to effect a plan or other arrangement with creditors or any other relief under the Bankruptcy Reform Act, Title 11 of the United States Code, as amended or recodified from time to time ("Bankruptcy Code"), or under any state or federal law granting relief to debtors, whether now or hereafter in effect; or any involuntary petition or proceeding pursuant to the Bankruptcy Code or any other applicable state or federal law relating to bankruptcy, reorganization or other relief for debtors is filed or commenced against Borrower or any guarantor hereunder, or Borrower or any such guarantor shall file an answer admitting the jurisdiction of the court and the material allegations of any involuntary petition; or Borrower or any such guarantor shall be adjudicated a bankrupt, or an order for relief shall be entered against Borrower or any such guarantor by any court of competent jurisdiction under the Bankruptcy Code or any other applicable state or federal law relating to bankruptcy, reorganization or other relief for debtors. (g) There shall exist or occur any event or condition which Bank in good faith believes impairs, or is substantially likely to impair, the prospect of payment or performance by Borrower of its obligations under any of the Loan Documents. (h) The death or incapacity of any guarantor hereunder. The dissolution or liquidation of Borrower or any guarantor hereunder; or Borrower or any such guarantor, or any of their directors, stockholders or members, shall take action seeking to effect the dissolution or liquidation of Borrower or such guarantor. SECTION 6.2. REMEDIES. Upon the occurrence of any Event of Default: (a) all indebtedness of Borrower under each of the Loan Documents, any term thereof to the contrary notwithstanding, shall at Bank's option and without notice become immediately due and payable without presentment, demand, protest or notice of dishonor, all of which are hereby expressly waived by each Borrower; (b) the obligation, if any, of Bank to extend any further credit under any of the Loan Documents shall immediately cease and terminate; and (c) Bank shall have all rights, powers and remedies available under each of the Loan Documents, or accorded by law, including without limitation the right to resort to any or all security for any of the Credits and to exercise any or all of the rights of a beneficiary or secured party pursuant to applicable law. All rights, powers and remedies of Bank may be exercised at any time by Bank and from time to time after the occurrence of an Event of Default, are cumulative and not exclusive, and shall be in addition to any other rights, powers or remedies provided by law or equity. ARTICLE VII MISCELLANEOUS SECTION 7.1. NO WAIVER. No delay, failure or discontinuance of Bank in exercising any right, power or remedy under any of the Loan Documents shall affect or operate as a waiver of such right, power or remedy; nor shall any single or partial exercise of any such right, power or remedy preclude, waive or otherwise affect any other or further exercise thereof or the exercise of any other right, power or remedy. Any waiver, permit, consent or approval of any kind by Bank of any breach of or default under any of the Loan Documents must be in writing and shall be effective only to the extent set forth in such writing. SECTION 7.2. NOTICES. All notices, requests and demands which any party is required or may desire to give to any other party under any provision of this Agreement must be in writing delivered to each party at the following address: BORROWER: SIMPSON MANUFACTURING CO., INC. 4637 Chabot Drive Suite 200 Pleasanton, CA 94588-0789 BANK: WELLS FARGO BANK, NATIONAL ASSOCIATION East Bay RCBO One Kaiser Plaza, Suite 850 Oakland, CA 94612 or to such other address as any party may designate by written notice to all other parties. Each such notice, request and demand shall be deemed given or made as follows: (a) if sent by hand delivery, upon delivery; (b) if sent by mail, upon the earlier of the date of receipt or three (s) days after deposit in the U.S. mail, first class and postage prepaid; and (c) if sent by telecopy, upon receipt. SECTION 7.3. COSTS, EXPENSES AND ATTORNEYS' FEES. Borrower shall pay to Bank immediately upon demand the full amount of all payments, advances, charges, costs and expenses, including reasonable attorneys' fees (to include outside counsel fees and all allocated costs of Bank's in-house counsel), expended or incurred by Bank in connection with (a) the negotiation and preparation of this Agreement and the other Loan Documents, Bank's continued administration hereof and thereof, and the preparation of any amendments and waivers hereto and thereto, (b) the enforcement of Bank's rights and/or the collection of any amounts which become due to Bank under any of the Loan Documents, and (c) the prosecution or defense of any action in any way related to any of the Loan Documents, including without limitation, any action for declaratory relief, whether incurred at the trial or appellate level, in an arbitration proceeding or otherwise, and including any of the foregoing incurred in connection with any bankruptcy proceeding (including without limitation, any adversary proceeding, contested matter or motion brought by Bank or any other person) relating to any Borrower or any other person or entity. SECTION 7.4. SUCCESSORS, ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of the heirs, executors, administrators, legal representatives, successors and assigns of the parties; provided however, that Borrower may not assign or transfer its interest hereunder without Bank's prior written consent. Bank reserves the right to sell, assign, transfer, negotiate or grant participations in all or any part of, or any interest in, Bank's rights and benefits under each of the Loan Documents. In connection therewith, Bank may disclose all documents and information which Bank now has or may hereafter acquire relating to any of the Credits, Borrower or its business, [any guarantor hereunder or the business of such guarantor,] or any collateral required hereunder. SECTION 7.5. ENTIRE AGREEMENT; AMENDMENT. This Agreement and the other Loan Documents constitute the entire agreement between Borrower and Bank with respect to the Credits and supersede all prior negotiations, communications, discussions and correspondence concerning the subject matter hereof. This Agreement may be amended or modified only in writing signed by each party hereto. SECTION 7.6. NO THIRD PARTY BENEFICIARIES. This Agreement is made and entered into for the sole protection and benefit of the parties hereto and their respective permitted successors and assigns, and no other person or entity shall be a third party beneficiary of, or have any direct or indirect cause of action or claim in connection with, this Agreement or any other of the Loan Documents to which it is not a party. SECTION 7.7. TIME. Time is of the essence of each and every provision of this Agreement and each other of the Loan Documents. SECTION 7.8. SEVERABILITY OF PROVISIONS. If any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity without invalidating the remainder of such provision or any remaining provisions of this Agreement. SECTION 7.9. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which when executed and delivered shall be deemed to be an original, and all of which when taken together shall constitute one and the same Agreement. SECTION 7.10. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of California. SECTION 7.11. ARBITRATION. (a) Arbitration. Upon the demand of any party, any Dispute shall be resolved by binding arbitration (except as set forth in (e) below) in accordance with the terms of this Agreement. A "Dispute" shall mean any action, dispute, claim or controversy of any kind, whether in contract or tort, statutory or common law, legal or equitable, now existing or hereafter arising under or in connection with, or in any way pertaining to, any of the Loan Documents, or any past, present or future extensions of credit and other activities, transactions or obligations of any kind related directly or indirectly to any of the Loan Documents, including without limitation, any of the foregoing arising in connection with the exercise of any self-help, ancillary or other remedies pursuant to any of the Loan Documents. Any party may by summary proceedings bring an action in court to compel arbitration of a Dispute. Any party who fails or refuses to submit to arbitration following a lawful demand by any other party shall bear all costs and expenses incurred by such other party in compelling arbitration of any Dispute. (b) Governing Rules. Arbitration proceedings shall be administered by the American Arbitration Association ("AAA") or such other administrator as the parties shall mutually agree upon in accordance with the ARA Commercial Arbitration Rules. All Disputes submitted to arbitration shall be resolved in acccrdance with the Federal Arbitration Act (Title 9 of the United States Code), notwithstanding any conflicting choice of law provision in any of the Loan Documents. The arbitration shall be conducted at a location in California selected by the ARA or other administrator. If there is any inconsistency between the terms hereof and any such rules, the terms and procedures set forth herein shall control. All statutes of limitation applicable to any Dispute shall apply to any arbitration proceeding. All discovery activities shall be expressly limited to matters directly relevant to the Dispute being arbitrated. Judgment upon any award rendered in an arbitration may be entered in any court having jurisdiction; provided however that nothing contained herein shall be deemed to be a waiver sy any party that is a bank of the protections afforded to it under 12 U.S.C. section 91 or any similar applicable state law. (c) No Waiver: Provisional Remedies, Self-Help and Foreclosure. No provision hereof shall limit the right of any party to exercise self-help remedies such as setoff, foreclosure against or sale of any real or personal property collateral or security, or to obtain provisional or ancillary remedies, including without limitation injunctive relief, sequestration, attachment, garnishment or the appointment of a receiver, from a court of competent jurisdiction before, after or during the pendency of any arbitration or other proceeding. The exercise of any such remedy shall not waive the right of any party to compel arbitration or reference hereunder. (d) Arbitrator Qualifications and Powers; Awards. Arbitrators must be active members of the California State Bar or retired judges of the state or federal judiciary of California, with expertise in the substantive laws applicable to the subject matter of the Dispute. Arbitrators are empowered to resolve Disputes by summary rulings in response to motions filed prior to the final arbitration hearing. Arbitrators (i) shall resolve all Disputes in accordance with the substantive law of the state of California, (ii) may grant any remedy or relief that a court of the state of California could order or grant within the scope hereof and such ancillary relief as is necessary to make effective any award, and (iii) shall have the power to award recovery of all costs and fees, to impose sanctions and to take such other actions as they deem necessary to the same extent a judge could pursuant to the Federal Rules of Civil Procedure, the California Rules of Civil Procedure or other applicable law. Any Dispute in which the amount in controversy is $5,000,000 or less shall be decided by a single arbitrator who shall not render an award of greater than $5,000,000 (including damages, costs, fees and expenses). By submission to a single arbitrator, each party expressly waives any right or claim to recover more than $5,000,000. Any Dispute in which the amount in controversy exceeds $5,000,000 shall be decided by majority vote of a panel of three arbitrators; provided however, that all three arbitrators must actively participate in all hearings and deliberations. (e) Judicial Review. Notwithstanding anything herein to the contrary, in any arbitration in which the amount in controversy exceeds $25,000,000, the arbitrators shall be required to make specific, written findings of fact and conclusions of law. In such arbitrations (i) the arbitrators shall not have the power to make any award which is not supported by substantial evidence or which is L sed on legal error, (ii) an award shall not be binding upon the parties unless the findings of fact are supported by substantial evidence and the conclusions of law are not erroneous under the substantive law of the state of California, and (iii) the parties shall have in addition to the grounds referred to in the Federal Arbitration Act for vacating, modifying or correcting an award the right to judicial review of (A) whether the findings of fact rendered by the arbitrators are supported by substantial evidence, and (B) whether the conclusions of law are erroneous under the substantive law of the state of California. Judgment confirming an award in such a proceeding may be entered only if a court determines the award is supported by substantial evidence and not based on legal error under the substantive law of the state of California. (f) Real Property Collateral: Judicial Reference. Notwithstanding anything herein to the contrary, no Dispute shall be submitted to arbitration if the Dispute concerns indebtedness secured directly or indirectly, in whole or in part, by any real property unless (i) the holder of the mortgage, lien or security interest specifically elects in writing to proceed with the arbitration, or (ii) all parties to the arbitration waive any rights or benefits that might accrue to them by virtue of the single action rule statute of California, thereby agreeing that all indebtedness and obligations of the parties, and all mortgages, liens and security interests securing such indebtedness and obligations, shall remain fully valid and enforceable. If any such Dispute is not submitted to arbitration, the Dispute shall be referred to a referee in accordance with California Code of Civil Procedure Section 638 et seq., and this general reference agreement is intended to be specifically enforceable in accordance with said Section 638. A referee with the qualifications required herein for arbitrators shall be selected pursuant to the AAA's selection procedures. Judgment upon the decision rendered by a referee shall be entered in the court in which such proceeding was commenced in accordance with California Code of Civil Procedure Sections 644 and 645. (g) Miscellaneous. To the maximum extent practicable, the AAA, the arbitrators and the parties shall take all action required to conclude any arbitration proceeding within 180 days of the filing of the Dispute with the AAA. No arbitrator or other party to an arbitration proceeding may disclose the existence, content or results thereof, except for disclosures of information by a party required in the ordinary course of its business, by applicable law or regulation, or to the extent necessary to exercise any judicial review rights set forth herein. If more than one agreement for arbitration by or between the parties potentially applies to a Dispute, the arbitration provision most directly related to the Loan Documents or the subject matter of the Dispute shall control. This arbitration provision shall survive termination, amendment or expiration of any of the Loan Documents or any relationship between the parties. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first written above. SIMPSON MANUFACTURING CO., INC WELLS FARGO BANK, NATIONAL ASSOCIATION By: /s/Steve Lamson By: /s/Steven Bojkovic ----------------------- ----------------------- Steve Lamson Steven Bojkovic Title: Chief Financial Officer Vice President By: /s/Thomas J Fitzmyers ----------------------- Thomas J Fitzmyers Title: President EX-10 3 AMENDED AND RESTATED LOAN AGREEMENT EXHIBIT 10.2 ------------ LOAN AGREEMENT THIS AMENDED AND RESTATED LOAN AGREEMENT ("Agreement") is made and entered into as of January 14, 1997 by and between Simpson Manufacturing Co., Inc., a California Corporation ("Borrower") and UNION BANK OF CALIFORNIA, N.A. ("Bank"). This Agreement amends and restates in its entirety that certain loan agreement dated July 15, 1995 between Bank and Simpson Manufacturing Co., Inc.. SECTION 1. THE LOAN 1.1.1 The Revolving Loan. Bank will loan to Borrower an amount not to exceed Thirteen Million and Eight Hundred Thousand Dollars ($13,800,000.00) outstanding in the aggregate at any one time (the "Revolving Loan"). Borrower may borrow, repay and reborrow all or part of the Revolving Loan in accordance with the terms of the Revolving Note. All borrowings of the Revolving Loan must be made before June 1, 1998, at which time all unpaid principal and interest of the Revolving Loan shall be due and payable. The Revolving Loan shall be evidenced by a promissory note (the "Revolving Note") on the standard form used by Bank for commercial loans. 1.1.2 The Standby L/C Sublimit. As a sublimit to the Revolving Loan, Bank shall issue, for the account of Borrower, one or more irrevocable, standby or commercial letters of credit (individually, an "L/C" and collectively, the "L/Cs"). All such L/Cs shall be drawn on such terms and conditions as are acceptable to Bank. The aggregate amount available to be drawn under all outstanding L/Cs and the aggregate amount of unpaid reimbursement obligations under drawn L/Cs shall not exceed Two Million Dollars ($2,000,000.00) and shall reduce, dollar for dollar, the maximum amount available under the Revolving Loan. Each L/C shall be governed by the terms of (and Borrower agrees to execute) Bank's standard form for L/C applications and reimbursement agreements. No L/C may be issued for a period exceeding 12 months, and no L/C shall expire after June 1, 1998. At Borrower's request, Bank will issue L/C's with the following affiliates named as the Account Party, so long as the Borrower executes the Bank's standard form for L/C applications and reimbursement agreements: 1. Simpson Holdings, Inc. 2. Simpson Strong-Tie, International, Inc. 3. Ackerman-Johnson Fastening Systems, Inc. 4. Simpson Strong-Tie Company, Inc. 5. Simpson Dura-Vent Company, Inc. Borrower currently maintains an outstanding L/C in the amount of Two Hundred and Seventy-five Thousand Pounds Sterling (GBP275,000) maturing June 15, 1997 and an L/C in the amount of Four Hundred and Sixteen Thousand Two Hundred Eighty Four Dollars and fifty cents ($416,284.50) maturing on June 1, 1997. These L/C's shall now be considered as utilization under the L/C sublimit. 1.1.3 The Term Loan. Solely to repay the Revolving Loan, Bank will loan to Borrower the sum outstanding related to an acquisition by Borrower at the maturity of the Revolving Loan in one disbursement on or before June 1, 1998 provided Borrower is in compliance with all other terms and conditions of this Agreement. The principal amount of the Term Loan shall be amortized over a maximum of a three (3) year period and shall be repaid in equal monthly installments, as set forth in a promissory note executed by Borrower on or before said date. 1.2 Terminology. As used herein the word "Loan" shall mean, collectively, all the credit facilities described above. As used herein the word "Note" shall mean, collectively, all the promissory notes described above. As used herein, the words "Loan Documents" shall mean all documents executed in connection with this Agreement. 1.3 Purpose of Loan. The proceeds of the Revolving Loan shall be used for general working capital purposes and acquisitions. 1.4.1 Interest. The unpaid principal balance of the Revolving Loan shall bear interest at the rate(s) specified in the Revolving Note; or, at borrower's option, Bank will make available under the Line advances bearing interest at (1.00%) above the London Interbank Offer Rate ("LIBOR"), quoted by the Bank at the time of Borrower's election, provided Borrower shall give Bank two (2) business days prior written notice of said election, for amounts greater than Two Hundred and Fifty Thousand Dollars ($250,000), and for periods of not less than one (1) month and not longer than one (1) year, but at no time shall such periods extend beyond June 1, 1998. 1.4.2 Interest. The unpaid principal balance of the Term Loan shall bear interest at the rate(s) specified in the Term Note; or, at borrower's option, Bank will make available under the Term Loan advances bearing interest at (1.25%) above the London Interbank Offer Rate ("LIBOR"), quoted by the Bank at the time of Borrower's election, provided Borrower shall give Bank two (2) business days prior written notice of said election, for amounts greater than Two Hundred and Fifty Thousand Dollars ($250,000), and for periods of not less than one (1) month and not longer than one (1) year, but at no time shall such periods extend beyond the maturity of the term note. 1.5 Unused Fee. On June 15 and December 15 of each year, or the earlier termination of the Loan, Borrower shall pay to Bank a fee of one eighth of one percent (.125%) per year on the unused portion of the Revolving Loan. 1.6 Stand-by Letter of Credit Fees. Borrower agrees to pay Bank one percent (1%) per annum of the principal face sum of all L/C's. 1.7 Disbursement. Upon execution hereof, Bank shall disburse the proceeds of the Loan as provided in Bank's standard form Authorization executed by Borrower. 1.8 Controlling Document. In the event of any inconsistency between the terms of this Agreement and any Note or any of the other Loan Documents, the terms of such Note or other Loan Documents will prevail over the terms of this Agreement. SECTION 2. CONDITIONS PRECEDENT Bank shall not be obligated to disburse all or any portion of the proceeds of the Loan unless at or prior to the time for the making of such disbursement, the following conditions have been fulfilled to Bank's satisfaction: 2.1 Compliance. Borrower shall have performed and complied with all terms and conditions required by this Agreement to be performed or complied with by it prior to or at the date of the making of such disbursement and shall have executed and delivered to Bank the Note and other documents deemed necessary by Bank. 2.2 Guaranties. Simpson Strong-Tie Company, Inc., and Simpson Dura- Vent Company, Inc. (collectively the "Guarantors") shall have executed and delivered to Bank their respective continuing guaranties, each in the amount of Fourteen Million One Hundred Thousand Dollars ($14,100,000), in form and amount satisfactory to Bank. 2.3 Borrowing Resolution. Borrower shall have provided Bank with certified copies of resolutions duly adopted by the Board of Directors of Borrower, authorizing this Agreement and the Loan Documents. Such resolutions shall also designate the persons who are authorized to act on Borrower's behalf in connection with this Agreement and to do the things required by Borrower pursuant to this Agreement. 2.4 Continuing Compliance. At the time any disbursement is to be made, there shall not exist any event, condition or act which constitutes an event of default under Section 6 hereof or any event, condition or act which with notice, lapse of time or both would constitute such event of default; nor shall there be any such event, condition, or act immediately after the disbursement were it to be made. SECTION 3. REPRESENTATIONS AND WARRANTIES Borrower represents and warrants that: 3.1 Authority to Borrow. The execution, delivery and performance of this Agreement, the Note and all other agreements and instruments required by Bank in connection with the Loan are not in contravention of any of the terms of any indenture, agreement or undertaking to which Borrower is a party or by which it or any of its property is bound or affected. 3.2 Financial Statements. The financial statements of Borrower, including both a consolidated balance sheet at September 30, 1996, together with supporting schedules, and a consolidated income statement for the nine (9) months ended September 30, 1996, have heretofore been furnished to Bank, and are true and complete and fairly represent the financial condition of Borrower during the period covered thereby. Since September 30, 1996, there has been no material adverse change in the financial condition or operations of Borrower. 3.3 Litigation. There is no litigation or proceeding pending or threatened against Borrower or any of its property which is reasonably likely to affect the financial condition, property or business of Borrower in a materially adverse manner or result in liability in excess of Borrower's insurance coverage. 3.4 Default. Borrower is not now in default in the payment of any of its material obligations, and there exists no event, condition or act which constitutes an event of default under Section 6 hereof and no condition, event or act which with notice or lapse of time, or both, would constitute an event of default. 3.5 Organization. Borrower is duly organized and existing under the laws of the state of its organization, and has the power and authority to carry on the business in which it is engaged and/or proposes to engage. 3.6 Authorization. This Agreement and all things required by this Agreement have been duly authorized by all requisite action of Borrower. 3.7 Compliance With Laws. Borrower is not in violation with respect to any applicable laws, rules, ordinances or regulations which materially affect the operations or financial condition of Borrower. 3.8 ERISA. Any defined benefit pension plans as defined in the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), of Borrower meets, as of the date hereof, the minimum funding standards of Section 302 of ERISA, and no Reportable Event or Prohibited Transaction as defined in ERISA has occurred with respect to any such plan. 3.9 Continuing Representations. These representations shall be considered to have been made again at and as of the date of each disbursement of the Loan and shall be true and correct as of such date or dates. SECTION 4. AFFIRMATIVE COVENANTS Until the Note and all sums payable pursuant to this Agreement or any other of the Loan Documents have been paid in full, unless Bank waives compliance in writing, Borrower agrees that: 4.1 Use of Proceeds. Borrower will use the proceeds of the Loan only as provided in subsection 1.3 above. 4.2 Records. Borrower will keep and maintain full and accurate accounts and records of its operations according to generally accepted accounting principles. 4.3 Information Furnished. Borrower will furnish to Bank: (a) Within sixty (60) days after the close of each fiscal quarter, a consolidated and consolidating financial statement, to include a balance sheet, income statement, statement of cash flow and consolidating schedules for Simpson Manufacturing Company, Inc., Simpson Holdings, Inc., Simpson Strong-Tie Company, Inc., Simpson Strong-Tie International, Inc., Simpson Dura-Vent Company, Inc., Ackerman-Johnson Fastening Systems, Inc, and Simpson Venture Capital; (b) Within one hundred twenty (120) days after the close of each fiscal year, an unqualified, audited consolidated financial statement of Simpson Manufacturing Company, Inc., prepared by an independent certified public accountant acceptable to Bank; (c) Give written notice within fifteen (15) days of all litigation affecting Borrowers or Guarantors in which the amount is Five Million Dollars ($5,000,000.00) or more; (d) Give written notice to Bank within fifteen (15) days of any property loss affecting Borrowers or Guarantors in which the amount is Five Million Dollars ($5,000,000.00) or more; (e) Notice of occurrence of any Event of Default or of any event, condition or occurrence which, with the giving of notice or the message of time or both, would constitute an Event of Default; (f) Copies of any amendments to Borrower's loan documents with Well Fargo Bank; (g) Prompt written notice to Bank of all events of default under any of the terms or provisions of this Agreement or of any other agreement, contract, document or instrument entered, or to be entered into with Bank; and of any litigation which, if decided adversely to Borrower, would have a material adverse effect on Borrower's financial condition; and of any other matter which has resulted in, or is likely to result in, a material adverse change in its financial condition or operations; (h) Prior written notice to Bank of any changes in Borrower's officers and other senior management; Borrower's name; and location of Borrower's assets, principal place of business or chief executive office; and (i) Give written notice at least 30 days prior to the proposed closing date of any acquisition in excess of Eight Million Dollars ($8,000,000.00), providing a description of the business or assets to be acquired and the terms of the acquisition. 4.4 Tangible Net Worth. Borrower will at all times maintain Tangible Net Worth of not less than Fifty Million Dollars ($50,000,000.00), as of December 30, 1996 plus fifty percent (50%) of net income measured on a quarterly basis. "Tangible Net Worth" shall mean net worth increased by indebtedness of Borrower subordinated to Bank and decreased by patents, licenses, trademarks, trade names, goodwill and other similar intangible assets, organizational expenses, security deposits, prepaid costs and expenses and monies due from affiliates (including officers, shareholders and directors). 4.5 Debt to Tangible Net Worth. Borrower will at all times maintain a ratio of total liabilities to tangible net worth of not greater than 1.50:1.0. 4.6 Profit From Operations. Borrower will maintain a net profit from operations, as defined by generally accepted accounting principles, of any positive amount for each fiscal year. 4.7 Cash Flow. Borrower will maintain a ratio of Cash Flow to Debt Service of not less than 1.50:1.0. Compliance with this subsection shall be measured as of the end of each fiscal year. "Cash Flow" shall mean net profit before taxes to which interest, net of capitalized interest, depreciation, amortization, and other noncash expenses are added for the twelve (12) month period immediately preceding the date of calculation. "Debt Service" shall mean interest expenses plus prior period current portion of long-term debt, including subordinated debt payments. 4.8 Litigation and Attorneys' Fees. Borrower will pay promptly to Bank upon demand, reasonable attorneys' fees (including but not limited to the reasonable estimate of the allocated costs and expenses of in-house legal counsel and legal staff) and all costs and other expenses paid or incurred by Bank in collecting, modifying or compromising the Loan or in enforcing or exercising its rights or remedies created by, connected with or provided for in this Agreement or any of the Loan Documents, whether or not an arbitration, judicial action or other proceeding is commenced. If such proceeding is commenced, only the prevailing party shall be entitled to attorneys' fees and court costs. 4.9 Additional Requirements. Borrower will promptly, upon demand by Bank, take such further action and execute all such additional documents and instruments in connection with this Agreement as Bank in its reasonable discretion deems necessary, and promptly supply Bank with such other information concerning its affairs as Bank may request from time to time. 4.10 Bank Expenses. Borrower will pay or reimburse Bank for all costs, expenses and fees incurred by Bank in preparing and documenting this Agreement and the Loan, and all amendments and modifications thereof, including but not limited to all filing and recording fees, costs of appraisals, insurance and attorneys' fees, including the reasonable estimate of the allocated costs and expenses of in-house legal counsel and legal staff. SECTION 5. NEGATIVE COVENANTS Until the Note and all other sums payable pursuant to this Agreement or any other of the Loan Documents have been paid in full, unless Bank waives compliance in writing, Borrower agrees that: 5.1 Encumbrances and Liens. Borrower will not create, assume or suffer to exist any mortgage, pledge, security interest, encumbrance, or lien in all or any portion of its accounts receivable or other rights to payment, general intangibles, inventory or equipment. 5.2 OTHER INDEBTEDNESS. Create, incur, assume or permit to exist any indebtedness or liabilities resulting from borrowings, loans or advances, whether secured or unsecured, matured or unmatured, liquidated or unliquidated, joint or several, except (a) the liabilities of Borrower to Bank; (b) trade debt incurred by Borrower in the normal course of its business; (c) the existing liabilities of Borrower disclosed to Bank on its financial statement referenced in Section 3.2 hereof; (d) indebtedness arising under existing real estate secured loans, provided however that such indebtedness shall not exceed the lesser of (I) 100% of the purchase price of the real property or (ii) the appraised value; and (e) unsecured indebtedness of Borrower to Wells Fargo Bank in an aggregate amount not to exceed Nine Million and Two Hundred Thousand Dollars ($9,200,000.00). 5.3 Sale of Assets, Liquidation or Merger. Borrower will not liquidate, dissolve, or enter into any consolidation, merger, partnership or other combination, nor convey, nor sell, nor lease all or the greater part of its assets or business; nor permit the dissolution, merger, consolidation or sale of all or any greater part of the assets of any of Borrower's affiliates or subsidiaries. 5.4 Guaranties. Borrowers will not become a guarantor or surety, pledge its credits or properties in any manner in excess of $1,000,000 in the aggregate 5.5 Acquisitions. Borrower will not make any acquisitions or acquire any net assets, other than fixed or capital assets acquired in the normal course of business, in excess of Fifteen Million Dollars ($15,000,000) in any fiscal year. 5.6 Except for the amendment anticipated to be executed prior to January, 1997, the terms of which have been advised to the Bank, Borrower will not amend, alter, supplement or otherwise modify the terms of Guarantor's existing indebtedness to Wells Fargo Bank, N.A. 5.7 Borrower will not transfer the proceeds of any loan or advance hereunder, or any other asset of Borrower to any affiliate or Guarantor, unless such transfer is evidenced by a valid and enforceable instrument or statement or account. SECTION 6. EVENTS OF DEFAULT The occurrence of any of the following events ("Events of Default") shall terminate any obligation on the part of Bank to make or continue the Loan and automatically, unless otherwise provided under the Note, shall make all sums of interest and principal and any other amounts owing under the Loan immediately due and payable, without notice of default, presentment or demand for payment, protest or notice of nonpayment or dishonor, or any other notices or demands: 6.1 Borrower shall default in the due and punctual payment of the principal of or the interest on the Note or any of the other Loan Documents and such default shall not be cured within ten (10) business days after the occurrence thereof; or 6.2 Any default shall occur under the Note; or 6.3 Borrower or any Guarantor shall default in the due performance or observance of any covenant or condition of the Loan Documents; 6.4 Any guaranty required hereunder is breached or becomes ineffective, or any Guarantor disavows or attempts to revoke or terminate such guaranty; or 6.5 If, in the opinion of Bank, there is materially adverse change in the financial condition of Borrower or any Guarantor, or for any reason Bank believes that the prospect of payment or performance pursuant to the Credit Facilities, any other indebtedness of Borrower to Bank, or any other agreement or instrument required by Bank in connection with the Credit Facilities has been impaired; or 6.6 Borrower or any Guarantor shall commit or do, or fail to commit or do, any act or thing which would constitute an event of default under any of the terms of any other agreement, document, or instrument executed, or to be executed by it and concerning a financial obligation of Borrower or any such Guarantor (including without limitation the existing loan documents with Wells Fargo Bank), and such default shall not have been cured within any applicable period of grace provided in such agreement, document or instrument. SECTION 7. MISCELLANEOUS PROVISIONS 7.1 Additional Remedies. The rights, powers and remedies given to Bank hereunder shall be cumulative and not alternative and shall be in addition to all rights, powers and remedies given to Bank by law against Borrower or any other person, including but not limited to Bank's rights of setoff or banker's lien. 7.2 Nonwaiver. Any forbearance or failure or delay by Bank in exercising any right, power or remedy hereunder shall not be deemed a waiver thereof and any single or partial exercise of any right, power or remedy shall not preclude the further exercise thereof. No waiver shall be effective unless it is in writing and signed by an officer of Bank. 7.3 Inurement. The benefits of this Agreement shall inure to the successors and assigns of Bank and the permitted successors and assignees of Borrower, and any assignment of Borrower without Bank's consent shall be null and void. 7.4 Applicable Law. This Agreement and all other agreements and instruments required by Bank in connection therewith shall be governed by and construed according to the laws of the State of California. 7.5 Amendments. This Agreement may be amended only in writing signed by all parties hereto. 7.6 Integration Clause. Except for documents and instruments specifically referenced herein, this Agreement constitutes the entire agreement between Bank and Borrower regarding the Loan and all prior communications verbal or written between Borrower and Bank shall be of no further effect or evidentiary value. 7.7 Construction. The section and subsection headings herein are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. 7.8 Amendments. This Agreement may be amended only in writing signed by all parties hereto. 7.9 Counterparts. Borrower and Bank may execute one or more counterparts to this Agreement, each of which shall be deemed an original. SECTION 8. SERVICE OF NOTICES 8.1 Any notices or other communications provided for or allowed hereunder shall be effective only when given by one of the following methods and addressed to the respective party at its address given with the signatures at the end of this Agreement and shall be considered to have been validly given: (a) upon delivery, if delivered personally; (b) upon receipt, if mailed, first class postage prepaid, with the United States Postal Service; (c) on the next business day, if sent by overnight courier service of recognized standing; and (d) upon telephoned confirmation of receipt, if telecopied. 8.2 The addresses to which notices or demands are to be given may be changed from time to time by notice delivered as provided above. THIS AGREEMENT is executed on behalf of the parties by duly authorized officers as of the date first above written. UNION BANK OF CALIFORNIA, N.A. /s/Carol Garrett /s/Joellen Ademski - ---------------------- ---------------------- Carol Garrett Joellen Ademski Vice President Vice President Address: 1800 Harrison Street, Suite 1400 Oakland, CA 94612-3429 Telephone: (510)271-1747 FAX: (510)271-1764 SIMPSON MANUFACTURING CO., INC. /s/Thomas Fitzmyers /s/Steve Lamson - ---------------------- ---------------------- Thomas Fitzmyers Steve Lamson President Chief Financial Officer Address: 4637 Chabot Drive, suite 200 Pleasanton, CA 94588-0789 Telephone: (510)460-9912 FAX: (510)847-9114 GUARANTORS SIMPSON STRONG-TIE COMPANY INC. /s/Thomas Fitzmyers /s/Steve Lamson - ---------------------- ---------------------- SIMPSON DURA-VENT COMPANY, INC. /s/Barclay Simpson /s/Steve Lamson - ---------------------- ---------------------- EX-10 4 COLLECTIVE BARGAINING AGREEMENT EXHIBIT 10.3 ------------ AGREEMENT BETWEEN SIMPSON STRONG - TIE CO., INC. AND SHEET METAL WORKERS' LOCAL NO. #371 FOR THE PERIOD JULY 18, 1997 TO JULY 17, 2000 TABLE OF CONTENTS ARTICLE I PURPOSE .............................. Page 3 ARTICLE II JURISDICTION ......................... 3 ARTICLE III UNION SECURITY ....................... 3 ARTICLE IV CHECK-OFF ............................ 4 ARTICLE V HOURS AND OVERTIME ................... 4 ARTICLE VI WAGES ................................ 5 ARTICLE VII FUNERAL LEAVE ........................ 6 ARTICLE VIII HOLIDAYS ............................. 7 ARTICLE IX JURY SERVICE ......................... 8 ARTICLE X VACATIONS ............................ 8 ARTICLE XI SHIFTS ............................... 9 ARTICLE XII GRIEVANCE PROCEDURE .................. 10 ARTICLE XIII ACCESS TO EMPLOYER ESTABLISHMENT ..... 11 ARTICLE XIV HEALTH CARE PLAN ..................... 11 ARTICLE XV PENSION PLAN ......................... 12 ARTICLE XVI INDUSTRIAL INJURIES .................. 12 ARTICLE XVII SENIORITY ............................ 13 ARTICLE XVIII SAFETY ............................... 14 ARTICLE XIX LEAVE OF ABSENCE ..................... 15 ARTICLE XX GENERAL .............................. 15 ARTICLE XXI DURATION OF AGREEMENT ................ 17 SIMPSON STRONG-TIE CO., INC., San Leandro Branch, 1450 Doolittle Rd, San Leandro, California, party of the first part, hereinafter sometimes called the "COMPANY", and SHEET METAL WORKERS' INTERNATIONAL ASSOCIATION, LOCAL UNION NO. 371 OF NORTHERN CALIFORNIA, 60 Hegenberger Place, Oakland, California, party of the second part, hereinafter sometimes called the "UNION". ARTICLE I PURPOSE Section 1. This agreement, made and entered into by and between parties specified above, established by mutual consent of both parties specific rules and regulations to govern employment, wage scale, and working conditions of sheet metal production workers and helpers, shop cleaners and maintenance men, parties to and recognized under this Agreement. Office, clerical, professional, supervisors, guards, watchmen, as defined in the National Labor Relations Act are excluded from the terms of this Agreement. Section 2. It is understood that maintenance men and shop cleaners hired after July 13, 1985, will be required to join the Union. Further, it is agreed that in the event of a work stoppage all people in this classification may enter the plant at his/her option to only accomplish work within their normal jobs. If such employees are subsequently put to production work, the Union has the right to call all maintenance and cleaning employees under Union affiliation to leave the plant, regardless of whether they are in violation or not. ARTICLE II JURISDICTION Section 1. The terms of the Agreement are hereby recognized and accepted as binding on both parties hereto and shall apply in a manner and under conditions specified herein to manufacture, fabrication, and assembly of all types of louver and vent products and to all types of variations of timber connectors and any and all new products not now manufactured at the above location and all associated production work included in the jurisdictional claims of the Sheet Metal Workers' International Association and none but sheet metal workers and welders and recognized by the Union shall be employed on said work by the Company. ARTICLE III UNION SECURITY Section 1. The Company recognizes the Union as the sole representative of employees in classifications of work set forth in Article II of the Agreement. Section 2. Membership in the Union, as a condition of employment, is required after thirty (30) days following the beginning of employment or the execution date of the Agreement, whichever is later in the case of particular employee. The Company is free to hire irrespective of Union or non-Union affiliation. Membership in the Union shall be available to new employees on the same terms and conditions applicable to other employees. If the Company has reasonable grounds for believing that Union membership was denied or terminated for any reason other than the employee's failure to pay regular initiation fees or dues, it is not required to discharge any such employee. Section 3. The Company will notify the Union of anticipated openings. Applicants referred by the Union will be given consideration with all other applicants. ARTICLE IV CHECK - OFF Section 1. The Company shall, during the life of this Agreement, upon writtten authorization by the employee on a form approved by the Company and the Union, in conformance with the Labor Management Relations Act of 1947, as amended, deduct from the first pay period of each month, Union dues in the amount as authorized by the Union, such Union dues shall be for the following month. Section 2. Initiation Fee: The Company shall deduct initiation fees, upon written authorization by the employee for twenty (20) weeks starting with the second pay period from the date of hire in the amount as authorized by the Union. Section 3. New Hires: The Employer shall direct all newly-hired employees to the office of the Union. The Union will then dispatch the employees with two (2) copies of a clearance form, one (1) copy going to the Company, and the other to the Shop Steward. Section 4. No later than ten (10) days after such deduction, on a form provided by the Union, the Company shall remit to the Union a check in the total amount of dues and initiation fees which have been deducted, together with a list of names of the employees from whose pay said dues and initiation fees have been deducted and the amount deducted from each. Initiation fees and Union dues can be included in the same check mailed ten (10) days after deduction for union dues. Section 5. All bargining unit employees shall receive once each calendar month a supplemental payment as follows: Effective January 1, 1997, ten cents ($.10) per hour for each hour paid. The Company shall forward the supplemental payment to the Local Union once each calendar month for the preceeding month hours paid as a supplemental dues payment. ARTICLE V HOURS AND OVERTIME Section 1. The regular shift for Day and Swing shifts will consist of eight (8) hours, with a one-half (1/2) unpaid meal period. (The regular shift for Midnight will consist of eight (8) hours, with a one-half (1/2) hour paid meal period.) A shift starting time will be established for each shift in each department. The starting time for day shift shall be at 7:00 a.m., plus or minus one (1) hour. The starting time for swing shift will 3:00 p.m., plus or minus one (1) hour. The start time for the midnight shift will be 11:00 p.m., plus or minus one (1) hour. The fixed starting time for any shift may only be changed by mutual consent of the employees involved and the Company. In the event of a change in starting time, special needs may be accommodated, if possible, by agreement between the affected employee and the Company. Personal emergencies will be accommodated by the Company, if possible. It will not be the intent of this section to offset overtime. Section 2. The first eight (8) hours of work on a given day shall be compensated at regular pay. All hours worked over eight (8) but less than twelve (12) on a given work day shall be compensated at time and one-half (1.5 rate). All hours worked over twelve (12) on a given work day shall be compensated at double time (2.0 rate). Any employee who starts work before the regular starting time on any shift shall be compensated at time and one-half (1.5 rate) after eight (8) hours. If sent home by the company before eight (8) hours worked, then any hours worked before his starting time shall be at time and one-half (1.5 rate). Section 3. For all hours worked on Saturday, time and one-half (1.5 rate) shall be paid and no employee shall be required to work in excess of eight (8) hours. Saturday hours in excess of eight (8) shall be by mutual consent of the Company and the employee involved and shall be compensated at double time (2.0 rate). All work performed on Sunday up to eight (8) hours will be compensated at double time (2.0 rate). All work performed on Sunday in excess of eight (8) will be by mutual consent of the employee involved and the Company, and shall be compensated at double time and one- half (2.5 rate). Section 4. All work in excess of eight (8) hours, Monday through Friday, shall be by mutual consent of the employee and the Company. Required overtime will be distributed among employees with preference given to those normally performing the work. The Company shall provide reasonable advance notice of required overtime. Section 5. There shall be no pyramiding of overtime. Nothing contained in this Agreement shall be interpreted as requiring a duplication or pyramiding of holiday, weekend, daily or weekly overtime payments involving the same hours of labor. ARTICLE VI WAGES Section 1. The following wage rates are established as the basic hourly rate for each department. Effective Effective Effective 07/18/97 07/18/98 07/18/99 --------- --------- --------- Warehouse/Production $ 15.40 $ 15.75 $ 16.10 Maintenance/Welding 15.85 16.20 16.55 Section 2. A. Entry level wages and progression to basic rates for employees hired between 07/14/91 to 07/13/94 are as follows: 1st four months: $ 7.00 5th four months: $ 9.00 2nd four months: 7.50 6th four months: 9.50 3rd four months: 8.00 7th four months: 10.00 4th four months: 8.50 8th four months: 10.50 Thereafter Base Section 2. B. Entry level wages and progression to basic rates for employees hired after 07/18/94 are as follows: 1st six months: $ 7.00 6th six months: $ 9.50 2nd six months: 7.50 7th six months: 10.00 3rd six months: 8.00 8th six months: 10.50 4th six months: 8.50 After 60 months: 12.50 5th six months: 9.00 After 72 months: Base Entry level wages apply only to new hires with no previous employment history as a Sheet Metal Union production worker at Simpson Strong - Tie, San Leandro Branch. Section 3. A. Shift premiums for employees on the Swing shift will be eighty (80) cents per hour. Shift premiums for employees on the Midnight shift will be one (1) dollar per hour. Section 3. B. The Company reserves the right to pay any or all employees above the basic rate at the Company's discretion. Employees currently above the basic rate will continue to receive their current differential. Differentials based on specific jobs such as leads and setups can be removed when the person(s) are no longer performing these jobs. Section 4. Employees covered by this Agreement who report for work by the direction of the Company and are not placed to work, shall be entitled to two (2) hours' pay at the established rate. This provision, however, shall not apply under conditions over which the Company has no control. Section 5. The welder classification is recognized by the $.45 cents per hour premium over and above the normal scale for production workers. If an employee is classified as a welder, he/she will receive welder pay regardless of job assignment. If an employee's job is changed and is permanently reassigned to other work, his/her classification will be changed. In the event that an employee who is not classified as welder temporarily does welding work he/she will receive welder pay for the hours he/she welds. Such temporary assignment must be by mutual consent of the Company and employee. Section 6. Foreman must approve all overtime. ARTICLE VII FUNERAL LEAVE Section 1. In the event of a death in the immediate family for any employee who has attained senority, he/she will, upon request, be granted a leave of three (3) working days immediately following such a death. The employee on such leave will receive eight (8) hours' pay for those days at his/her normal rate of pay. This provision does not apply if the employee is on leave of absence or layoff. A. For purposes of this provision, the immediate family shall be restricted to father, mother, spouse, child, father-in-law, mother-in-law, stepson, stepdaughter, brother, sister, grandmother, grandfather, brother- in-law, and sister-in-law. Section 2. In the event that additional time is needed, a leave of absence may be applied for. ARTICLE VIII HOLIDAYS Section 1. The following legal holidays shall be recognized and observed within the territory covered by this Agreement on the date established by the Federal or State law. New Year's Day Presidents' Day Memorial Day Independence Day Labor Day Veterans' Day Thanksgiving Day Friday after Thanksgiving Day Day before Christmas Day Christmas Day Day before New Year's Day Section 2. When a holiday falls on a Saturday, it will be observed on the preceeding Friday. When a holiday falls on a Sunday, it will be observed on the following Monday. Section 3. Whenever a regular legal paid holiday falls on a Tuesday, Wednesday, or Thursday, employees shall have the option, with the Company's approval, of taking the Friday or Monday as the paid holiday, with the understanding that work performed on the regular holiday shall be paid at straight time. Section 4. An employee after completing thirty (30) calendar days of employment shall be paid for the above holidays at his normal rate of pay including shift differential and any other premiums, for a full shift, provided, however, that the employee shall have worked the full regularly scheduled work day before and after the holiday; except that if an employee is absent due to a medically certified illness, Company authorized absence, or is detained due to justifiable circumstances beyond his control, he shall not lose holiday pay as outlined above. Section 5. Work performed on holidays will be paid at double time (2) rate PLUS the regular straight-time holiday pay (1) for a total of triple time (3). ARTICLE IX JURY SERVICE Section 1. When a member of the Union working under the jurisdiction of the Agreement necessarily loses time from work because of jury service on a day on which he would normally have worked, he will be reimbursed by the Company for the difference between the pay received for jury service and his regular straight-time rate of pay for his regular scheduled hours of work. It is understood that such reimbursement shall exclude travel allowances and shall not be in excess or eight (8) hours per day of forty (40) hours per week, less pay received for jury service. Section 2. In order to qualify for the benefits herein described, employees shall be required to provide the Company with a statement or certification from the clerk of the court attesting to the time rendered. Section 3. An employee called for jury service on any regular work day shall report to his employer for work for such time as may be available prior to the hour he is required to be in Court, and shall report back to his employer upon being excused for Court. An employee who fails to so report waives his right to reimbursement for time lost as herein provided. Section 4. Any Swing or Midnight shift employee who is on jury duty will be moved to day shift while he is on jury duty. He will continue to receive shift premium. ARTICLE X VACATIONS Section 1. Vacation and severance pay are hereby established under the following schedule, based on straight-time hourly rate of pay. Swing or Midnight shift time hourly rate of pay. Section 2. Any production employee who has worked for the Company for a period of one (1) year, and during that year worked a total of 1040 hours, shall be entitled to one (1) week's vacation, with pay. Any employee who either has not been employed continuously by the Company for one (1) year, or has not worked a total of 1,040 hours during that year shall not be entitled to two (2) weeks' vacation with pay. Any employee who either has not been employed continuously by the Company for one (1) year, or has not worked a total of 1,040 hours during that year shall not be entitled to any vacation. Section 3. Any production employee who has worked for the Company for a period of two (2) years or more and during that last year worked 1,040 hours or more, shall be entitled to two (2) weeks' vacation with pay. Section 4. Any employee who has completed at least six (6) years shall be entitled to the number of days of vacation shown in the following table. Partial weeks of vacation must be taken in conjunction with regularly scheduled weeks of vacation. Full Years of Service Days of Vacation --------------------- ---------------- 6 Years 15 10 Years 16 12 Years 17 14 Years 18 16 Years 20 20 Years 21 22 Years 22 24 Years 23 26 Years 24 28 Years 25 All Years thereafter 25 Section 5. Any employee who is discharged for cause, or who has less than 1,040 hours of employment and quits, will not be eligible for vacation or severance pay. Section 6. Vacation pay shall be paid on the payday preceeding the employee's vacation provided the employee has notified the Company of his/her request for such a payment by cutoff date for the payroll prior to his/her vacation. Section 7. Employees returning from layoff have a right to schedule time off without pay for up to the accrued vacaton which was paid at the time of layoff. Section 8. Individual vacation days may be used as sick days provided the employee calls before the start of the shift and has a verified signed doctor's certicate. ARTICLE XI SHIFTS Section 1. Shift work will be allowed in all classifications without restrictions on the following basis: Section 2. Employees on the day shift shall be compenstated at the rate specified in Article VI. Pay for a full day shift shall be a sum equivalent to eight (8) times the regular hourly rate. Section 3. Employees on the swing shift shall be compensated at the rate specified in Article VI plus the swing shift premium. Pay for a full swing shift shall be a sum equivalent to eight (8) times the regular hourly rate plus the swing shift premium. Section 4. Employees on the midnight shift shall be compensated at the rate specified in Article VI plus the midnight shift premium. Pay for a full midnight shift shall be a sum equivalent to eight (8) times the regular hourly rate plus the midnight shift premium. Section 5. IN THE EVENT THERE IS A THIRD SHIFT, THE COMPANY SHALL USE THE LEAST SENIOR QUALIFIED EMPLOYEES. ARTICLE XII GRIEVANCE PROCEDURE Section 1. The Company and the Union agree in the case of any and all grievances concerning rate of pay, hours, or working conditions, or the interpretation or application of this Agreement, the following procedure shall be followed: Section 2. Definitions for use in ARTICLE XII only: Day Zero = The day of the occurrence, meeting, response, or other action which starts a process with a time limit. Day = A day ends at the end of the shift on which an employee normally works. Example: Day 1 for a day shift employee is the end of the day shift on the day after the incident occurs. All days are working days. Pay for Grievance Time = A single shop steward and the aggrieved employee may be paid for up to one (1) hour for handling a grievance at Step 1 and up to one (1) hour for Step 2. The pay will be for actual time in meeting with foreman. Pay at Step 3 and beyond will be determined by the Union Business Representative and the appropriate manager. Step 1: When a grievable action occurs, the aggrieved employee must meet with the foreman to discuss the problem. This meeting must take place at least one (1) day after the incident and not more than five (5) days after the incident. The employee must clearly request a grievance meeting in a quiet place where communications can take place. Following this meeting, the foreman must provide a verbal response to the employee within one (1) day of the meeting. Step 2: If the aggrevieved employee is not satisfied with the response in Step 1, he/she may file a written greivance with the Shop Steward at least one (1) day after the reply is given in Step 1 and not more than five (5) days after. The Shop Steward will IMMEDIATELY take the written grievance to the foreman and request a meeting. The foreman must hold such a meeting as soon as possible. The meeting may not be delayed more than 24 hours. The foreman must accommodate this request by meeting in a quiet place where communications can take place. The Shop Steward must be present and partcipate. Following this meeting, the foremen must provide a written response to the employee within four (4) days of the meeting. Step 3: If the aggrieved employee is not satisfied with the response in Step 2, he/she may request the matter be referred to the Business Representative of the local union. Such a request must be made at least one (1) day and not more that five (5) days after the receipt of the response given in Step 2. If the Business Representative agrees to handle the grievance, he will schedule a meeting with the Plant Manager within five (5) days of the receipt of the request. The meeting should be held as soon as the schedules of the people involved will permit. At this step, the plant manager and the Business Representative will determine who needs to attend the meeting. It is generally understood the aggrieved employee and the foreman will be involved. Following the meeting, the Plant Manager and the Business Represenative are jointly responsible for responding to the aggrieved employee in writing within ten (10) days of the 3rd Step meeting. NOTE: Time limits in Step 3 may be extended by mutual agreement of the Plant Manager and the Business Representative. Step 4: If the aggrieved employee is not satisfied with the response in Step 3, he/she may request the matter be referred to the Business Representative and the Branch Manager. Such a request must be made at least one (1) day and not more than five (5) days after the receipt of the response given in Step 3. The Business Representative and the Branch Manager shall attempt to reach a settlement before any other action is taken. There are no restrictions on the actions that can be taken at this step. However, if a meeting is needed, it shall be scheduled within five (5) days of the receipt of the request by the Business Representative. Following the meeting or other resolution of the grievance at this step, the Branch Manager and the Business Representative are jointly responsible for responding to the aggrieved employee within ten (10) days of the meeting or other resolution. NOTE: Time limits in Step 4 may be extended by mutual agreement of the Branch Manager and the Business Representative. Step 5: Where settlement cannot be reached between the Company and the Union in a prior step, an effort will be made to have the grievance settled by use of the State Conciliation Service, or submitted to a single arbitrator for settlement. The decision of the impartial arbitrator shall be final and binding on both parties. All arbitration and/or conciliation expenses shall be shared equally by the Union and the Company. Pending such final settlement of the grievance, there shall be no lockout or strike by either party to this Agreement. Section 3. Shop stewards shall not solicit grievances. ARTICLE XIII ACCESS TO EMPLOYER ESTABLISHMENT Section 1. It is hereby understood and agreed that a duly authorized representative of the Union shall have access to the shops and opportunity to discuss with employees, parties to this Agreement, matters of common interest in performance of their duties. Said privilege is to be so exercised that no unncecessary time be lost to the Company. Section 2. It is further understood and agreed that there shall be no discrimination against any member of the Union for union affiliation. ARTICLE XIV HEALTH CARE PLAN Section 1. The Company agrees to contribute an amount specified in Article XIV, Section 3, to the Sheet Metal Workers' of Northern California Benefit Trust Fund. Payments will be made on all straight-time hours worked. Holidays and Vacation Time will be considered time worked for the purpose of determining hours worked in this Article. Section 2. It is understood that the operation of the Sheet Metal Workers' Local 371 Benefit Trust Fund shall be under the supervision of a joint trusteeship of an equal number of employer and Union trustees. Section 3. The Company's only obligation will be to pay the following amounts in the Trust Fund. It is agreed that the maximum amount to be paid will be the amount to maintain the existing benefits of the below amount, whichever is less. 01/18/97 to 07/17/98 $ 2.55 07/18/98 to 07/17/99 2.67 07/18/99 to 07/17/00 2.79 ARTICLE XV PENSION PLAN Section 1. The Company agrees to make contributions into the Northern California Sheet Metal Workers' Pension Trust as outlined below. It is understood and agreed that such contributions are the Company's only obligation. 07/18/97 to 17/17/98 $ 1.40/hour worked 07/18/98 to 07/17/99 1.45/hour worked 07/18/99 to 07/17/00 1.50/hour worked Section 2. The payments and contributions outlined in Section 1 of this Article shall be made in accordance with the applicable trust agreement and regulations adopted by the Board of Trustees of the applicable trust. Section 3. The payments provided for herein shall be made in accordance with the applicable Pension Trust Agreement and regulations adopted by the Board of Trustees of the Trust. The payments provided for herein are due on or before the tenth (10) day of the month following the month in which the work was performed, and each monthly payment shall included payments for all hours worked during the previous month. Payments are delinquent if not paid by the twentieth (20) day of the month following the month in which the work was performed. Section 4. All new employees hired after 07/18/94 will be limited to a hour $.50/hour worked pension. All new employees will receive full pension monies after 72 months of service. ARTICLE XVI INDUSTRIAL INJURIES Section 1. All industrial injuries, no matter how slight, must be reported to the foreman at the time that the injury occurs. Any employee sent home by the Company or Company physician because of an industrial injury or industrial disease shall be paid for the remainder of his shift. Section 2. The Company shall pay employees for reasonable appointment and travel time lost during regular working hours in visits to the doctor in the case of industrial injury or industrial disease only in cases when such appointments cannot be scheduled outside normal working hours. It is the employee's responsiblility to provide written verification from the doctor's office in such cases. Failure to provide such verification will result in the loss of pay until it is provided. Section 3. Any employee who is off work due to an industrial injury or an industrial disease shall be paid by the employer, commencing with the first day he is off work due to such injury or disease, an amount when added to Workman's Compensation which will equal 100% of the workers regular take-home pay. These payments will be based on a regular 40 hour week. Payments will be made for a period of three (3) weeks from the date of injury or whenever the employee returns to work whichever is sooner. However, this in only payable three (3) weeks per contract year with no carryover from year to year. Section 4. If the employee is admitted to a hospital within 24 hours for industrial injury or industrial disease, the payments will commence the day following the injury and will continue for a period of three (3) weeks from the date of injury or whenever the employee returns to work, whichever is sooner. Section 5. If the employee with industrial injury is released for light duty the Company agrees to place him in a light duty job consistent with his condition if such work can be found. Section 6. If an employee with an industrial injury or disease is released to light duty, the Company agrees to place him in a light duty job if one can be found. An employee refusing such light duty will be considered to have abandoned their job as of the date of the injury. Section 7. An employee failing for return to work from an industrial injury as scheduled, or who fails to communicate within twenty-four (24) hours with the Original, Signed Doctor's Certification on their condition and progress on a regular basis, shall be considered to have abandoned their job as of the date of the injury. ARTICLE XVII SENIORITY Section 1. The Company agrees to handle layoffs on the basis of senority provided that demonstrated ability and qualifications of the individual involved are consistent with the requirements of the position involved. In this section, departments are defined as Welding, Production and Warehouse. The Company agrees to initiate a cross-training program by department within six (6) months that will be available to all people who want to participate in it. Section 2. New employees shall be considered to be in training for three months from date of hire. During this period the Company may transfer, layoff or discharge such a training employee as it finds advisable, and such action shall not constitute a greivance against the Company. Section 3. Employees who are laid off due to lack of work, or other economic conditions, shall retain their senority and have recall rights for twelve (12) months provided they have worked for the Company for more than twelve (12) months. Employees who have less than twelve (12) months of work time with the Company shall retain seniority and have recall rights for three (3) months. The original hire date will be the seniority date for any employee who is "recalled" by the Company after his recall rights have expired, but shall not be extended for more than 12 months after recall rights have expired (3 months and 12 months). The seniority for employees who are "rehired" will be the new hire date. Section 4. Failure of any employee to report to work within five (5) days when called shall automatically cancel his seniority. Section 5. Seniority is defined as your hire date unless you quit, terminate, or are rehired. Section 6. Union Shop Steward: Shop Stewards will be recognized by the Company and will have super seniority when it comes to layoff. Union will provide the names to the Company. ARTICLE XVIII SAFETY Section 1. Safety is one of the highest objectives of Simpson Strong - - Tie Company. It is agreed that the Union and the Company will establish and maintain an effective, dynamic safety program which will require active participation by all employees regardless of position. Program definition and administration will be a joint responsibility of the Union and the Company. Both the Company and the Union representative will have equal reponsibility and authority. Such programs will include all aspects of health and safety (including cleanliness of restrooms and lunch rooms) as well as plant safety, training, etc. Section 2. The Company agrees to continue to require pre-employment drug and alcohol screening of new employees and those recalled from layoff. Section 3. Employees may be requested to submit to drug and alcohol screening (subject to Article XII, Grievance Procedures) when there is a justifiable reason to believe an employee is working under the influence of drugs or alcohol. Justifiable reasons will be limited to industrial injury and to cases in which a person's behavior places him/her in danger of harming him/herself, a fellow employee, or the equipment. If the employee refuses to submit to screening, he/she can be sent home without pay. The shop steward must be present before any action is taken. Section 4. Employees who are determined to be under the influence of, or using drugs or alcohol while on company property may be terminated immediately. For purposes of this agreement, "under the influence" is defined as levels of alcohol or drugs in the employee's blood or urine that are detectable by standard tests. Section 5. An employee who is offered and accepts professional assistance in lieu of being fired, will be granted a leave of absence of up to thirty (30) days of treatment. Extensions may be granted upon application and with the recommendation of treating professionals. The total leave may not exceed ninety (90) days. Each employee may exercise this provision one (1) time only. ARTICLE XIX LEAVE OF ABSENCE Section 1. Leaves of absence shall be granted in cases of extreme emergency and such other times as the work load may permit. Leaves of up to three (3) months may be granted. Such leaves must be requested and approved in writing. The Company will notify the Union via a copy of the approval letter. Failure to return at the end of the leave period will be considered as a resignation as of the first day of the leave. While on leave the employee may not engage in or seek other employment, or be self- employed. Employees who misrepresent facts to obtain or secure a leave of absence may be discharged. Section 2. In the event of a serious medical problem, as determined by the Company, the Company will automatically place the employee on a sixty (60) day leave of absence, with the understanding that the employee is to return to work as soon as he/she is medically able. If the employee is unable to return within sixty (60) days, an evalutaion will be made. If appropriate, the leave will be extended for up to sixty (60) days more. This process will continue until the employee has returned to work, or it has been determined that he/she will not be able to return to work, or a total twelve (12) months has been granted. If the employee is unable to return to work within (12) months, he/she will be administratively dropped from the payroll unless the Company and Union agree to a six (6) month extension. ARTICLE XX GENERAL Section 1. It is hereby understood and agreed that nothing included in this Agreement shall be interpreted, construed or applied in any way that will conflict with the provisions, requirements, purpose and intent of the Constitiution of the Sheet Metal Workers' International Association or with the obligations of its members in connection therewith. If the Constitution is revised which causes any section to be in violation of the constitiution, Article XX, Section 5, will apply. Section 2. All parties hereto mutually agree to cooperate fully, in every legal and proper way to establish and maintain, within the territory in which they shall operate a code of ethics and fair practices which will insure compliance with the specific terms of this Agreement, and to direct their efforts, individually and collectively, as circumstances may warrant and justify, to the elimination of unfair competition and destructive practices. Section 3. Except to the extent expressly abridged by a specific provsion of the Agreement, the Company reserves and retains, solely and exclusively, all of its common law rights to manage the business as such rights existed prior to the execution of this or any other previous agreement with the Union or any other union. The sole and exclusive rights of management shall include, but are not limited to, its rights to determine the existance or non-existance of facts which are the basis of a management decision, to determine prices of products, volume of production and methods of financing, to drop a product line, to establish or continue policies, practices, and procedures for the conduct of the business, and from time to time redetermine, the number, location, relation and types of its operations, and the methods, processed and materials to be employed, to discontinue processed or operations, or to discontinue their performance by employees of the Company, to determine the number of hours per day, or per week operation shall be carried on, to select and to determine the number of types of employees required; to assign work to such employees in accordance with the requirements determined by management; establish and change work schedules and assignments; to transfer, promote, or demote employees or to layoff, terminate, or otherwise relieve employees from duty for lack of work, other legitmate reasons, to determine the facts of lack of work, to make and enforce reasonable rules for the maintenance of discipline; to suspend, discharge, or otherwise discipline employees for just cause and otherwise to take such measures as management may determine to be necessary for the orderly, efficient, and profitable operation of the business all to the best regard of its employees. Section 4. The Company agrees that it is to the Company's advantage to perform as much of the work with its own employees as possible, and to that end the Company will make every effort to maintain maximum utilization of its plant and equipment. It is understood and agreed that there shall be no discrimination against any member of this Union for Union affiliation. Section 5. Should any part hereof, of any provisions contained herein be rendered or declared illegal, or any unfair labor practice by reason of any existing or subsequently enacted legislation or by any decree of a Court of competent jurisdiction or by the decision of any authorized governmental agency, including the National Labor Relations Board, such invalidation of such part of portions of this Agreement shall not invalidate the remaining proptions hereto, provided that upon such invalidation the parties immediately meet and negotiate substitute provisions for such parts or provision rendered or declared illegal or an unfair labor practice. The remaining parts or provisions shall remain in full force and effect. Section 6. The Company agrees that in the event the Company decides to suspend operations or move to another location which is more than fifty (50) straight-line miles from the present location, the Company will notify the Union not less than thirty (30) days before such action takes place. In this, the Company agrees to gain with the Union concerning severance pay for affected employees. Section 7. Swing shift shop stewards will be allowed to take 2 hours with pay in order to attend one monthly stewards' meeting. Section 8. A. During the life of this Agreement, the Union will not cause a strike or production stoppage of any kind, nor will any employee or emplyees take part in a strke, intentionally slow down in the rate of production, or in any manner cause interference with or stoppage of the employer's work, PROVIDED the employer follows the grievance procedure in Article XII. B. Likewise, the Company agrees that there shall be no lockouts during the life of this Agreement, provided the Union follows the grievance procedure in Article XII. C. It shall be considered a violation of this Agreement if employees fail to report for work by reason of a legitimate, authorized picket line established by another union which has a collective bargaining agreement with the Company, except as provided for in Article I, Section 2. Except for the above, the Union shall not observe a picket line placed for organizational or any other purpose. ARTICLE XXI DURATION OF AGREEMENT Section 1. All provisions of this Agreement shall go into effect on July 18, 1997, and shall remain in effect until Midnight on July 17, 2000, and shall continue in force and effect from year to year thereafter, unless either party shall desire a change and shall file a notice in writing of changes desired at least sixty (60) days prior to subsequent year ending July 17, and the established wage scales and conditions specified herein shall continue in force and effect pending negotiations and settlement of any proposed changes desired by either party. Section 2. In Witness and testimony of the provisions and terms mutually agreed upon and specified herein, the duly authorized officers and/or representatives of both parties hereby affix their signatures this 30th day of December 1996. SIMPSON STRONG - TIE SHEET METAL WORKERS' SAN LEANDRO BRANCH INTERNATIONAL ASSOCIATION LOCAL UNION NO. #371 By: /s/Murray Daniels By: /s/Christopher Boreliz ------------------------ ------------------------ Murray Daniels Christopher Boreliz /s/Edward Davis /s/Keenan Fincher ------------------------ ------------------------ Edward Davis Keenan Fincher /s/Michael Plunk /s/Maryiln Caluya ------------------------ ------------------------ Michael Plunk Maryiln Caluya /s/Robert O'Connor /s/Louie Liwanag ------------------------ ------------------------ Robert O'Connor Louie Liwanag /s/Nelson Martin ------------------------ Nelson Martin /s/Clarence Garcia ------------------------ Clarence Garcia ADDENDUM TO THE PRESENT COLLECTIVE BARGAINING AGREEMENT BETWEEN SIMPSON STRONG-TIE AND SHEET METAL WORKERS' LOCAL #371 Article IV. Check-Off Section 5. All bargaining unit employees shall receive once each calender month a supplemental payment as follows: Effective January 1, 1997, ten cents ($.10) per hour for each hour paid. The Company shall forward the supplemental payment to the Local Union once each calendar month for the preceding month hours paid as a supplemental dues payment. Article VI. Wages All employees shall receive a fifty-cent ($.50) pay increase across the board effective January 1, 1997 Article XI. Shifts Section 5. In the event there is a third shift, the Company shall use the least senior qualified employees. Article XV. Pension The pension shall be increased for all employees effective January 1, 1997, ten cents ($.10) per hour. All employees shall receive a $500.00 signing bonus effective January 1, 1997. SIMPSON STRONG - TIE SHEET METAL WORKERS' SAN LEANDRO BRANCH INTERNATIONAL ASSOCIATION LOCAL UNION NO. #371 By: /s/Murray Daniels By: /s/Christopher Boreliz ------------------------ ------------------------ Murray Daniels Christopher Boreliz /s/Edward Davis /s/Keenan Fincher ------------------------ ------------------------ Edward Davis Keenan Fincher /s/Michael Plunk /s/Maryiln Caluya ------------------------ ------------------------ Michael Plunk Maryiln Caluya /s/Robert O'Connor /s/Louie Liwanag ------------------------ ------------------------ Robert O'Connor Louie Liwanag /s/Nelson Martin ------------------------ Nelson Martin /s/Clarence Garcia ------------------------ Clarence Garcia EX-10 5 STOCK PURCHASE AGREEMENT EXHIBIT 10.4 ------------ STOCK PURCHASE AGREEMENT This STOCK PURCHASE AGREEMENT is made as of March 7, 1997, by and among the following parties: Simpson Strong-Tie Company Inc., a California corporation ("SST"); Simpson Strong-Tie Canada, Limited, a corporation incorporated under the laws of the Province of Ontario ("SST-Canada" and, collectively with SST, "Buyer"); Robert Anthony Cunningham ("R. Cunningham"); Diane Saroginie Cunningham ("D. Cunningham"); D. Cunningham, Joan Phyllis Seetaram, Martin I. Silver and Tracey Eichinger, as trustees of The Angela Cunningham Trust dated May 17, 1985 (the "Trust" and, collectively with R. Cunningham and D. Cunningham, the "ADB Sellers"); D. Cunningham Holdings Inc., an Ontario corporation ("DCHI"); and Joan Phyllis Seetaram ("Seetaram" and, collectively with the ADB Sellers and DCHI, the "Sellers"), with reference to the following facts: Seetaram Holdings Limited, an Ontario corporation ("Holdings"), all of the outstanding capital stock of which (the "Holdings Stock") is owned by Seetaram, Isometric Limited, an Ontario corporation ("Isometric"), all of the outstanding capital stock of which is owned by Holdings, A.D.B. Heading Limited, an Ontario corporation ("ADB"), all of the outstanding capital stock of which (the "ADB Stock") is owned by the ADB Sellers, and Dual Fastening, Inc., a Georgia corporation ("DFI" and, collectively with Holdings, Isometric and ADB, the "Companies"), all of the outstanding capital stock of which (the "DFI Stock") is owned by DCHI, are engaged in the business of developing, producing, manufacturing, marketing and selling, principally in Canada and the United States of America (the "U.S."), fastening products used in building construction. SST is engaged in a similar business. Sellers and Buyer (collectively, the "Parties") consider it desirable and in their respective best interests that Buyer purchase from Sellers and Sellers sell to Buyer all of the outstanding capital stock of each of the Holdings, ADB and DFI, on the terms and conditions in this Agreement. All references herein to "dollars" or "$" mean U.S. dollars, except as otherwise expressly indicated. NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements herein, the Parties agree as follows: 1. Purchase and Sale. 1.1. Assignment of Stock. At the Closing (as hereinafter defined), Seetaram shall sell, assign, transfer and convey to SST-Canada all right, title and interest, of record and beneficial, in and to all of the Holdings Stock, the ADB Sellers shall sell, assign, transfer and convey to SST-Canada all right, title and interest, of record and beneficial, in and to all of the ADB Stock, and DCHI shall sell, assign, transfer and convey to SST all right, title and interest, of record and beneficial, in and to all of the DFI Stock, in each case subject to no, and free of any, liens, claims, pledges, mortgages, encumbrances, security interests, defects in title, community property rights, restrictions on transfer and other defects in title or restrictions (collectively, "Liens"). To that end, Sellers shall deliver to SST-Canada and SST, as provided above, at the Closing all certificates or other instruments representing or evidencing the Holdings Stock, the ADB Stock and the DFI Stock (collectively, the "Company Stock"), duly endorsed for transfer to SST-Canada or SST, as provided above, or accompanied by stock powers duly executed by the respective Sellers transferring and assigning the Company Stock to SST- Canada or SST, as provided above, all in form and substance satisfactory to Buyer. 1.2. Purchase of Stock. At the Closing (as hereinafter defined), Buyer shall purchase from Sellers, respectively, all right, title and interest, of record and beneficial, in and to all of the Company Stock, as herein provided. 1.3. Base Purchase Prices. The base purchase prices for the Company Stock (each, a "Base Stock Price"), expressed in Canadian dollars, shall be as follows: Base Stock Price Company Stock (Canadian Dollars) -------------- ------------------ Holdings Stock $ 6,000,000 ADB Stock $ 1,800,000 DFI Stock $ 2,200,000 -------------- Total $ 10,000,000 ============== 1.4. Payment. At the Closing (as hereinafter defined), Buyer shall pay the total Base Stock Prices, by delivering to Morris Silver Lewis, Barristers-at-Law and Solicitors, counsel for Sellers, a certified cheque drawn on a Canadian Chartered Bank, in immediately available Canadian dollars, payable to the order of "Morris Silver Lewis, in trust", or payable to such other person or persons as Sellers may direct by notice signed by all Sellers and received by Buyer at least three days prior to the Closing. On making such payment, Buyer shall be deemed to have paid in full the Base Stock Prices for all of the Stock, and the $25,000 deposit (the "Deposit") heretofore lodged by SST with its counsel, together with any interest earned thereon, shall thereupon be returned to SST. 1.5. Closing. The purchases and sales of the Company Stock shall be consummated in accordance with this Agreement at a closing (the "Closing") to be held at the offices of Stikeman, Elliott, Barristers & Solicitors, Canadian counsel for Buyer, at Suite 5300, Commerce Court West, Toronto, Canada, at 10:00 A.M. Toronto time, on March 10, 1997, or on such later date as all of the conditions in section 9 are satisfied or waived or on such earlier or later date as the Parties may determine by mutual agreement (the date of the Closing being hereinafter called the "Closing Date"); provided that the Closing Date shall not be later than April 15, 1997. 1.6. Earn-Out Payments. For each of the four calendar years 1997, 1998, 1999 and 2000 (each, an "Earn-Out Year") for which Mechanical Anchor Sales (as hereinafter defined) exceed the Mechanical Anchor Sales for the preceding calendar year, SST-Canada shall pay to Sellers an additional amount (each, an "Earn-Out Payment") equal to ten percent of such excess; provided that no Earn-Out Payment shall accrue or be due or payable for any Earn-Out Year for which the Mechanical Anchor Sales are not more than $6,395,380. For purposes of this section 1.6, "Mechanical Anchor Sales" means the aggregate net revenues (determined by Buyer in accordance with U.S. generally accepted accounting principles ("GAAP") from Buyer's sales reports prepared in the ordinary course of Buyer's business) for sales by Buyer and its affiliates (including the Companies) of Mechanical Anchor Products identified on Schedule 1.6 attached hereto, reduced by charges for returns of any of such products; provided that Schedule 1.6 may be amended at any time or from time to time by agreement between R. Cunningham and SST. Mechanical Anchor Sales for calendar year 1996 shall be deemed to have been $6,395,380 (including $5,552,380 by the Companies and $843,000 by SST and its subsidiaries). Buyer shall furnish to R. Cunningham within forty-five days after the end of each calendar quarter ending on or prior to December 31, 2000, commencing with the calendar quarter ending March 31, 1997, a report showing the Mechanical Anchor Sales for that quarter. Not later than March 31 of the year following each Earn- Out Year, Buyer shall furnish to R. Cunningham copies of all such sales reports for such Earn-Out Year. SST-Canada shall make each Earn-Out Payment that accrues as provided in this section 1.6 by check or wire transfer in accordance with instructions provided by the respective Sellers entitled thereto not later than March 31 of the calendar year following the respective Earn-Out Year to the following parties in the following proportions: R. Cunningham 4.5% D. Cunningham 4.5% Trust 9.0% DCHI 22.0% Seetaram 60.0% 2. Publicity. Prior to the Closing Date, no publicity, release, announcement, notice, statement or report concerning the transactions contemplated hereby shall be issued by any Party without the prior approval of the form and substance thereof by SST and R. Cunningham; provided that SST and its affiliates shall have the right, in their absolute discretion, to make or file with the U.S. Securities and Exchange Commission or any other U.S. or Canadian governmental agency such releases, announcements, notices, statements or reports as they may determine to be necessary or advisable for Buyer or any of its affiliates to comply with applicable laws, rules and regulations. 3. Representations and Warranties of Buyer. Buyer hereby represents and warrants to, and agrees with, Sellers, as follows: 3.1. Organization. SST and SST-Canada are corporations duly organized, validly existing and in good standing under the laws of the State of California and the Province of Ontario, respectively, and each has full corporate power and authority to carry on its business as now conducted and to own its assets. Buyer is duly qualified to do business and is in good standing as a foreign corporation in each jurisdiction where, by virtue of its business conducted therein, it is required to be so qualified, except in any jurisdiction where the failure to be so qualified does not affect Buyer materially and adversely. All of the outstanding capital stock of SST-Canada is owned of record and beneficially by SST. 3.2. Litigation. There are no actions, suits, proceedings or investigations pending before any court or governmental agency or before any arbitrator of any kind, or any order, injunction or decree outstanding, or, to the knowledge of Buyer, threatened, against Buyer or against or relating to its property, assets or business, that would materially and adversely affect the right, power or capacity of Buyer to enter into and perform its obligations under this Agreement. 3.3. No Breach. The execution and delivery of, and the transactions contemplated by, this Agreement do not and will not result in a breach of the terms or conditions of or constitute a default under, or violate, the Articles of Incorporation or Bylaws of Buyer or any agreement or other document or undertaking, oral or written, to which Buyer is a party or by which it is bound. 3.4. Authority for Agreement. All corporate and other proceedings required to be taken by or on behalf of Buyer to authorize Buyer to enter into and carry out this Agreement have been duly and properly taken. This Agreement has been duly executed and delivered by Buyer. This Agreement is the legal, valid and binding agreement of Buyer, enforceable against Buyer in accordance with its terms. 3.5. Brokers. All negotiations relative to this Agreement and the transactions contemplated hereby have been carried on directly by Buyer with Sellers, without the intervention of any broker or investment banker or other third party engaged by Buyer. Buyer has not engaged, consented to or authorized any broker, investment banker or other third party to act on its behalf, directly or indirectly, as a broker or finder in connection with the transactions contemplated by this Agreement. 3.6. Investment Canada. Buyer is a WTO Investor within the meaning of the Investment Canada Act. 4. Representations and Warranties of Sellers. Sellers, jointly and severally, hereby represent and warrant to Buyer, and agree with Buyer, as follows: 4.1. Organization. Each of the Companies and Sellers (collectively, the "Selling Parties") that is incorporated is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation and has full corporate power and authority to carry on its business as now conducted and to own its assets. The Trust is duly organized, validly existing and in good standing as a trust under the laws of each jurisdiction that govern the Trust and has full power and authority to carry on its business as now conducted and to own its assets. Each of such corporations is duly qualified to do business and is in good standing as an extra-provincial or foreign corporation in each jurisdiction where, by virtue of its business conducted therein, it is required to be so qualified, except in any jurisdiction where the failure to be so qualified does not affect it materially and adversely. True and complete copies of the articles or certificate of incorporation, trust instrument, bylaws and other charter documents, as currently in effect, of each such corporation and the Trust have been delivered to Buyer. The minute books of each such corporation contain substantially accurate records of all meetings of its board of directors, all committees of its board of directors, and its shareholders since its incorporation and accurately reflect all material transactions to which such minutes refer. 4.2. Capitalization. The authorized capital stock of the Selling Parties that are corporations, the issued and outstanding capital stock of those corporations and the record and beneficial owners thereof and the number of shares owned by each are as follows: Issued and Record and Outstanding Beneficial Corporation Authorized Capital Stock Shares Owner ----------- ----------------------------- ----------- ------------- DCHI unlimited Class A, B, C, D 1 Common D. Cunningham and E Shares and unlimited Common Shares DFI 1,500 Common Shares 500 Common DCHI ADB 100,000 Common Shares, no par 10 Common R. Cunningham value 10 Common D. Cunningham 20 Common Trust Isometric 3,600 Non-Voting Special 10 Common Holdings Shares, par value $10 each, and 400 Common Shares, no par value Holdings 10,000 Common Shares, no par 100 Common Seetaram value, 4,000 Class A Non- 100 Class A Seetaram Cumulative,Non-Voting, Non- Special Partici pating, Special Shares, par value $10 each, and 5,000 Class B Non- Cumulative, Voting, Non- Participating Shares, par value $10 each All of such shares that are issued and outstanding have been duly and validly issued and are outstanding, fully paid, nonassessable and free of all Liens and preemptive and similar rights. The record and beneficial owners identified above in this section 4.2 own all right, title and interest in and to the shares set forth above, subject to no Lien or preemptive or similar rights. Sellers have contributed to the capital of the respective Companies the amounts of all debts and liabilities of any of Companies to any of Sellers shown on the 1996 Financial Statements (as that term is defined in section 4.6), including, without limitation, the contribution by DCHI to the capital of DFI in the amount of $38,688, or subsequently incurred (other than debts for ordinary and customary employee compensation incurred in the ordinary course of the Companies' businesses), and none of the Companies has any debt, duty, obligation or liability to any of Sellers. 4.3. Subsidiaries. None of the Companies has any subsidiaries or owns of record or beneficially any capital stock or other equity securities issued by any person, except that Isometric is a wholly owned subsidiary of Holdings. 4.4. Options, Warrants, Convertible Securities, etc. Except as provided in this Agreement, there are no outstanding options, rights, warrants, convertible securities, commitments or agreements calling for the issuance, assignment, transfer, sale, pledge, hypothecation or other disposition of any capital stock of any of the Selling Parties that is a corporation or of any securities convertible into or exchangeable for any capital stock of any such corporation. 4.5. Officers and Directors. Schedule 4.5 attached hereto contains a complete and correct list of the names of all officers and directors of each of the Selling Parties that is a corporation. 4.6. Financial Statements. Except as set forth in Schedule 4.6 attached hereto, the books of account of each of the Companies are correct and complete in all material respects and fairly present its income, expenses, assets and liabilities in accordance with GAAP and with Canadian generally accepted accounting principles ("Cdn.GAAP"), as appropriate, consistently applied. Except as set forth in Schedule 4.6, the unaudited financial statements of the Companies for the two years ended December 31, 1995, and the combined audited financial statements of the Companies for the eleven-month period ended November 30, 1996, all of which have been delivered by Sellers to Buyer, fairly present the Companies' financial position as of said dates and the results of their operations for such periods and were prepared in conformity with GAAP or Cdn.GAAP, as appropriate, consistently applied throughout the periods covered thereby. Such financial statements for the eleven-month period ended November 30, 1996 (the "1996 Financial Statements") have been prepared in accordance with GAAP, consistently applied, and have been audited by Coopers & Lybrand, Chartered Accountants, independent certified public accountants. None of the Companies has any material liabilities or obligations, whether accrued, absolute, contingent or otherwise, and whether due or to become due, which arose or, in accordance with GAAP, should be accrued, with respect to any period ended on or prior to November 30, 1996, other than (a) those disclosed, or reflected as liabilities or obligations, or reserved against, on the 1996 Financial Statements, (b) those disclosed herein or on any schedule hereto or (c) those fully covered by insurance and not otherwise materially adversely affecting the financial condition, business, assets or operations of any of the Companies. The current working capital of each of the Companies is consistent with its past practices and sufficient for the purposes of operating its business in its present form and at its present level of activity and for the purpose of fulfilling in accordance with their respective terms all purchase orders, projects and contractual obligations which have been placed with or undertaken by it. 4.7. Liabilities Since November 30, 1996. None of the Companies has any liabilities or obligations material to it, whether accrued, absolute, contingent or otherwise, and whether due or to become due, which arose, or, in accordance with GAAP, were accrued or should be accrued, with respect to any period that began after November 30, 1996, and none of Sellers has any knowledge of any circumstances, conditions, events or arrangements that would give rise to any such liabilities or obligations of any of the Companies in the future, other than (a) those incurred in the ordinary course of its business, which have not been in the aggregate materially adverse to the business or financial condition of any of the Companies, (b) those disclosed on any schedule hereto, (c) those reasonably incurred in connection with this Agreement and the transactions contemplated hereby, and (d) those covered by insurance and not otherwise materially adversely affecting the financial condition, business, assets or operations of any of the Companies. 4.8. Actions Since November 30, 1996. Except as reflected in the 1996 Financial Statements and except as otherwise expressly set forth in or contemplated by this Agreement, since November 30, 1996, none of the Companies has (a) and none of Sellers has, issued or sold, or agreed to issue or sell, or purchased, or agreed to purchase any capital stock of any of the Companies or securities convertible into or exchangeable for such capital stock, or any options, warrants, rights or calls to purchase such capital stock, or other securities, (b) incurred any obligation or liability, absolute or contingent, except those to which clauses (a) through (d) of section 4.7 refer, (c) discharged or satisfied any Lien, except in the ordinary course of business, or paid or satisfied any liability other than liabilities as of November 30, 1996, to which clauses (a) through (c) of section 4.6 refer or liabilities to which clauses (a) through (d) of section 4.7 refer, in each case only in the ordinary course of business, (d) entered into, or modified, any employment or consulting agreement, or made any wage or salary increases or granted any bonuses, except in the normal employee or executive review process, which has been fully disclosed to Buyer in writing, (e) subjected to Lien any of its properties or assets, (f) sold, assigned or transferred any of its properties or assets, except in the ordinary course of business, (g) entered into any transaction not in the ordinary course of business, (h) waived any rights of substantial value, or cancelled, modified or waived any debts owed to it in excess of $10,000 in the aggregate, (i) declared, paid or set aside any dividends or other distributions or payments on its capital stock, (j) made any loans or advances to any person or assumed, guaranteed, endorsed or otherwise become responsible for obligations of any person, except for advances to unaffiliated third parties not in excess of $10,000 in the aggregate, (k) except as described in Schedule 4.7 attached hereto, made any payment to any of Sellers in respect of any debt of any of the Companies to any of Sellers in any capacity other than ordinary and customary employee compensation paid in the ordinary course of business, (l) made any change or amendment in its articles or certificate of incorporation, or other charter documents, (m) effected any merger, consolidation, recapitalization, stock split, stock dividend, reorganization or other transaction affecting any of its capital stock, (n) made any illegal payments to governmental or quasi-governmental officials, or any payments to customers for the sharing of fees or to customers or suppliers for the rebating of charges, or other reciprocal practices, or (o) entered into any agreement, commitment or understanding to do any of the foregoing. 4.9. Adverse Developments. Since November 30, 1996, there has not occurred (a) any materially adverse change in the business, assets, results of operations or financial condition of any of the Companies, or (b) any loss or destruction, whether or not covered by insurance, of any material portion of the assets of any of the Companies which materially adversely affects the ability of any of the Companies to carry on its business as currently conducted, and none of Sellers knows of any development that may give rise to any of the foregoing. 4.10. Taxes. All taxes, including, without limitation, income, property, sales, use, occupancy, excise, franchise, added value, employees' withholding and Social Security taxes, imposed by Canada, the U.S. or any other country or by any province, state, municipality, subdivision or instrumentality of Canada, the U.S. or any other country or by any other taxing authority, which have become due and payable by any of the Companies, and all interest and penalties thereon, whether disputed or not, have been paid in full or adequately provided for by reserves shown in its books of account. All deposits required by law to be made by any of the Companies with respect to employees' withholding taxes, and income, franchise or capital taxes of any of the Companies, have been duly made, and all income or franchise tax returns of each of the Companies were true and complete and have been filed as and when required by applicable law. As of November 30, 1996, none of the Companies was liable for the payment of any taxes, including, without limitation, income, gross receipts, property, sales, use, occupancy, excise, value added or franchise taxes, in any jurisdiction, other than as set forth herein or in the 1996 Financial Statements. No deficiency or adjustment in respect of Canadian, U.S., provincial, state, local or foreign income taxes has been assessed against any of the Companies and remains unpaid, other than such taxes or assessments as are being contested in good faith and which have been disclosed to Buyer in writing, and none of Sellers has knowledge of any unassessed tax deficiency proposed or threatened against any of the Companies. The Canadian federal income tax liability of Isometric and ABD has been assessed for all fiscal years to and including the year ended December 31, 1995. There has been no reassessment filed and no notice of objection by any taxing authorities. The U.S. Federal and state tax returns of DFI have been filed with all tax authorities having jurisdiction, and the time for audit thereof by tax authorities having jurisdiction has expired for all tax years ended on or prior to December 31, 1993. No examination of any tax return of any of the Companies is currently in progress, there are no outstanding agreements or waivers extending the statutory period or providing for an extension of time with respect to the assessment or reassessment of tax or the filling of any tax return or any payment of any tax by any of the Companies (except that DFI routinely requests extension of the time for the filing of its tax returns), and there are no claims now threatened or pending against any of the Companies in respect of taxes or any matters under discussion with any governmental entity relating to taxes. DFI requested such an extension for the year ended March 31, 1996, and DFI's tax returns for that year were prepared and filed in a timely manner. Each of the Companies has withheld from each payment made by it the amount of all taxes and other deductions required to be withheld therefrom and has paid the same to the proper taxing or other authority within the time prescribed under any applicable law. None of Sellers is a nonresident person of Canada within the meaning of the Income Tax Act (Canada). 4.11. Ownership of Assets. Except as set forth in Schedule 4.11 attached hereto, each of the Companies owns outright and has good and marketable, indefeasible title to all of its assets and properties, tangible and intangible (including all assets reflected in the 1996 Financial Statements, except those disposed of in the ordinary course of business since November 30, 1996), and good title to its leasehold estates, in each case free and clear of all Liens, in each case except for (a) Liens for current taxes not delinquent, or taxes being protested in good faith (such protests being set forth in Schedule 4.11), and (b) such imperfections in the title thereto and Liens, if any, as do not materially detract from the value, or interfere with the present or continued use, of its property, or otherwise impair its business or operations. None of the properties or assets, the value of which is reflected in the 1996 Financial Statements, is held by any of the Companies as lessee or subject to any lease or as conditional vendee under conditional sale or other title retention agreement or as optionee under any option to purchase. Each of the Companies owns or has the right to use all assets and properties that are used or useful in its business, subject to no Liens, excepting only those described in the 1996 Financial Statements, those that will be discharged or released prior to the Closing and minor easements and exceptions, none of which will interfere with its use thereof after the Closing. 4.12. Intangible Assets. Schedule 4.12 attached hereto sets forth a list and brief description of all patents and patent rights and applications, and all trademarks, service marks, trade names and copyrights and applications for the registration thereof, and other intangible assets (other than trade secrets) owned or used by any of the Companies or in which it has an interest. No person has any proprietary or other interest in any of such intangible assets or any trade secrets of any of the Companies and no third party has infringed on any of the properties so listed or has asserted the invalidity or unenforceability of any thereof. None of the Companies is infringing on any patent, copyright, trademark, service mark or other intangible right of any third party, and no proceedings have been instituted or are pending or are threatened, and no claim has been received by any of the Companies, alleging any such infringement. To the best knowledge of Sellers, none of the Companies, no activity in which any of the Companies is engaged, no product which any of the Companies manufactures, uses or sells and no process, method, packaging, advertising, or material that any of the Companies employs in the manufacture, marketing or sale of any such product, breaches, violates, infringes, interferes with, or requires payment for the use of any rights of any third party. Except as set forth in Schedule 4.12, none of the Companies is a party to or bound by any license or other agreement (as licensor or licensee or otherwise) providing for the payment or receipt of any royalty. 4.13. Litigation. Except as set forth in Schedule 4.13 attached hereto, there are no actions, suits, proceedings or investigations pending before any court or governmental agency or before any arbitrator of any kind, or any order, injunction or decree outstanding or, to the best knowledge of Sellers, threatened, against any of the Companies or against or relating to its property, assets or business, nor do any of Sellers know or have reasonable grounds to know of any basis for any such action, suit, proceeding, governmental investigation, order, injunction or decree. None of the Companies is in violation of any applicable law, regulation, ordinance, order, injunction, decree, award or other requirement of any governmental body, court or arbitrator relating to its property, assets or business, except for such law, regulation, ordinance, order, injunction, decree, award and other requirement of which Sellers have no actual or constructive knowledge and which would not have a material adverse effect on the business or financial condition of any of the Companies. 4.14. Agreements and Obligations. Except as set forth on Schedule 4.14 attached hereto, each of the Companies has performed all obligations required to be performed by it to the date hereof under all material agreements to which it is a party or by which it is bound, is not in default under any such agreement which would permit any other party to terminate or would give rise to a claim for damages by any other party, and none of Sellers knows of any default or alleged default thereunder by any other party or of any event which, with the giving of notice or the passage of time, or both, would become such a default by any of the Companies which would permit any other party to terminate or would give rise to a claim for material damages against the defaulting party or such other party. All such agreements are valid and in full force and effect and, to the best knowledge of Sellers, none of such agreements is subject to rescission or reformation and there are no circumstances or writings extrinsic to any of such agreements that would materially modify any of their terms, prevent their assignment or create a Lien on any of the Companies or any of its properties. Without limiting the generality of the foregoing, except as contemplated hereby or as set forth herein or in Schedule 4.14, none of the Companies is a party to or bound by any written or oral (a) material contract, commitment or arrangement that cannot by its terms be cancelled on notice of thirty days or less, (b) contractual obligation or liability of any kind to holders of its securities as such, (c) contracts or arrangements with its customers for the sharing of their fees, the rebating of charges to such customers or other similar arrangements, (d) contract for the purchase or sale of any materials, products or supplies, which contains any escalator, renegotiation or redetermination clause, (e) lease material to it for real or personal property, (f) union or other collective bargaining agreement, (g) contract, accepted order or commitment for the purchase of materials, products, supplies or equipment having a total contract price in excess of $10,000, (h) agreement or instrument evidencing or relating to indebtedness for borrowed money or creating any Lien on any property owned or used by any of the Companies, (i) contract which by its terms requires the consent of any party other than any of the Companies to the consummation of the transactions contemplated hereby, (j) contract containing covenants limiting the freedom of any of the Companies to compete in any line of business or with any person in any geographical area, (k) contract or option relating to acquisition by any of the Companies of any operating business, (l) irrevocable proxy, voting agreement, voting trust agreement or shareholder agreement, (m) option for the purchase of any asset, tangible or intangible, (n) contract or arrangement requiring the payment to any person of an override or similar commission or fee or (o) other agreement which was entered into other than in the ordinary course of business of any of the Companies. 4.15. Accounts Receivable. All accounts receivable reflected in the 1996 Financial Statements have arisen in the ordinary course of business, represent obligations due to the respective Companies and have been collected or are collectible in the ordinary course of business in the aggregate recorded amounts thereof, except to the extent set forth as reserves for bad debts in the 1996 Financial Statements. None of Sellers is indebted to any extent to any of the Companies. 4.16. Permits. Each of the Companies has all permits, licenses, orders, approvals, franchises and other rights and privileges necessary for it to carry on its business as presently conducted, except such permits, licenses, orders, approvals, franchises and other rights and privileges which no governmental authority has demanded be obtained and of which none of Sellers has any actual or constructive knowledge, and with respect to which the failure to obtain, if required, would not have a material adverse effect on the business or financial condition of any of the Companies. 4.17. Banking Arrangements. Schedule 4.17 attached hereto sets forth the name of each bank or other financial institution in or with which any of the Companies has an account, credit line or other credit arrangement or safety deposit box, the account or box number thereof, the names of all persons presently authorized to draw thereon or having access thereto, the balance thereof as of January 31, 1997, and a statement describing the purpose of each such account. 4.18. No Breach. The execution and delivery of, and the transactions contemplated by, this Agreement or any agreement or instrument entered into or to be entered into in connection herewith do not and will not result in a breach of the terms or conditions of or constitute (with or without the giving of notice or the passage of time) a default under, or violate, the articles or certificate of incorporation, bylaws or other charter documents of any of the Selling Parties that is a corporation or any lease, agreement, indenture, Lien or other document or instrument, or any undertaking, oral or written, or any law, rule, regulation, order, judgment or decree, or any other requirement or restriction, to which any of the Selling Parties is a party or by or to which he, she or it is bound or subject. 4.19. Authority for Agreement. All corporate and other proceedings required to be taken by or on behalf of each of the Selling Parties that is a corporation or trust to authorize it to enter into and carry out this Agreement and each other agreement or instrument entered into or to be entered into in connection herewith to which it is a party have been duly and properly taken. This Agreement has been, and each such other agreement or instrument will at the Closing have been, duly executed and delivered by each of the Selling Parties that is a party thereto. This Agreement is, and each such other agreement or instrument will be from and after the Closing Date, the legal, valid and binding agreements of each of the Selling Parties that is a party thereto, enforceable in accordance with the respective terms thereof. 4.20. Interests in Assets. None of the Selling Parties and no officer, director, shareholder or trustee of any of the Selling Parties that is a corporation or trust or any member of his or her family owns any property or rights, tangible or intangible, used in or related, directly or indirectly, to the business of any of the Companies, or the use of which is necessary for such business as now conducted. Each of the Companies owns all right, title and interest in and to all trade names, trademarks, service marks and copyrights necessary for the conduct of its business as now conducted, and all rights to registrations thereof. 4.21. Powers of Attorney. No person now holds any power of attorney granted by any of the Selling Parties or any of its officers, directors or trustees, as such. 4.22. Employees. (a) Schedule 4.22 attached hereto contains a true and complete list of all employees of each of the Companies, whether they are full-time or part-time, their salaries and wage rates, bonus arrangements, benefits, positions and length of service. Schedule 4.22 also contains a correct and complete list showing all amounts due or accrued for all salary, wages, bonuses, commissions, vacation with pay, pension benefits or other employee benefits relating to all employees. (b) Except for those written employment contracts identified in Schedule 4.22 (true and complete copies of which have been furnished to Buyer), none of the Companies has any written contracts of employment with any employees. (c) The business of each of the Companies is being operated in material compliance with all laws relating to employees, including employment standards, occupational health and safety and pay equity, and there are no outstanding orders or prosecutions under any such law. (d) No compliant is pending or, to the best knowledge of Sellers, threatened against any of the Companies before any employment standards branch or tribunal or human rights tribunal. (e) No unfair labour practice, complaint or grievance against any of the Companies is pending or, to the best knowledge of Sellers, threatened before any labour relations board or similar governmental entity. (f) There is no labour strike, dispute, slowdown or stoppage existing, pending or involving or, to the best knowledge of Sellers, threatened against any of the Companies. (g) No union representation question exists respecting the employees of any of the Companies. (h) No grievance which might have a material adverse effect on any of the Companies or the conduct of the business of any of the Companies exists, no arbitration proceeding arising out of or under any collective agreement is pending, and no claim therefor has been asserted. (i) No collective bargaining agreement is currently being negotiated by any of the Companies with respect to its employees and there are no collective bargaining agreements in force with respect to any of the employees of any of the Companies. (j) No employee of any of the Companies has any agreement as to length of notice required to terminate his or her employment, other than such as results by law from the employment of an employee without agreement as to such notice or as to length of employment. (k) All vacation pay (including all banked vacation pay), bonuses, commissions and other employee benefit payments are reflected and have been accrued in the books and records of the respective Companies. (l) No person or party (including, but not limited to, governmental agencies of any kind) has asserted any claim, or has any basis for any action or proceeding, against any of the Companies under or arising out of any statute, ordinance or regulation relating to discrimination in employment or employment practices. (m) None of the Companies is a party to or bound by any contract, agreement or commitment by the terms of which any person, firm, corporation, business, trust or other individual or entity is or may become entitled (for any reason or in any capacity) to any share in the proceeds, earnings or profits of any of the Companies or of any department, division or other unit of any of the Companies, and none of the Companies has any pension, retirement, bonus, incentive, profit sharing, deferred compensation or other program, plan, contract, agreement or commitment in force for the benefit of any shareholders, directors, officers, employees or consultants of any of the Companies, except as described on Schedule 4.22. (n) No person or party has asserted any claim under which any of the Companies has any liability under any health, sickness, disability, death, medical, surgical, hospital or similar benefit plan or arrangement (whether legally binding or not) maintained by any of the Companies, or to or by which any of the Companies is a party or is subject or is bound, or under any workers' compensation or similar law, which is not fully covered by insurance maintained with reputable, financially responsible insurers. 4.23. Insurance. Schedule 4.23 attached hereto contains a correct and complete list of all insurance policies that are maintained by each of the Companies, together with a brief description of each such policy, including the type of policy, name of insurer, coverage allowance, expiration dates, annual premiums and any pending claims thereunder. None of the Companies has failed to pay or is in default with respect to the payment of any premiums for or under any such insurance policy. None of the Companies has failed to give any notice or to present any claim under any such insurance policy in a due and timely fashion. To the best knowledge of Sellers there are no circumstances in respect of which any person may make a claim against any of the Companies, whether covered by insurance or not. Such policies are in full force and effect and are free from any right of termination on the part of the insurers, except on notice as stipulated in such policies and no such notice has been received by any of the Companies. True and complete copies of such insurance policies and the most recent inspection reports received from insurance underwriters have been delivered to Buyer. There has not been any material adverse change in the relationship of any of the Companies with any of its insurers, in the availability of coverage, or in the premiums payable pursuant to such policies. Included in Schedule 4.23 is a list setting forth any and all material claims, with reasonable particulars, made under any policies of insurance maintained by or for the benefit of each of the Companies since January 1, 1993. 4.24. Condition of Assets. All of the assets of each of the Companies are in good operating condition and repair and in compliance with all applicable laws and regulations. The use and operation of such assets is in full compliance with applicable building codes, environmental, zoning and land use laws, and all other local, state, province and national laws and regulations. All inventory of each of the Companies is in good and merchantable condition, reasonably in balance and currently of a usable and saleable quality. 4.25. Environmental Matters. Each of the Companies is in compliance with, and none of the Companies has any liability under, any Canada, U.S., province, state or other statute, law, rule, regulation or ordinance relating to the environment or to the discharge of matter into the air, ground or water or to the generation, disposal or storage of matter, which liability arises or results from or by reason of the ownership or operation of any of the properties or assets of, or the operation of any business or activity by, any of the Companies. There has been no production, transportation, disposal or storage on, to, from or in any real property owned, used or occupied by any of the Companies of any hazardous waste or other toxic substance by any of the Companies or, to the best knowledge of Sellers, by any previous owner or tenant of any of such real property. To the best knowledge of Sellers, no claims, actions, suits, proceedings, investigations or inquiries are pending or are contemplated or have been threatened and no judgments have been entered by or before any court or governmental authority or agency concerning any such statutes, laws, rules, regulations or ordinances or any such production, transportation, disposal or storage. 4.26. Brokers. All negotiations relative to this Agreement and the transactions contemplated hereby have been carried on directly by Sellers with Buyer, without the intervention of any broker or investment banker or other third party engaged by any of the Selling Parties. None of the Selling Parties has engaged, consented to or authorized any broker, investment banker or other third party to act on his, her or its behalf, directly or indirectly, as a broker or finder in connection with the transactions contemplated by this Agreement. 4.27. Use of Property. None of the properties owned or occupied by any of the Companies or the occupancy or operation thereof is in violation of any law or any building, zoning or other ordinance, code or regulation, in such manner as to materially interfere with the use and occupancy thereof in the ordinary course of business of any of the Companies. 4.28. Disclosure. None of the information furnished by any of the Selling Parties to Buyer herein or in connection herewith contained any statement of material fact that was not true and complete as of its date or omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading as of its date. 4.29. Knowledge. Where any representation or warranty contained in this Agreement is expressly qualified by reference to the best knowledge of Sellers, or where any other reference is made herein to the knowledge of Sellers, it shall be deemed to refer to the knowledge of each of the Selling Parties. Sellers further confirm that they have made due and diligent inquiry of such persons (including appropriate officers, directors, employees, accountants, consultants and lawyers of or for each of the Companies) as they consider necessary as to the matters that are the subject of such representations, warranties or references. 5. Confidential Information. Each Party agrees that, until the Closing, such Party and its representatives will hold in confidence all information and documents received from any of the other Parties and, if the transactions contemplated hereby are not consummated, such Party shall continue to hold such information and documents in confidence and shall return to the other Parties all such documents and information in written form (including the documents annexed to this Agreement) then in such Party's possession without retaining copies thereof, and from and after the Closing, each of the Selling Parties shall hold in confidence and deliver to Buyer (without retaining copies) all such documents and information and all documents and information of or relating to any of the Companies; provided that each Party's obligation under this section 6 to maintain such confidentiality shall not apply to any information or documents that are in the public domain at the time furnished by another Party or that are disclosed by another Party to any person having no duty of confidentiality with respect thereto through any means other than as a result of any act of such Party or its agents, officers, directors or shareholders which constitutes a breach of this section 5. 6. Preclosing Covenants. From and after the date hereof and until the Closing on the Closing Date: 6.1. Access. Sellers shall afford Buyer and its officers, employees, lawyers, accountants and other authorized representatives free and full access, during regular business hours, to all books, records, personnel and properties of each of the Companies. To permit Buyer full opportunity to make such review, examination or investigation as Buyer may desire of the business and affairs of each of the Companies, Sellers shall cause the employees, accountants and lawyers of each of the Companies to cooperate fully with such review and examination and make full disclosure to Buyer of all information affecting the financial condition and business operations of each of the Companies, and Sellers shall promptly notify Buyer of any event which results, or with the passage of time might result, in any of Sellers' representations and warranties herein being or becoming false. Anything in this Agreement to the contrary notwithstanding, no inquiry or investigation by or on the behalf of Buyer, whether before or after the date hereof, shall constitute a waiver of, negate, abrogate or otherwise affect the validity of any representation, warranty or covenant of any of Sellers in, pursuant to or in connection with this Agreement or modify or affect any of Sellers' obligations or Buyer's rights herein or hereunder in the event of any breach of any such representation, warranty or covenant. 6.2. Conduct of Business. Sellers shall cause each of the Companies to conduct its business only in the ordinary course and not suffer or permit any change in any material respect of any business policy or practice of any of the Companies, without the prior written consent of Buyer. 6.3. Insurance. Sellers shall cause each of the Companies to maintain in force the insurance policies that it now maintains, except to the extent that they may be replaced with equivalent policies appropriate to insure adequately its business and properties at the same rates or at rates approved by Buyer. 6.4. Capital Stock; Dividends. Sellers shall not suffer or permit (a) any change to be made in the authorized, issued or outstanding capital stock of any of the Companies, (b) any securities convertible into or exchangeable for capital stock of any of the Companies to be authorized or issued, (c) any options, rights, warrants or calls to purchase capital stock of any of the Companies to be sold, issued or granted with respect to any capital stock or any other securities of any of the Companies, or (d) any of the Companies to declare, pay or commit to pay any cash or stock dividend or other distribution with respect to its capital stock. 6.5. Contracts and Commitments. Except as shall be approved in advance by Buyer in writing, or as is contemplated hereby, Sellers shall not suffer or permit any of the Companies to enter into any contract or commitment, except contracts or commitments in the ordinary course of business and involving either (a) an expenditure by it in any one transaction (other than purchases of materials) not in excess of $10,000 or (b) the purchase by it of a quantity of materials reasonably anticipated to be consumed or resold in less than six months. 6.6. Liabilities. Subject to section 6.5, Sellers shall not suffer or permit any of the Companies to incur any obligation or liability, absolute or contingent, except for those incurred in the ordinary course of its business which are not in the aggregate materially adverse to its business or financial condition, or to pay any obligation or liability other than the foregoing obligations and liabilities and those described in clauses (a) through (c) of section 4.6 and clauses (a) through (d) of section 4.7. 6.7. Other Actions. None of Sellers shall take or omit to take any action, and each shall exercise his, her or its best efforts to prevent the occurrence of any event, which would have violated any of Sellers' representations or warranties herein had such action been taken after November 30, 1996, and prior to the date hereof. 6.8. Banking Arrangements. Sellers shall not suffer or permit any of the Companies to cause, suffer or permit any change to be made in any of its banking arrangements. 6.9. Preservation of Business. Except as otherwise expressly provided herein, Sellers shall use their best efforts to preserve the business organizations of the Companies intact, keep available the services of the present officers (other than D. Cunningham and Seetaram), employees and consultants of the Companies, maintain the present customers and suppliers of the Companies and preserve the goodwill of the Companies. 6.10. Litigation. Sellers shall promptly notify Buyer of any lawsuits, claims, proceedings or investigations that are threatened or commenced by or against or affecting any of the Companies or any employee, consultant, officer or director of any of the Companies which might relate to or affect the business or assets of any of the Companies, including, without limitation, regular updates regarding the litigation between Chun Zu Machinery Industry Co. Ltd., plaintiff, and Isometric, defendant, in the Ontario (Canada) Court (General Division), Court File No. 95-CQ- 59977. 6.11. Monthly Statements. Sellers shall furnish to Buyer (a) within five days after the end of February 1997 and each subsequent calendar month, complete and correct reports of all sales by each of the Companies during that calendar month, and (b) within thirty days after the end of each such calendar month, complete and correct unaudited monthly financial statements of each of the Companies for such month. 6.12. Continued Effectiveness of Representations and Warranties. Each Party shall use his, her or its best efforts to conduct its business and affairs in such a manner that his, her or its representations and warranties herein shall continue to be true and complete on and as of the Closing Date as if made on and as of the Closing Date, and shall advise the other promptly in writing of any condition or circumstance that would cause any of such Party's representations or warranties herein to become untrue in any respect, which condition or circumstance shall be deemed excepted from such representations and warranties to the extent accepted by the other. 6.13. Consents. Prior to the Closing Date, Sellers shall procure all consents and waivers required under any contracts or by any governmental entities for the full and complete transfer of the Company Stock to Buyer or otherwise to evidence, effect or perfect the transactions contemplated hereby, except where, in the opinion of Buyer, the failure to obtain the consent or waiver would not have a material adverse effect on the business, condition or financial results of any of the Companies on or after the Closing Date. 7. Further Covenants. 7.1. Indemnity. 7.1.1. By Buyer. Buyer agrees to indemnify and defend Sellers and hold Sellers harmless from and against any and all claims, liabilities, damages, losses and expenses (including, without limitation, fees and expenses of lawyers and expert witnesses, costs of investigation and court costs) suffered or incurred by Sellers, as a direct or indirect result of any breach of any covenant, representation or warranty by Buyer herein or hereunder. 7.1.2. By Sellers. Sellers, jointly and severally, agree to indemnify and defend Buyer and its shareholders, controlling persons, affiliates, directors, officers, employees and agents and hold them harmless from and against any and all claims, liabilities, damages, losses and expenses (including, without limitation, fees and expenses of lawyers and expert witnesses, costs of investigation and court costs) suffered or incurred by any of them, as a direct or indirect result of any breach of any covenant, representation or warranty by any of Sellers herein or hereunder. 7.2. Further Assurances. Sellers shall cooperate with Buyer, at Buyer's request, after the Closing Date and without further consideration, (a) to execute, deliver, record and publish as appropriate such other certificates, instruments and documents of sale, assignment, transfer and conveyance of the Company Stock, and take such other action, as Buyer may reasonably request more effectively to convey, assign, sell and transfer to or vest in Buyer any and all of the Company Stock, (b) in the case of contracts, if any, to which any of the Companies is a party and which require the consent of any third party that is not received prior to the Closing Date, to continue to endeavor to obtain such consents promptly and, if any such consents are not obtainable, to provide Buyer with the benefit thereof in some other manner, and (c) to assist Buyer in connection with any actions, proceedings or arrangements or disputes relating to the Companies and their ownership of and other rights in their respective assets. The Parties shall each do or perform such further acts and things and execute and deliver such further certificates, instruments and other documents as may be reasonably necessary and proper to implement the intent of the Parties as expressed in this Agreement. 7.3. Proceedings. Each Party shall promptly inform the other of the making of any threat or claim or the commencement of any investigation, litigation or proceeding against or affecting the business of any of the Companies, its assets or any of the transactions contemplated hereby. 7.4. Sales Tax. Sellers shall pay when due, to the appropriate governmental authority or authorities, all stock transfer, sales, excise and other taxes and levies, if any, arising from the sale of any of the Company Stock hereunder. 7.5. Expenses. The Companies shall pay all reasonable and customary costs, expenses and fees incurred by Sellers on or prior to the Closing Date for the services of lawyers, accountants and other advisers retained by Sellers in negotiating the terms and conditions of this Agreement, making any investigation in connection herewith, preparing and executing this Agreement and any certificates, instruments and documents necessary in connection herewith and consummating the transactions contemplated hereby; provided that the fees and expenses of Coopers & Lybrand, Chartered Accountants, in connection with their audit of the 1996 Financial Statements, shall be borne one-half by the Companies and one-half by Buyer. 7.6. No Solicitation. Prior to the Closing Date, none of Sellers shall contact, solicit, discuss or negotiate with any person other than Buyer any of the transactions contemplated hereby or the possible sale to any person of any capital stock of any of the Companies or the assets of any of the Companies or any substantial part thereof. 7.7. Noncompetition. Subject to section 7.8, none of Sellers shall at any time within five years after the Closing Date directly or indirectly own an interest in, join, operate, control, participate in, or be connected as officers, employees, agents, independent contractors, consultants, partners, shareholders (except as holders of not more than one percent of the outstanding stock of any class of a corporation, the stock of which is actively and publicly traded) or principals with, any corporation, proprietorship, association or other entity or person engaged in any business that is competitive with any business of any of the Companies as conducted during the two-year period ending on the Closing Date. 7.8. Employment Arrangement with R. Cunningham. On or prior to the Closing Date, R. Cunningham and Isometric shall have agreed on a mutually satisfactory employment arrangement, whereby R. Cunningham shall be employed by Isometric from and after the Closing Date on terms satisfactory to Buyer. 7.9. Lawyers' Fees. If either Buyer or any of Sellers shall fail to perform any of its or their obligations under this Agreement or if a dispute arises concerning the meaning, interpretation or enforcement of any provision of this Agreement, the defaulting Party or Parties or the Party or Parties not prevailing in such dispute, as the case may be, shall pay any and all costs and expenses incurred by the other Party or Parties in enforcing or establishing its or their rights hereunder, including, without limitation, court costs, reasonable fees and expenses of lawyers and expert witnesses and all costs of investigation. 7.10. Risk of Loss. If, prior to the Closing, all or any material part of the assets or the business of any of the Companies is destroyed or damaged by fire or any other casualty or shall be appropriated, expropriated, condemned or seized by any governmental entity or other lawful authority, Buyer shall have the option, exercisable, in Buyer's absolute discretion, by notice given within three business days of Buyer's receipt of notice of such destruction, damage, appropriation, expropriation, condemnation or seizure: (a) to reduce the Base Stock Price for the Company Stock of each of the Companies affected thereby by an appropriate amount equal to the cost of repair, or, if destroyed or damaged beyond repair, by an amount equal to the replacement cost of the assets so damaged or destroyed and to complete the purchase hereunder; or (b) to complete the purchase without reduction of the Base Stock Prices, in which event all proceeds of insurance or compensation for appropriation, expropriation, condemnation or seizure shall be payable to the applicable Company and any and all right and claim of Sellers to any such amounts shall be assigned to the applicable Company; or (c) to terminate this Agreement and not complete the purchase, in which case all obligations of Buyer shall terminate forthwith on Buyer giving notice as required herein. 7.11. Other Negotiations. Sellers shall not, and shall not permit any of the Companies to, contact, commence or continue negotiations with, or otherwise discuss with any person other than Buyer, any merger, consolidation, sale of stock, sale of assets, joint venture, strategic alliance or other business combination involving any of the Companies. 8. Conditions Precedent to the Obligations of Sellers. The obligations of Sellers on the Closing Date to consummate the transactions contemplated hereby are subject to the fulfillment, prior to or on the Closing Date, of each of the following conditions, any one or more of which may be waived by R. Cunningham (for himself and on behalf of Sellers) (except when the fulfillment thereof is a requirement of law): 8.1. Representations, Warranties and Covenants. All representations and warranties of Buyer in this Agreement and in any written statement (including financial statements), certificate, schedule, exhibit, agreement or other document or instrument delivered pursuant hereto or in connection with the transactions contemplated hereby, shall have been true and complete on and as of the date hereof and shall be true and complete as of the Closing Date, as if made on and as of the Closing Date. Buyer shall have performed and complied with all covenants, agreements and conditions required by this Agreement to be performed or complied with by Buyer prior to or on the Closing Date. 8.2. No Actions. No action, suit or proceeding shall be pending, or to the knowledge of Buyer, threatened, before a court or governmental body, or instituted or threatened by any governmental agency, to restrain or prevent the carrying out of the transactions contemplated hereby. 8.3. Certificate. Buyer shall have delivered to Sellers a certificate, in form reasonably satisfactory to R. Cunningham (for himself and on behalf of Sellers), dated the Closing Date and signed by the President or Chief Financial Officer and the Secretary of Buyer, to the following effects: 8.3.1. Setting forth the names and specimen signatures of the officers and agents of Buyer authorized to execute and deliver this Agreement and the documents and instruments deliverable by Buyer hereunder; 8.3.2. Stating that all of the conditions set forth in this section 8 have been fulfilled on or prior to the Closing Date and Buyer is not in breach of or default under any provision of this Agreement; and 8.3.3. Stating that such certificate is being executed and delivered to induce Sellers to consummate the transactions contemplated hereby. 8.4. Other Documents. Buyer shall have duly executed and delivered to Sellers such other documents and instruments necessary to effect or evidence any of the transactions contemplated hereby as R. Cunningham (for himself and on behalf of Sellers) may reasonably request. 9. Conditions Precedent to the Obligations of Buyer. The obligations of Buyer on the Closing Date to consummate the transactions contemplated hereby are subject to the fulfillment, prior to or on the Closing Date, of each of the following conditions, any one or more of which may be waived by Buyer (except when the fulfillment thereof is a requirement of law): 9.1. Representations, Warranties and Covenants. All representations and warranties of Sellers in this Agreement and in any written statement (including financial statements), certificate, schedule, exhibit, agreement or other document or instrument delivered pursuant hereto or in connection with the transactions contemplated hereby, shall have been true and complete on and as of the date hereof and shall be true and complete as of the Closing Date, as if made on and as of the Closing Date. Sellers shall have performed and complied with all covenants, agreements and conditions required by this Agreement to be performed or complied with by them prior to or on the Closing Date. 9.2. No Actions. No action, suit or proceeding shall be pending, or to the knowledge of any of Sellers, threatened, before a court or governmental body, or instituted or threatened by any governmental agency, to restrain or prevent the carrying out of the transactions contemplated hereby or which might adversely affect the right of Buyer to own any of the Company Stock or of any of the Companies to own, operate or control its assets, property or business from and after the Closing Date. 9.3. Certificate. Sellers shall have delivered to Buyer a certificate, in form satisfactory to Buyer, dated the Closing Date and signed by each of Sellers that is a natural person, by each trustee of the Trust and by the President and the Secretary of DCHI, to the following effects: 9.3.1. Setting forth the names and specimen signatures of the officers of DCHI and the trustees of the Trust authorized to execute and deliver this Agreement and the documents and instruments deliverable by DCHI or the Trust hereunder; 9.3.2. Stating that all of the conditions set forth in this section 9 have been fulfilled on or prior to the Closing Date and that none of Sellers is in breach of or default under any provision of this Agreement; and 9.3.3. Stating that such certificate is being executed and delivered to induce Buyer to consummate the transactions contemplated hereby. 9.4. Business Relationships. Sellers shall have furnished to Buyer the names and addresses and all pertinent information regarding all employees, suppliers, distributors and others who have material business relationships with any of the Companies and shall have introduced Buyer to each of them, and Buyer shall be satisfied that each of such relationships may reasonably be expected to be continued from and after the Closing Date. 9.5. Approvals. Buyer shall have received all applicable governmental approvals, permits, consents and authorizations that Buyer considers necessary in connection with the transactions contemplated hereby and the operation after the Closing of the businesses of the Companies. 9.6. Due Diligence. Buyer shall have completed to its satisfaction such review, examination and investigation of Sellers, the Companies and the properties, businesses and affairs of the Companies, as Buyer considers necessary. 9.7. Financial Statements. The 1996 Financial Statements shall have been audited by Coopers & Lybrand, Chartered Accountants, in accordance with GAAP, and Buyer shall be satisfied with the 1996 Financial Statements. 9.8. Premises Lease. Isometric (as tenant) and Seetaram or a corporation owned by her (as landlord) shall have duly executed and delivered a lease, providing for monthly rent of $4.50 (in Canadian dollars) per square foot on a triple net basis for a term of one year from the Closing Date and four one-year renewal options in favor of Isometric, of the premises to be conveyed by Holdings to Seetaram or a corporation owned by her at 12 Ashbridge Circle, Woodbridge, Ontario, Canada, which lease shall be in substantially the form of Schedule 9.8 attached hereto; provided that, anything in this Agreement to the contrary notwithstanding, Buyer consents and agrees to the transfer and conveyance prior to the Closing Date of such premises by Holdings to Seetaram or a corporation of which Seetaram is the sole shareholder. 9. Opinion of Counsel. On the Closing Date, Sellers shall have delivered to Buyer an opinion, dated the Closing Date, in form and substance satisfactory to Buyer, of Morris Silver Lewis, Barristers and Solicitors, counsel for Sellers, to the effects stated in sections 4.1, 4.2, 4.3, 4.4, 4.5, 4.13, 4.16, 4.18 and 4.19 and to such other effects as Buyer may reasonably request. 9.10. Other Documents. Sellers shall have duly executed and delivered to Buyer such other documents and instruments necessary to effect or evidence any of the transactions contemplated hereby as Buyer may reasonably request. 10. Modification and Waiver. This Agreement may be amended or modified at any time only by a written instrument executed by the Parties, and any of the terms, covenants, representations, warranties or conditions hereof may be waived by a written instrument executed by the Party waiving compliance. The failure of any Party at any time or times to require performance of any provision hereof shall in no manner affect the right of such Party at a later time to enforce the same. No waiver by any Party of the breach of any term, agreement, covenant, representation or warranty in this Agreement as a condition to such Party's obligations hereunder shall release or affect any liability resulting from such breach, and no waiver of any nature, whether by conduct or otherwise, in any one or more instances shall be deemed to be or construed as a further or continuing waiver of any such condition or of any breach of any other term, agreement, covenant, representation or warranty. 11. Termination. This Agreement and transactions contemplated hereby may be terminated at any time prior to the Closing Date, as follows: (a) By mutual consent of the Parties; (b) By any Party if the Closing Date shall not have occurred on or prior to April 15, 1997, unless such delay shall have been caused by the breach of the Party seeking to terminate; (c) By any of Sellers (i) if any of the representations and warranties of Buyer herein or in any schedule, exhibit, agreement, certificate or other document or information delivered in connection herewith is false, which falsity affects Sellers materially and adversely, or (ii) if Buyer shall have failed to comply with or perform any covenant or agreement or to satisfy any condition on the part of Buyer to be complied with, performed or satisfied on or prior to the date of such termination; (d) By Buyer (i) if any of the representations and warranties of Sellers herein or in any schedule, exhibit, agreement, certificate or other document or information delivered in connection herewith is false, which falsity affects Buyer or any of the Companies materially and adversely, (ii) if any of Sellers shall have failed to comply with or perform any covenant or agreement or to satisfy any condition on the part of Sellers to be complied with, performed or satisfied on or prior to the date of such termination, or (iii) as provided in section 7.10. Any such termination under clause (c) or (d) of the preceding sentence shall be upon at least ten days' notice of termination given to the other Party by the Party seeking termination. On any termination in accordance with this section 11, no Party shall have any further rights or obligations under or in connection with this Agreement, except that the Parties' rights and obligations under sections 2, 5, 7.1 and 7.9 shall survive any such termination and except that no termination of this Agreement shall relieve or release any Party from such Party's liability for any breach or violation of such Party of any representation, warranty, covenant or agreement herein; provided that, if Buyer terminates this Agreement without due cause (due cause being defined as (1) any breach or violation by any of Sellers of their agreements in sections 6.1 and 7.11, or (2) any representation or warranty made by any of Sellers herein or in connection herewith is found by Buyer to be materially incorrect), Buyer shall forthwith cause the Deposit and any earnings thereon to be paid to the Companies in the proportions specified in section 1.6, but otherwise the Deposit and any earnings thereon shall be returned to Buyer. 12. Notices. Any notice, consent, demand or other communication required or permitted to be given hereunder shall be in writing and shall be deemed duly given and received when delivered personally, when transmitted by facsimile if receipt is acknowledged by the addressee, or one day after being deposited for next-day delivery with an internationally recognized overnight delivery service, all charges prepaid, properly addressed, as follows: If to Buyer, to: 4637 Chabot Drive, Suite 200 Pleasanton, CA 94588 United States of America Facsimile: 510-847-9114 Attention: Chief Financial Officer and 109 E. Main Street Whitesboro, TX 76273 United States of America Facsimile: 903-564-9348 Attention: David Hendricks With a copy (not by itself constituting notice) to: Shartsis, Friese & Ginsburg, LLP One Maritime Plaza, 18th Floor San Francisco, CA 94111 United States of America Facsimile: 415-421-2922 Attention: Douglas L. Hammer, Esq. If to any of Sellers, to: 12 Ashbridge Circle Woodbridge, Ontario L4L 3R5 Canada Facsimile: 905-856-0056 Attention: Robert A. Cunningham With a copy (not by itself constituting notice) to: Morris Silver Lewis 1 Yorkdale Road, Suite 403 Toronto, Ontario M6A 3A1 Canada Facsimile: 416-781-3110 Attention: Martin I. Silver, Esq. Any Party may change his, her or its address by notice hereunder to each other Party. 13. Successors and Assigns. This Agreement shall bind and inure to the benefit of the Parties and their respective heirs, executors, administrators, successors and assigns; provided that no Party shall assign this Agreement or any rights hereunder or delegate any duties hereunder, without the prior consent of each other Party, and any attempted or purported assignment or delegation without such consent shall be void; but provided further that SST or SST-Canada may, in its exclusive discretion and without the consent of any other Party, assign this Agreement or any or all of its rights hereunder or delegate any or all of its duties hereunder to any corporation controlled by, controlling or under common control with it, so long as it is not thereby released from any of its obligations hereunder without the prior consent of R. Cunningham on behalf of himself and Sellers. This Agreement is not intended, nor shall it be construed, to confer any enforceable rights on any person who is not a Party, other than an assignee of a Party as permitted hereby. 14. Joint and Several Obligations. The duties, obligations and liabilities of Sellers in or pursuant to this Agreement or any other agreement, certificate, instrument or other document to be executed by Sellers hereunder or in connection herewith (except any employment agreement or arrangement between Isometric and R. Cunningham) shall be joint and several, and each representation, warranty, covenant, agreement and condition of or to be performed or satisfied by Sellers in or pursuant to this Agreement or any other agreement, certificate, instrument or other document to be executed by Sellers hereunder or in connection herewith (except any employment agreement or arrangement between Isometric and R. Cunningham) shall be deemed to be the representation, warranty, covenant, agreement or condition of or to be performed by each and all of Sellers. 15. Governing Law. This Agreement shall be governed by and construed and interpreted in accordance with the laws of the State of California, without giving effect to principles of conflict of laws thereunder. 16. Entire Agreement. This Agreement contains the entire agreement of the Parties and supersedes all prior or contemporaneous negotiations, correspondence, understandings, letters of intent and agreements, whether written or oral, between or among the Parties, regarding the subject matter hereof. 17. Exhibits. All schedules and exhibits attached hereto and the documents and instruments delivered at the Closing are expressly made a part of this Agreement as fully as though completely set forth herein, and all references to this Agreement herein or in any of such documents and instruments (whether or not such references include a specific reference to such documents and instruments) shall be deemed to refer to and include all such documents and instruments. Any breach of or default under any provision of any of such documents and instruments, shall, for all purposes, constitute a breach or default under this Agreement. 18. Counterparts. This Agreement may be executed in any number of counterparts, or by different Parties in different counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. 19. Section Headings. The section headings in this Agreement are included for convenience of reference only and are not part of this Agreement. 20. Number and Gender. Whenever the context requires, the use in this Agreement of the singular number shall be deemed to include the plural and vice versa, each gender shall be deemed to include each other gender, and "person" shall be deemed to include, in addition to natural person, corporation, partnership, limited liability company, trust, association, firm or other entity or organization. IN WITNESS WHEREOF, this Agreement has been duly executed by or on behalf of the Parties as of the date first above written. BUYER: SELLERS: Simpson Strong-Tie Company Inc. /s/Robert A. Cunningham ----------------------------- By /s/Stephen B. Lamson Robert A. Cunningham ----------------------------- Stephen B. Lamson /s/Diane Saroginie Cunningham Chief Financial Officer ----------------------------- Diane Saroginie Cunningham for herself and as Trustee of The Simpson Strong-Tie Canada, Limited Angela Cunningham Trust dated May 17, 1985 By /s/Stephen B. Lamson /s/Joan Phyllis Seetaram ----------------------------- ----------------------------- Stephen B. Lamson Joan Phyllis Seetaram for Chief Financial Officer herself and as Trustee of The Angela Cunningham Trust dated May 17, 1985 /s/Martin I. Silver ----------------------------- Martin I. Silver as Trustee of The Angela Cunningham Trust dated May 17, 1985 /s/Tracey Eichinger ----------------------------- Tracey Eichinger as Trustee of The Angela Cunningham Trust dated May 17, 1985 D. Cunningham Holdings, Inc. By: /s/Diane S. Cunningham ----------------------------- Diane S. Cunningham President EX-11 6 STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
SIMPSON MANUFACTURING CO., INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER COMMON SHARE FOR THE THREE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 Exhibit 11 PRIMARY EARNINGS PER SHARE 1996 1995 1994 ------------ ------------ ------------ Weighted average number of common shares outstanding 11,422,995 11,316,073 9,690,411 Shares issuable pursuant to employee stock option plans, less shares assumed repurchased at the average fair value during the period 326,604 142,822 605,767 Shares issuable pursuant to the independent director stock option plan, less shares assumed repurchased at the average fair value during the period 3,635 1,072 - Shares issuable pursuant to stock bonus plan 1,950 600 8,700 Effect of 1994 share exchange: Additional common shares outstanding - - 17,893 Additional shares issuable pursuant to employee stock option plans - - 238,870 ------------ ------------ ------------ Number of shares for computation of primary net income per share 11,755,184 11,460,567 10,561,641 ============ ============ ============ Net income $ 19,720,638 $ 14,121,885 $ 5,450,764 Minority interest of employee shareholders - - (32,628) ------------ ------------ ------------ Net income for computation of net income per share $ 19,720,638 $ 14,121,885 $ 5,418,136 ============ ============ ============ Primary net income per share $ 1.68 $ 1.23 $ 0.51 ============ ============ ============
SIMPSON MANUFACTURING CO., INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER COMMON SHARE FOR THE THREE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 Exhibit 11 (Continued) FULLY DILUTED EARNINGS PER SHARE 1996 1995 1994 ------------ ------------ ------------ Weighted average number of common shares outstanding 11,422,995 11,316,073 9,690,411 Shares issuable pursuant to employee stock option plans, less shares assumed repurchased at the end of period fair value 409,191 214,375 618,157 Shares issuable pursuant to the independent director stock option plan, less shares assumed repurchased at the end of period fair value 4,522 1,824 - Shares issuable pursuant to stock bonus plan 1,950 600 8,700 Effect of 1994 share exchange: Additional common shares outstanding - - 17,893 Additional shares issuable pursuant to employee stock option plans - - 233,894 ------------ ------------ ------------ Number of shares for computation of fully diluted net income per share 11,838,658 11,532,872 10,569,055 ============ ============ ============ Net income $ 19,720,638 $ 14,121,885 $ 5,450,764 Minority interest of employee shareholders - - (32,628) ------------ ------------ ------------ Net income for computation of net income per share $ 19,720,638 $ 14,121,885 $ 5,418,136 ============ ============ ============ Fully diluted net income per share $ 1.67 $ 1.22 $ 0.51 ============ ============ ============
EX-21 7 SUBSIDIARIES OF THE REGISTRANT SIMPSON MANUFACTURING CO., INC. AND SUBSIDIARIES LIST OF SUBSIDIARIES OF SIMPSON MANUFACTURING CO., INC. AT MARCH 15, 1997 EXHIBIT 21 1. Simpson Holdings, Inc., a California corporation 2. Simpson Strong-Tie Company Inc., a California corporation 3. Simpson Dura-Vent Company, Inc., a California corporation 4. Simpson Strong-Tie International, Inc., a California corporation 5. Simpson Venture Capital Company, Inc., a California corporation 6. Simpson Manufacturing International Corporation, a Barbados corporation 7. Ackerman Johnson Fastening Systems, Inc., an Illinois corporation 8. Simpson Strong-Tie Canada, Limited., a Canadian corporation 9. Simpson Strong-Tie France, Limited., a French corporation 10. Patrick Bellion, S.A., a French corporation 11. Dual Fastening, Inc., a Georgia corporation Each subsidiary of Registrant does business using its respective name listed above, and Simpson Strong-Tie Canada, Limited, uses as a fictitious business name, "Isometric Limited." EX-23 8 CONSENTS OF EXPERTS AND COUNSEL SIMPSON MANUFACTURING CO., INC. AND SUBSIDIARIES CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS EXHIBIT 23 We consent to the incorporation by reference in the registration statements of Simpson Manufacturing Co., Inc. on Forms S-8 (File No. 33-85662 and File No. 33-90964) of our report dated January 31, 1997, except for Note 15 for which the date is March 11, 1997, on our audits of the consolidated financial statements and the financial statement schedule of Simpson Manufacturing Co., Inc. and subsidiaries as of December 31, 1996 and 1995 and for the years ended December 31, 1996, 1995, and 1994, which report is included in this Annual Report on Form 10-K. COOPERS & LYBRAND L.L.P. San Francisco, California March 26, 1997 EX-27 9 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the Consolidated Balance Sheet at December 31, 1996, and the Consolidated Statement of Operations for the twelve months ended December 31, 1996, and is qualified in its entirety by reference to such financial statements. 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 19,815,297 3,896,428 22,242,827 1,312,337 42,247,777 90,766,012 64,603,989 35,916,354 122,520,773 20,090,432 0 0 0 31,233,648 71,063,360 122,520,773 202,408,917 202,408,917 124,394,086 124,394,086 45,320,373 0 0 33,289,638 13,569,000 19,720,638 0 0 0 19,720,638 1.68 1.67 Interest income for the twelve months ended December 31, 1996, was $595,180.
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