<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 7, 1997
REGISTRATION NO. 333-13499
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
SIMULA, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
ARIZONA 3728 86-0320129
(State of Incorporation) (Primary Standard Industrial (I.R.S. Employer
Classification Code Number) Identification No.)
</TABLE>
------------------------
2700 NORTH CENTRAL AVENUE, SUITE 1000
PHOENIX, ARIZONA 85004
(602) 631-4005
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
------------------------
BRADLEY P. FORST, ESQ.
VICE PRESIDENT AND GENERAL COUNSEL
2700 NORTH CENTRAL AVENUE, SUITE 1000
PHOENIX, ARIZONA 85004
(602) 631-4005
(Name, address including zip code, and telephone number,
including area code, of agent for service)
with copies to:
<TABLE>
<S> <C>
CHRISTIAN J. HOFFMANN, III, ESQ. ROBERT S. KANT, ESQ.
STREICH LANG, P.A. MICHELLE S. MONSEREZ, ESQ.
RENAISSANCE ONE O'CONNOR, CAVANAGH, ANDERSON,
TWO NORTH CENTRAL AVENUE KILLINGSWORTH & BESHEARS, P.A.
PHOENIX, ARIZONA 85004-2391 ONE EAST CAMELBACK ROAD, SUITE 1100
(602) 229-5200 PHOENIX, ARIZONA 85012-1656
(602) 263-2400
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
TITLE OF EACH CLASS PROPOSED PROPOSED
OF SECURITIES TO BE AMOUNT TO BE MAXIMUM OFFERING MAXIMUM AGGREGATE AMOUNT OF
REGISTERED REGISTERED PRICE PER SHARE(3) OFFERING PRICE REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------
Convertible Preferred Stock,
par value $.05 per
share(1)................... 1,380,000 shares $25.00 $34,500,000 $11,896
- ---------------------------------------------------------------------------------------------------------
Common Stock, par value $.01
per share(2)............... 2,300,000 shares -- -- (4)
=========================================================================================================
</TABLE>
(1) Includes 180,000 shares that may be purchased pursuant to the Underwriters'
over-allotment option.
(2) This number is estimated on the date of this Registration Statement. The
actual number of shares of Common Stock issuable upon conversion will be
determined by the Conversion Rate on the date this Registration Statement
becomes effective.
(3) Estimated solely for purposes of calculating the registration fee.
(4) The shares of Common Stock being registered hereby are issuable upon
conversion of shares of Convertible Preferred Stock. Accordingly, no
additional filing fee is required pursuant to Rule 457(i) under the
Securities Act of 1933.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS
EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH
SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME
EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL
THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE
COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED MARCH 7, 1997
PROSPECTUS
1,200,000 SHARES
SIMULA, INC.
$ SERIES A CONVERTIBLE PREFERRED STOCK
Simula, Inc. (the "Company") is hereby offering 1,200,000 shares of its
$ Series A Convertible Preferred Stock, par value $.05 per share
("Convertible Preferred Stock"). Dividends on the Convertible Preferred Stock
are cumulative from the date of original issuance and payable quarterly
commencing July 30, 1997 at an annual rate of $ per share. Each share of
Convertible Preferred Stock is convertible at the option of the holder at any
time, unless previously redeemed, into shares of the Company's Common Stock, par
value $.01 per share ("Common Stock") at a rate of shares of Common
Stock for each share of Convertible Preferred Stock (the "Conversion Rate"),
equivalent to a conversion price of $ per share of Common Stock, subject to
adjustment in certain events.
The Convertible Preferred Stock is redeemable by the Company, in whole or
in part on a pro rata basis, at $ plus accrued dividends payable through the
redemption date, upon 30 days' written notice to the holders, mailed within 15
days after the closing price of the Company's Common Stock as quoted on the New
York Stock Exchange ("NYSE") has equaled or exceeded $ for any 10
consecutive trading days. The Convertible Preferred Stock is also redeemable at
the option of the holders of the Convertible Preferred Stock in the event of a
Change of Control of the Company.
The Common Stock of the Company is traded on the NYSE under the symbol
"SMU." On March 5, 1997, the closing price of the Common Stock on the NYSE was
$17.50. See "Price Range of Common Stock." The Convertible Preferred Stock will
be listed for trading on the NYSE under the symbol "SMU-pfA."
INVESTORS SHOULD CAREFULLY CONSIDER THE FACTORS SET FORTH UNDER "RISK
FACTORS," BEGINNING ON PAGE 7.I,3I,5I,7I,9I,11I,13I,15
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
- --------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT(2) COMPANY(1)(3)
- ----------------------------------------------------------------------------------------------------
Per Share..................................... $ $ $
- ----------------------------------------------------------------------------------------------------
Total(4)...................................... $ $ $
====================================================================================================
</TABLE>
(1) Plus accrued dividends, if any, from the date of original issuance.
(2) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities arising under the Securities Act of 1933,
as amended. See "Underwriting."
(3) Before deducting expenses payable by the Company estimated at $ .
(4) The Company has granted to the Underwriters an option for 45 days to
purchase up to an additional 180,000 shares of Convertible Preferred Stock
at the Price to Public less the Underwriting Discount, solely to cover
overallotments, if any. If such option is exercised in full, the total Price
to Public, Underwriting Discount and Proceeds to Company will be
$ , $ , and $ , respectively. See "Underwriting."
The shares of Convertible Preferred Stock are being offered by the
Underwriters on a "firm commitment" basis, when, as and if delivered to and
accepted by them and subject to the right of the Underwriters to withdraw,
cancel, modify or reject any orders, in whole or in part, and subject to certain
other conditions. It is expected that delivery of the certificates representing
the shares will be made on or about , 1997.
HD BROUS & CO., INC.
BREAN MURRAY SECURITIES INC.
L.H. FRIEND, INC.
The date of this Prospectus is March , 1997
LOGO
<PAGE> 3
[ARTWORK]
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CONVERTIBLE
PREFERRED STOCK AND THE UNDERLYING COMMON STOCK AT A LEVEL ABOVE THAT WHICH
MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON
THE NEW YORK STOCK EXCHANGE OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified
in its entirety by, the more detailed information and financial statements and
notes thereto appearing elsewhere in this Prospectus. Unless otherwise noted,
all information in this Prospectus assumes that the over-allotment option
granted to the Underwriters will not be exercised. All information in this
Prospectus gives retroactive effect to the Company's 3-for-2 stock split of its
Common Stock on September 28, 1995.
THE COMPANY
The Company is a market-focused developer of technologies and advanced
products and solutions to safety-related problems. A recognized world leader in
energy absorption and related safety technologies, the Company designs and
manufactures occupant seating, safety systems, and other devices engineered to
safeguard human life in a wide range of air, ground, and sea transportation
vehicles. Through strategic acquisitions and successful application of its
various proprietary technologies in a variety of industries, the Company in
recent years has expanded its market focus and is introducing new products for
commercial and military applications. The Company currently conducts operations
in three principal market segments including, commercial transportation seating,
government and defense, and automobile safety systems. Products include
commercial airliner seating systems, rail and mass-transit seating, helicopter
and other military aircraft crashworthy seats, advanced composite materials
including armor, and a side-impact head protection inflatable restraint system
for automobiles. In 1997 the Company will commence volume production for roll
out of additional products including a bulkhead airbag system for commercial
airliners, and two cockpit inflatable restraint systems for military aircraft.
Energy-Absorbing and Other Seating Systems. For over 20 years, the Company
has been a leading provider of energy-absorbing, or "crashworthy," seating
systems. Seating systems incorporating this crashworthy technology absorb shock
upon impact that would otherwise be absorbed by an occupant of the vehicle. This
is accomplished through engineering and utilization of the Company's proprietary
data bases regarding the properties of materials, failure characteristics, and
human body dynamics. Management believes that the Company is the world's largest
supplier of energy-absorbing military helicopter and other military aircraft
seats. The Company's principal competitors in the military seating market are
Martin Baker (U.K.) and Israeli Aircraft (Israel). The Company does not have
financial or market share data concerning these two competitors. However, based
on internal market surveys and data, the Company believes that it is the
supplier for a majority of the world's energy-absorbing seating programs under
domestic and foreign military contracts.
As an outgrowth of this core business, in late 1995 the Company commenced
the manufacture and sale of commercial airliner seating systems utilizing its
technology to comply with stringent new FAA safety standards mandating seats
designed to absorb 16 times the force of gravity upon impact ("16g"). Management
believes that the Company achieved a 2.5% share of the worldwide commercial
seating market in its first full year of production in 1996. The Company has 10
principal competitors in the commercial airline seating market, with BE
Aerospace having approximately 50% of the market. Based on internal data,
management believes that the Company also is the leading North American provider
of seating systems for rail and other mass transit vehicles, with an approximate
70% to 80% market share. The Company has four principal competitors in the North
American rail and mass transit seating market, comprising in the aggregate 20%
to 30% of the market.
Inflatable Restraint Systems. The Company has developed proprietary and
patented structures and systems that are used as inflatable restraints. The
first product for automobiles, the inflatable tubular structure ("ITS"), is
being introduced in 1997 BMW models to provide head and neck protection in
side-impact collisions. The Company has a variety of other inflatable restraint
applications and configurations for automobiles. The Company has also developed
and certified the first airbag systems for commercial and military aircraft,
which will be introduced in 1997. In addition to providing inflatable restraint
products directly to automobile and aircraft manufacturers, the Company licenses
its proprietary inflatable restraint technology and products to first tier
component suppliers.
3
<PAGE> 5
Armor and Other Composite Materials. The Company develops and manufactures
a variety of composite materials which are integrated into its products and the
products of third parties. The Company's principal composite products include
high-strength, ultra-lightweight armor systems for use in targeted applications,
such as surrounding crew seats in aircraft (V-22 Osprey, Apache, Blackhawk, and
CH-53 Sea Stallion), protecting vital components of aircraft (C-17 cockpits and
tank power units), and providing additional floor protection (multi-wheeled and
transport vehicles). Other new products utilizing the Company's composite
technology include portable transparent armor products for use in commercial
vehicles, such as police cars and executive vehicles.
Introductory Stage Technologies. The Company has several technologies and
products in various phases of development that it believes will provide it with
new products over the next several years. These products include additional
applications of the Company's inflatable restraint technology, light-weight
transparent armor, advanced sensors with multi-axial sensing ability, a
vacuum-packed sealed parachute, and new polymers that may be used for
high-performance windows, lenses, visors, and a number of other applications.
The Company has experienced substantial growth since fiscal 1992 resulting
from the broader application of its technology, its strategic acquisitions, and
its development of new products. The Company's revenue increased from $18.8
million in 1992 to $ million in 1996. During this time period, the
percentage of the Company's revenue derived from government contracts declined
from 100% in 1990 to approximately % in 1996, with the balance from commercial
customers. The Company's principal customers include America West Airlines,
Autoliv GmbH, BMW, Boeing, Continental Airlines, Matsushita, McDonnell Douglas,
Morton International, Sikorsky Aircraft, Southwest Airlines, metropolitan
transit authorities in major North American cities, and various branches of the
United States armed forces and agencies.
The Company's strategy is to maintain its leading position in creating and
applying proprietary technologies and advanced solutions to safety related
problems and to develop its products for commercial sale to a wide range of
customers in each of its three market segments. The key elements in executing
this strategy are to (i) develop and utilize technology to enhance current
products and create new products, (ii) focus on new product markets and
regulatory requirements, (iii) expand manufacturing capabilities and maximize
internal synergies, and (iv) pursue acquisitions and strategic alliances that
complement existing businesses or provide manufacturing or distribution
opportunities.
The Company maintains its principal executive offices at 2700 North Central
Avenue, Suite 1000, Phoenix, Arizona 85004, and its telephone number is (602)
631-4005. Unless the context indicates otherwise, all references to the
"Company" or "Simula" refer to Simula, Inc. and its subsidiaries.
4
<PAGE> 6
THE OFFERING
See "Description of Convertible Preferred Stock."
Securities Offered......... 1,200,000 shares of $ Convertible Preferred
Stock.
Capital Stock
Outstanding................ 8,998,948 shares of Common Stock and no shares of
Preferred Stock.
Capital Stock
Outstanding After
Offering................. 8,998,948 shares of Common Stock and 1,200,000
shares of Convertible Preferred Stock that is
convertible into an aggregate of shares of
Common Stock.
Liquidation Preference..... $25 per share of Convertible Preferred Stock, plus
accumulated and unpaid dividends.
Dividends.................. Cumulative annual dividends of $ per share
payable quarterly out of assets legally available
therefor on the 30th day of January, April, July,
and October of each year (or if such day is not a
business day, on the next succeeding business day),
commencing July 30, 1997, when, as, and if declared
by the Board of Directors. Dividends will cumulate
from the date of issuance.
Conversion Rights.......... Each share of Convertible Preferred Stock is
convertible at the option of the holder at any
time, unless previously redeemed, into shares of
the Company's Common Stock (the "Conversion Rate"),
equivalent to a conversion price of $ per share
of Common Stock, subject to adjustment in certain
events.
Optional Redemption........ If not earlier converted or redeemed, the
Convertible Preferred Stock is redeemable at the
option of the Company in whole or in part on a pro
rata basis, at $ per share plus accrued dividends
payable through the redemption date, upon 30 days'
written notice to the holders, mailed within 15
days after the closing price of the Company's
Common Stock on the NYSE has equaled or exceeded
$ for any 10 consecutive trading days. Holders
will have the right to convert their shares at any
time until the close of business on the day prior
to the date fixed for redemption.
Change of Control
Redemption................. Within 30 days following the occurrence of any
Change of Control, as defined herein, the Company
will offer ("Change of Control Offer") to purchase
all outstanding Convertible Preferred Stock at a
purchase price of $25 per share plus accrued and
unpaid dividends to the date of the Change of
Control Offer. No assurance can be given that at
such date upon such event the Company would have
adequate or legally available resources to pay such
redemption price. Further, redemption rights of
preferred Stockholders could be subordinated to the
rights of creditors.
Voting Rights.............. The holders of the Convertible Preferred Stock are
not entitled to vote, except as set forth below and
as provided by law. On matters subject to a vote by
holders of the Convertible Preferred Stock, the
holders are entitled to one vote per share. If the
equivalent of six consecutive quarterly dividends
payable on the Convertible Preferred Stock, or on
any other series of preferred stock ranking on a
parity with the Convertible Preferred Stock as to
dividends or liquidation rights and having similar
voting rights, are in arrears, the number of
directors of the Company will be increased by two
and the holders of all outstanding series of parity
preferred stock, voting as a single class without
regard to series, will be entitled to elect the
additional two directors until all dividends in
arrears have been paid or declared and set apart
for payment. Without the consent of the holders of
Convertible Preferred Stock, the Company may issue
other series of preferred stock that
5
<PAGE> 7
are pari passu with, or junior to, the Convertible
Preferred Stock as to dividends and liquidation
rights. Without the approval of the holders of at
least a majority of the number of shares of
Convertible Preferred Stock, voting separately as a
class, the Company may not issue preferred stock
that is senior to the Convertible Preferred Stock
as to dividends or liquidation rights or amend,
alter, or repeal any of the voting rights,
designations, preferences, or other rights of the
holders of the Convertible Preferred Stock or amend
the Company's Articles of Incorporation so as to
adversely affect such voting rights, designations,
preferences, or other rights.
Listing.................... The Convertible Preferred Stock will be listed for
trading on the NYSE under the symbol "SMU-pfA." The
Company's Common Stock is listed on the NYSE under
the symbol "SMU."
Use of Proceeds............ Establishment and expansion of manufacturing
facilities, working capital and other general
purposes, and potentially for acquisitions. See
"Use of Proceeds."
Risk Factors............... Prospective purchasers of the Common Stock offered
hereby should carefully consider certain risk
factors as detailed in this Prospectus and
contained in all documents incorporated by
reference into this Prospectus. Included among such
factors are the Company's: Recent Losses, Entry
Into New Markets, Production Risks and
Manufacturing Experience, Investment In and
Dependence On Proprietary Technology, Need For
Additional Capital, Quarterly Operating Results and
Cyclicality, Possible Volatility of Stock Price,
and Management of Growth. See "Risk Factors."
6
<PAGE> 8
SUMMARY CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
-------------------------------------------------------------- -----------------------------
1991 1992 1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenue...................... $ 15,144 $ 18,833 $ 24,781 $ 41,158 $ 59,089 $ 28,802 $ 36,358
Operating income(1).......... 2,089 2,387 2,665 5,184 6,858 3,559 487
Earnings (loss) before
cumulative effect of a
change in accounting
principle(2)............... 1,732 1,270 1,121 2,114 4,102 1,553 (183)
Cumulative effect of change
in accounting
principle(2)............. -- -- -- -- -- -- (3,240)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net earnings (loss)(2)(3).... 1,732 1,270 1,121 2,114 4,102 1,553 (3,423)
========== ========== ========== ========== ========== ========== ==========
PER SHARE AMOUNTS:
Earnings (loss) before
cumulative effect of a
change in accounting
principle(2)(4)............ $ 0.31 $ 0.29 $ 0.22 $ 0.37 $ 0.48 $ 0.20 $ (0.02)
Cumulative effect of change
in accounting
principle(2)............... -- -- -- -- -- -- (.36)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net earnings (loss)(2)(5).... $ 0.31 $ 0.29 $ 0.22 $ 0.37 $ 0.48 $ 0.20 $ (0.38)
========== ========== ========== ========== ========== ========== ==========
Weighted average shares
outstanding(5)............. 3,571,940 4,608,825 5,024,679 5,704,926 8,576,817 7,748,819 8,916,287
Ratio of earnings to fixed
charges and preferred
dividends(6)............... 3.85x 5.86x 3.00x 2.67x 3.20x 2.97x --
OTHER DATA:
Research and development:
Funded by the Company...... $ 127 $ 240 $ 376 $ 688 $ 1,419 $ 729 $ 338
Funded through contracts... 1,161 4,529 1,813 3,165 4,722 2,023 1,958
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
YEAR ENDED DECEMBER 31, 1996
-------------------------------------------------------------- -----------------------------
1991 1992 1993 1994 1995 PRO FORMA(7) AS ADJUSTED(8)
---------- ---------- ---------- ---------- ---------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............... $ 2,197 $ 4,049 $ 8,209 $ 5,236 $ 21,476 $ 33,885 $ 52,624
Total assets.............. 9,073 18,007 26,787 47,691 74,739 88,059 110,755
Long-term debt................ 1,456 4,839 12,794 15,339 11,261 23,725 20,964
Shareholders' equity.......... 2,800 7,232 8,078 16,649 47,532 44,892 72,392
</TABLE>
- ---------------
(1) Includes an unusual item to pay certain settlement costs of $919,000 for the
year ended December 31, 1993. See Note 13 to Consolidated Financial
Statements.
(2) During the second quarter of 1996, the Company adopted a new method of
accounting for pre-contract costs. These costs were previously deferred and
recovered over the revenue streams from the Company's customers. Effective
January 1, 1996, these costs have been expensed. As a result, periods prior
to January 1, 1996 are not comparable. Net earnings and earnings per share
for the year ended December 31, 1995 and the six-month period ended June 30,
1995 would have been $1,658,299, $.19, $1,116,402, and $.14, respectively,
if the new method of accounting had been adopted in such periods.
(3) Pro forma net earnings for 1991 and 1992, reflecting pro forma tax
provisions and the elimination of certain expenses related to the period
prior to the Company's initial public offering, were $1,123,000 and
$1,313,000, respectively.
(4) Amounts for 1991 and 1992 are pro forma earnings per share reflecting pro
forma income noted in (3) above.
(5) The Company effected a 3-for-2 split of its Common Stock on September 28,
1995. As a result, all shares and related references have been restated for
all prior periods and transactions.
(6) Ratio of earnings to fixed charges and preferred dividends is computed by
dividing (i) earnings (loss) before income taxes plus fixed charges and
preferred stock dividend requirements by (ii) fixed charges and preferred
stock dividend requirements. Fixed charges consist of interest on
indebtedness, amortization of debt issuance cost and the estimated interest
component (one-third) of rental and lease expense. There were no preferred
stock dividend requirements during the periods presented. Earnings were
insufficient to cover fixed charges by $304,000 for the six months ended
June 30, 1996.
(7) Pro forma reflects historical amounts adjusted to reflect the issuance of
$14,300,000 of Series C 10% Senior Subordinated Convertible Notes in
September 1996.
(8) Adjusted to reflect the issuance of the 1,200,000 shares of Convertible
Preferred Stock offered hereby and the application of the estimated net
proceeds of $27.5 million.
7
<PAGE> 9
RISK FACTORS
Prospective purchasers of the Convertible Preferred Stock offered hereby
should carefully consider the following factors in addition to the other
information in this Prospectus. This Prospectus contains certain forward-looking
statements and information. The cautionary statements made in this Prospectus
should be read as being applicable to all related forward-looking statements
wherever they appear in this Prospectus. The Company's actual results could
differ materially from those discussed herein. Factors that could cause or
contribute to such differences include those discussed below as well as those
discussed elsewhere herein.
RECENT LOSSES
In order to prepare for the production of the 16g Seat in commercial
quantities and the commercial introduction of the ITS and bulkhead airbag, the
Company incurred significant pre-contract costs, which were charged to expense
in 1996. In prior years, such costs were capitalized. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Note 20 to the Consolidated Financial Statements. In order to support the
introduction and production of these products, the Company incurred plant
start-up costs and has also significantly increased expenses applicable to its
corporate and sales infrastructure, which expenses were necessary to develop
markets and support the production of these products that are anticipated to
produce revenue in 1997. In addition, the Company accelerated research and
development expenses applicable to potential new products related to these
technologies. The incurrence of these costs resulted in a loss before the
cumulative effect of the change in accounting principle of $ for the
year ended December 31, 1996. The Company's contracts for the 16g seat and ITS
provide for deliveries of significant commercial quantities in 1997. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
ENTRY INTO NEW MARKETS
The Company plans to enter full scale production for new product roll-outs
in 1997 for its crashworthy seating systems for commercial aircraft, a
side-impact inflatable restraint system for automobiles, a bulkhead airbag
system for commercial aircraft, and two cockpit inflatable restraint systems for
military aircraft. There can be no assurance that the Company will be successful
in the introduction of its new products. Such success will depend on a variety
of factors, including successful product testing and acceptance by its potential
customers, particularly airlines and automobile manufacturers; the success of
the Company's sales and marketing efforts in markets not previously addressed by
the Company; successful and rapid expansion of the Company's manufacturing
capacity, including the expansion or establishment of additional manufacturing
facilities, particularly for inflatable restraints and aircraft seating systems;
the ability of the Company's products to provide their intended benefits; and
increasing government safety regulations and consumer safety concerns,
particularly for energy-absorbing seating systems and for inflatable restraints.
If the Company is unable to manufacture and market its new products
successfully, its business, results of operations, and financial condition will
be materially and adversely affected. See "Business."
PRODUCTION RISKS AND MANUFACTURING EXPERIENCE
The Company does not have experience in high-volume manufacturing and must
build capacity to meet anticipated demand for certain of its new products. The
Company is currently adding to its production capabilities through new plant and
equipment. The Company plans to use approximately $ million of the net
proceeds of this offering to establish new and expand existing manufacturing
facilities, primarily for the manufacture of aircraft systems and components
related to the Company's automobile side-impact inflatable restraint system. See
"Use of Proceeds." The Company has received initial purchase orders for its new
products and has invested substantial resources for the manufacture of such new
products prior to receipt of volume orders. In fiscal 1996 the Company invested
approximately $ million in the purchase of plant and equipment. The Company
funded this investment with its bank credit facilities. The Company believes
that it currently has sufficient capacity to meet 1997 delivery requirements.
The Company could incur significant start-up costs, expenses, and delays in
connection with its attempts to manufacture commercial quantities of its new
products. There can be no assurance that the anticipated level of demand will
occur or that the
8
<PAGE> 10
Company will not experience either overcapacity or undercapacity in its new
production facilities. Further, there can be no assurance that the Company will
be successful in overcoming the technological, engineering, and management
challenges associated with the production of commercial quantities of its new
products, at any given volume, at acceptable costs, or on a timely or profitable
basis. Operating results could be adversely affected if the expansion of the
Company's manufacturing capacity is delayed or inefficiently implemented. No
assurance can be given that the Company will not experience manufacturing
inefficiencies or delivery problems in the future in the event of fluctuations
in demand. When and if the Company receives volume orders for its products, it
may determine to license or outsource the manufacturing of certain of the
components. There can be no assurance that the Company will be able to identify
manufacturers that will meet its requirements as to quality, reliability,
timeliness, and cost-effectiveness. Any such failure will limit the Company's
ability to satisfy customer orders and would have a material adverse effect on
the Company's business, results of operations, and financial condition. See
"Business -- Production, Manufacturing, and Licensing."
The Company believes that its products and components have passed, and will
continue to pass, certain product performance and reliability testing by its
customers; however, there can be no assurance that its products will continue to
pass such testing in the future, particularly as the Company moves toward higher
production volumes. If such problems occur, the Company could experience
increased costs, delays, reductions or cancellations of orders and shipments,
and warranty issues, any of which could adversely affect the Company's business,
results of operations, and financial condition.
ABILITY TO PAY CONVERTIBLE PREFERRED STOCK DIVIDENDS
The ability of the Company to pay dividends on the Convertible Preferred
Stock is limited by covenants contained in the Company's Indenture governing the
issuance of the Company's 12% Senior Subordinated Notes due 1998 (the "12%
Notes") and 10% Series C Senior Subordinated Convertible Notes due 1999 (the
"10% Notes"). The covenants restrict the Company from making certain payments,
including the payment of dividends, in the event the Company is in default in
the payment of principal or interest or fails to meet certain prescribed debt
coverage ratios. To date, the Company has never been in default under its debt
instruments or failed to comply with any covenants or debt coverage ratios in
the Indenture. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Description of Convertible Preferred Stock," and
"Description of Other Capital Stock and Debt Securities."
INVESTMENT IN AND DEPENDENCE ON PROPRIETARY TECHNOLOGY
The Company's future success and competitive position depend to a
significant extent upon its proprietary technology. The Company must make
significant investments to continue to develop and refine its technologies.
Technological advances, the introduction of new products, and new design and
manufacturing techniques could adversely affect the Company's operations unless
the Company is able to adapt to the resulting change in conditions. As a result,
the Company will be required to expend substantial funds for and commit
significant resources to the conduct of continuing research and development
activities, the engagement of additional engineering and other technical
personnel, the purchase of advanced design, production, and test equipment, and
the enhancement of design and manufacturing processes and techniques. The
Company's future operating results will depend to a significant extent on its
ability to continue to provide design and manufacturing services for new
products that compare favorably on the basis of time to introduction, cost, and
performance with the design and manufacturing capabilities of aircraft and
automobile suppliers. The success of new design and manufacturing services
depends on various factors, including utilization of advances in technology,
innovative development of new solutions for customer products, efficient and
cost-effective services, timely completion and delivery of new product
solutions, and market acceptance of customers' end products. Because of the
complexity of the Company's products, the Company may experience delays from
time to time in completing the design and manufacture of new product solutions.
In addition, there can be no assurance that any new product solutions will
receive or maintain customer or market acceptance. If the Company were unable to
design and manufacture solutions for new products of its customers on a timely
and cost-effective basis, its future operating results would be adversely
affected.
9
<PAGE> 11
The Company relies in part on patent, trade secret, and copyright law to
protect its intellectual property. There can be no assurance that any patent
owned by the Company will not be invalidated or challenged, that the rights
granted thereunder will provide competitive advantages to the Company, or that
any of the Company's pending or future patent applications will be issued with
the scope of the claims sought by the Company, if at all. Furthermore, there can
be no assurance that others will not develop technologies that are similar or
superior to the Company's technology, duplicate the Company's technology, or
design around the patents owned by the Company. In addition, effective patent
and other intellectual property protection may be unavailable or limited in
certain foreign countries. There can be no assurance that the steps taken by the
Company will prevent misappropriation of its technology. Litigation may be
necessary in the future to enforce the Company's patents and other intellectual
property rights, to protect the Company's trade secrets, and to determine the
validity and scope of the proprietary rights of others. Similarly, there can be
no assurance that the Company's technologies will not be subject to claims that
they infringe the rights of others, which would require the Company to defend
such claims. Patent and trade secret litigation could result in substantial
costs and diversion of resources, which could have a material adverse effect on
the Company's operating results and financial condition. See
"Business -- Proprietary Technology."
DEPENDENCE ON INDUSTRY RELATIONSHIPS
A number of the Company's products are components in its customers' final
products. In particular, the Company's automobile and aircraft inflatable
restraint systems are intended for use as components in automobiles or aircraft.
Accordingly, to gain market acceptance, the Company must demonstrate that its
products will provide advantages to the manufacturers of final products,
including increasing the safety of their products, providing such manufacturers
with competitive advantages or assisting such manufacturers in complying with
existing or new government regulations affecting their products. There can be no
assurance that the Company's products will be able to achieve any of these
advantages for the products of its customers. Furthermore, even if the Company
is able to demonstrate such advantages, there can be no assurance that such
manufacturers will elect to incorporate the Company's products into their final
products, or if they do, that the Company's products will be able to meet such
customers' manufacturing requirements. Additionally, there can be no assurance
that the Company's relationships with its manufacturer customers will ultimately
lead to volume orders for the Company's products. The failure of manufacturers
to incorporate the Company's products into their final products would have a
material adverse effect on the Company's business, results of operations, and
financial condition. The Company also depends on its relationships with first
tier component suppliers to which it licenses its proprietary technology to
facilitate the marketing and distribution of its products, particularly its
inflatable restraint products. See "Business -- Operating and Growth Strategy --
Expanding Manufacturing Capabilities and Maximizing Internal Synergies."
SUBSTANTIAL RELIANCE UPON MAJOR CUSTOMERS
The Company's business has relied to a great extent on relatively few major
customers, although the mix of major customers has varied from year to year
depending on the status of then current contracts. During fiscal 1995 and fiscal
1996, no commercial customer accounted for more than 10% of the Company's
revenue. Although the Company has long-established relationships with a number
of its customers, the Company does not have long-term supply contracts with any
customers. The Company's customers also generally do not commit to long-term
production schedules and, as a result, customer orders generally can be canceled
and volume levels changed or delayed. The timely replacement of canceled,
delayed, or reduced orders cannot be assured. The loss or reduction in sales to
a major customer may have a more material adverse effect on the Company's
operations and financial condition than would be the case if the Company's
revenue were less concentrated by customer. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and
"Business -- Customers."
The Company believes that the United States Army and other branches of the
United States armed forces as well as prime defense contractors, to which the
Company has supplied products for approximately 20 years, will continue to be
major customers, although the percentage of the Company's revenue attributable
to them can be expected to decrease as a result of the Company's expanding
commercial operations. See
10
<PAGE> 12
"Business -- Customers" and "Business -- Backlog." For the year ended December
31, 1996, approximately %, % and % of the Company's revenue was
attributable to the Company's contracts with the US Army, other branches of the
US armed forces, and prime defense contractors, respectively. Reliance upon
defense contracts involves certain inherent risks, including dependence on
Congressional appropriations, changes in governmental policies that reflect
military and political developments, and other factors characteristic of the
defense industry. The Company believes that the impact of reductions in military
expenditures have been and may continue to be less significant on the Company
than on many other military suppliers because completed and currently announced
reductions in military expenditures have tended to relate more to strategic
programs than to the types of tactical programs that the Company's products
address. There can be no assurance, however, that reductions in military
expenditures or the type of reductions instituted will not adversely affect the
Company's business, operating results, and financial condition. See
"Business -- Overview of Market Segments and Industries -- Government and
Defense."
EFFECT OF GOVERNMENT CONTRACT PROVISIONS
As a contractor and subcontractor to the United States government, the
Company is subject to various laws and regulations that are more restrictive
than those applicable to non-government contractors. Sales of many of the
Company's products are governed by rules favoring the government's contractual
position. As a consequence, such contracts may be subject to protest or
challenge by unsuccessful bidders or to termination, reduction, or modification
in the event of changes in government requirements, reductions of federal
spending, or other factors. The Company's government-related revenue has
resulted almost exclusively from firm, fixed-price contracts. Fixed-price
contracts involve certain inherent risks to the Company, including
underestimating costs, problems with new technologies, and economic and other
changes that may occur over the contract period. The accuracy and
appropriateness of certain costs and expenses used to substantiate direct and
indirect costs of the Company for the United States government under both
cost-plus and fixed-price contracts are subject to extensive regulation and
audit by the Defense Contract Audit Agency ("DCAA"), an arm of the United States
Department of Defense. The DCAA has the right to challenge the Company's cost
estimates or allocations with respect to any such contract. If a DCAA audit
establishes overcharges or discrepancies in costs or accounting, it can seek the
repayment of such overcharges or seek other reconciliations. DCCA audits are
routine in the defense contracting industry, and the Company has been subject to
such audits from time to time. Since the inception of the Company's operations,
no DCAA audit has resulted in an adverse determination against the Company. In
September 1993, however, the Company agreed to pay $445,000 over a 12-month
period to resolve an overcharge dispute, without any admission of liability. The
investigation and settlement resulted in the review of virtually all of the
Company's government contracts entered into between April 1987 and June 1990.
The settlement agreement concluded any other potential defective pricing claims
on all of the Company's contracts with the United States Department of Defense
negotiated during that period. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Note 13 to the Consolidated
Financial Statements.
NEED FOR ADDITIONAL CAPITAL
The Company must continue to make significant investments in research and
development, equipment, and facilities, including capital expenditures to
construct and equip the facilities it presently has under development. The
Company's operating results may be adversely affected if its revenue does not
increase sufficiently to offset the increase in fixed costs and operating
expenses relating to these capital expenditures. The continued expansion of the
Company's business may require it, from time to time, to seek debt or equity
financing in addition to the funds to be provided by this offering. Such capital
expenditures may be required to maintain or expand the Company's engineering,
design, and production facilities and equipment as well as to otherwise finance
the growth of its business. The Company cannot predict the timing or amount of
any such capital requirements. The Company anticipates that such financing may
include bank financing or the issuance of debt or equity securities. The
Company's ability to incur indebtedness is limited by covenants and restrictions
under the Company's loan agreement with Wells Fargo Bank N.A. and the Indenture
pursuant to which its 12% Notes and 10% Notes were issued. See "Management's
Discussions and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." The ability of the Company to
11
<PAGE> 13
obtain bank financing or raise additional debt or equity capital also will
depend on its financial condition and results of operations. In addition, there
can be no assurance that additional financing will be available to the Company
if and when required and under terms acceptable to the Company.
ACQUISITIONS
The Company's acquisition strategy depends in large part on its continued
ability to successfully acquire, integrate, and operate additional companies
that have complementary businesses that can utilize or enhance the Company's
technologies or that can provide benefits in terms of manufacturing,
distribution, or availability of component parts. The Company has completed
three major acquisitions since August 1993. There can be no assurance that the
Company will be able to identify additional suitable acquisition candidates,
that it will be able to consummate or finance any such acquisitions, or that it
will be able to integrate any such acquisitions successfully into its
operations. See "Business -- Operating and Growth Strategy -- Exploring
Acquisition and Strategic Alliance Opportunities" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
QUARTERLY OPERATING RESULTS; CYCLICALITY
Since the beginning of 1993 the Company has experienced significant growth
in its revenue and net income as a result of internal growth and its
acquisitions. As a growth company, the Company's quarterly results may be
especially variable and historic results are not a reliable basis on which to
predict future operating results. Further, during the second quarter of 1996,
the Company adopted a new method of accounting for pre-contract costs under
which various costs are expensed as incurred rather than being deferred. The
effect of changing this accounting principle resulted in a restatement and
reduction of earnings per share previously reported for the first quarter of
1996. The Company's change in accounting method in 1996 will make year to year
and quarter to quarter comparisons of earnings difficult. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The continued success of the Company will be impacted by the cyclical
nature of the airline, rail, and automobile industries as well as other markets
served by the Company's products; the level and makeup of military expenditures;
technological changes; competition and competitive pressures on pricing; new
government regulations; and economic conditions in the United States and
worldwide markets served by the Company and its customers. The Company's
products are incorporated into a variety of transportation vehicles. A slowdown
in demand for such new transportation vehicles or modification services to
existing transportation vehicles as a result of economic or other conditions in
the United States or in the worldwide markets served by the Company and its
customers or other broad-based factors could adversely affect the Company's
operating results and financial condition. Conversely, an increase in demand for
new transportation vehicles or modification services could strain the Company's
capacity, its manufacturing efficiency, and delivery schedules. See "Business."
POSSIBLE VOLATILITY OF STOCK PRICE
The trading price of the Company's Common Stock has been and in the future
may be subject to wide fluctuations in response to quarterly variations in
operating results of the Company or its competitors, actual or anticipated
announcements of technical innovations or new products by the Company or its
competitors, contracts with key customers, new agreement negotiations, changes
in analysts' estimates of the Company's financial performance, general industry
conditions, military expenditures, worldwide economic and financial conditions,
and other events or factors. In addition, the stock market has experienced
extreme price and volume fluctuations, which have particularly affected the
market price of many technology companies and which often have been unrelated to
the operating performance of such companies. These broad market fluctuations and
other factors may adversely affect the market price of the Company's Common
Stock. See "Price Range of Common Stock" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
12
<PAGE> 14
COMPETITION
The markets served by the Company's aircraft and rail seating and
inflatable restraint systems are intensely competitive. Most of the Company's
competitors have greater marketing capabilities and financial resources than the
Company. Although most of the Company's technology is proprietary, many
businesses are actively engaged in the research and development of new products
and in the manufacture and sale of products that may compete with the Company's
inflatable restraint systems, structures, and materials capabilities. The
Company's present or future products could be rendered obsolete by technological
advances by one or more of its competitors or by future entrants into its
markets. Competition for commercial contracts relates primarily to technical
know-how, cost, and marketing efforts. Competition for government contracts
relates primarily to the award of contracts for the development of proposed
products rather than for the supply of products that have been developed under
contracts. Numerous suppliers compete for government defense contracts as prime
contractors or subcontractors. The demand for aircraft seating, which is one of
the Company's target markets, currently exceeds supply; however, the Company's
competitors may seek to cover such undercapacity. As a result, there is no
assurance that such undercapacity in those markets will continue to exist in the
future. A substantial increase in the capacity of all manufacturers in those
markets may have an adverse impact on the Company's results of operations and
financial condition. See "Business -- Competition."
MANAGEMENT OF GROWTH
The Company currently is experiencing a period of significant growth. The
Company's ability to manage its growth effectively will require it to enhance
its operational, financial, and management information systems. In addition, the
Company must also effectively oversee operations of geographically dispersed
subsidiaries in diverse lines of business. The Company is increasing staffing
and other expenses as well as its expenditures on manufacturing plants, capital
equipment and leasehold improvements in order to meet the anticipated demand of
its customers for its new products. However, the Company's customers generally
do not commit to firm production schedules for other than a relatively short
time in advance. The Company's profitability would be adversely affected if the
Company increased its expenditures in anticipation of future orders that do not
materialize. Its customers may also require, from time to time, rapid increases
in design and production services, which place an excessive short-term burden on
the Company's resources. The failure of the Company to manage its growth
effectively could have a material adverse effect on the Company's business,
operating results, and financial condition.
PRODUCT LIABILITY
The Company will face increasing exposure to product liability claims as it
increases its presence in commercial markets. Product liability claims may be
particularly significant in connection with the Company's commercial aircraft
and automobile products. The Company maintains product liability insurance,
including general product liability, special aircraft product liability, and
product recall insurance. In connection with its government business, product
liability defense is available to some extent under the so-called "government
contractor defense." In addition, the Company's product liability insurance also
provides protection with respect to exposure, if any, under government contracts
and products. The Company believes its insurance is adequate.
GOVERNMENT SAFETY REGULATIONS
The Company regularly monitors regulations adopted or being considered by
the Federal Aviation Administration ("FAA") relating to airlines, particularly
those relating to seating and restraints, and by the National Highway Traffic
Safety Administration ("NHTSA"), particularly those relating to airbags and
other safety features in automobiles, rail, and other mass transit vehicles.
Administratively promulgated regulations are typically subject to industry
resistance, comment periods, and significant delays in implementation. To the
extent that proposed regulations are withdrawn or that new or existing
regulations are subsequently amended, rescinded, or deadlines for compliance
extended, the demand for improved safety systems, such as those provided by the
Company, could be adversely impacted. See "Business -- Overview,"
"Business -- Operating and Growth Strategy -- Market and Regulatory Focus,"
"Business -- Overview of Market Segments and
13
<PAGE> 15
Industries -- Commercial Transportation Seating," and "Business -- Overview of
Market Segments and Industries -- Automobile Safety Systems."
HOLDING COMPANY STRUCTURE
The Company is a holding company with no business operations of its own.
The Company's only material assets are the outstanding capital stock of its
subsidiaries, through which it conducts its operations. See
"Business -- Operating and Growth Strategy." As a holding company, the Company
depends on dividends from its subsidiaries to pay dividends on the Convertible
Preferred Stock.
ENVIRONMENTAL REGULATIONS
The Company is subject to a variety of federal, state, and local government
regulations related to the storage, use, discharge, and disposal of toxic,
volatile, or otherwise hazardous chemicals used in its manufacturing processes.
There can be no assurance that changes in environmental regulations will not
impose the need for additional capital equipment or other requirements. Any
failure by the Company to obtain required permits for, control the use of, or
adequately restrict the discharge of, hazardous substances under present or
future regulations could subject the Company to substantial liability or could
cause manufacturing operations to be suspended. Such liability or suspension of
manufacturing operations could have a material adverse effect on the Company's
operating results and financial condition. See "Business -- Environmental
Regulations."
INTERNATIONAL TRADE AND CURRENCY EXCHANGE
Approximately % of the Company's revenue in fiscal 1996 was derived from
international customers, all of which is billed and recorded in U.S. dollars.
The Company has acquired manufacturing facilities outside the United States in
anticipation of an increased volume of business overseas, particularly with
respect to its inflatable restraint systems for automobiles. Therefore, the
Company may purchase an increasing portion of its raw materials and equipment
from foreign suppliers and incur labor costs in foreign locations. The foreign
sale of products and the purchase of raw materials and equipment from foreign
suppliers may be adversely affected by political and economic conditions abroad.
Protectionist trade legislation in either the United States or foreign
countries, such as a change in current tariff structures, export compliance
laws, or other trade policies, could adversely affect the Company's ability to
sell its products in foreign markets and purchase materials or equipment from
foreign suppliers.
DEPENDENCE ON MANAGEMENT AND OTHER KEY PERSONNEL
The Company's success depends upon the retention of key personnel,
particularly Stanley P. Desjardins, its founder and Chairman, and Donald W.
Townsend, its President. The Company has entered into five-year employment
contracts with Messrs. Desjardins and Townsend through the year 2001. The loss
of Messrs. Desjardins or Townsend or other existing key personnel or the failure
to recruit and retain necessary additional personnel would adversely affect the
Company's business prospects. Additionally, the covenants of one of the
Company's credit facilities requires that the Company continue to employ Messrs.
Desjardins and Townsend. There can be no assurance that the Company will be able
to retain its current personnel or attract and retain necessary additional
personnel. See "Business -- Employees" and "Management."
CONTROL BY MANAGEMENT
Following the completion of this offering and assuming the conversion of
the Convertible Preferred Stock into Common Stock, the directors and executive
officers of the Company will own an aggregate of 4,244,974 shares of Common
Stock, or approximately 47% of the outstanding Common Stock of the Company, of
which Stanley P. Desjardins owns 3,543,052 shares. Through the ownership of such
Common Stock, the ability to elect or otherwise designate members of the Board
of Directors, as a practical matter, will continue to reside with the current
management of the Company. The directors and executive officers have the right
to acquire additional shares upon exercise of options granted under the
Company's stock option plans, and the
14
<PAGE> 16
executive officers may acquire additional shares under the Company's Employee
Stock Purchase Plan. See "Principal Shareholders," "Management -- Stock
Options," and "Management -- Employee Stock Purchase Plan."
SHARES ELIGIBLE FOR FUTURE SALE
As of March 5, 1997, the Company had 8,998,948 shares of Common Stock
outstanding, of which 3,682,049 shares are "restricted securities" (the
"Restricted Shares") as that term is defined in Rule 144 under the Securities
Act of 1933, as amended (the "Act"). Such Restricted Shares may be subject to
volume and other resale limitations described below. The directors and executive
officers have agreed with the Company at the request of the Representative not
to sell or otherwise dispose of any shares of Common Stock in the public market
for a period of 90 days after the date of this Prospectus without the prior
written consent of the Representative. In general, under Rule 144 as currently
in effect, any person (or persons whose shares are aggregated for purposes of
Rule 144) who beneficially owns restricted securities with respect to which at
least two years have elapsed since the later of the date the shares were
acquired from the Company or from an affiliate of the Company, is entitled to
sell, within any three-month period, a number of shares that does not exceed the
greater of (i) 1% of the then outstanding shares of Common Stock of the Company,
or (ii) the average weekly trading volume in Common Stock during the four
calendar weeks preceding such sale. Sales under Rule 144 also are subject to
certain manner-of-sale provisions and notice requirements and to the
availability of current public information about the Company. A person who is
not an affiliate, has not been an affiliate within three months prior the sale,
and who beneficially owns restricted securities with respect to which at least
three years have elapsed since the later of the date the shares were acquired
from the Company or from an affiliate of the Company, is entitled to sell such
shares under Rule 144(k) without regard to any of the volume limitations or
other requirements described above. See "Principal Shareholders -- Shares
Eligible For Future Sale" and "Underwriting."
REGISTRATION RIGHTS
In September 1996, the Company issued $14.3 million principal amount of the
10% Notes in a private placement. Based on the average closing prices of the
Company's Common Stock for the 10 trading day period ending March 5, 1997, the
10% Notes are convertible into approximately 816,000 shares of Common Stock. See
"Description of Other Capital Stock and Debt Securities." The Company committed
to use its best efforts to file a registration statement in November 1996
covering resales by the holders of the Common Stock issuable upon conversion of
the 10% Notes. In addition, for the term of the 10% Notes, the holders of at
least 25% of the 10% Notes, or Common Stock if converted, may require the
Company to file a registration statement under the Act with respect to the
Common Stock underlying the Notes. The Company also committed to use its best
efforts to cause such registration statement to become effective and will bear
the expenses associated with the registration. Sales of substantial amounts of
Common Stock in the public market subsequent to the completion of this offering,
and the possibility that such sales may be made, could adversely affect the
prevailing market price of the Company's Common Stock into which the Convertible
Preferred Stock may be converted.
NO PRIOR PUBLIC MARKET
There has been no public market for the Convertible Preferred Stock prior
to this offering, and there can be no assurance that such market will develop or
be sustained upon completion of this offering.
15
<PAGE> 17
USE OF PROCEEDS
The net proceeds of the 1,200,000 shares being offered hereby, after
deducting underwriting discounts and offering expenses, are estimated to be
approximately $27.5 million. The Company plans to use approximately $ million
of the net proceeds to establish new and expand existing manufacturing
facilities, primarily for the manufacture of aircraft and rail seating systems
and components related to the Company's automobile side-impact inflatable
restraint system. The Company also intends to use approximately $ million of
the net proceeds for repayment of various debt obligations, of which
approximately $ million was included in the current portion of long-term debt
at December 31, 1996. The indebtedness to be repaid was incurred primarily to
fund equipment purchases. The remaining net proceeds will be used for working
capital and other general corporate purposes, including potential future
acquisitions. The Company does not have any acquisitions pending at this time.
Pending the uses described above, the Company will invest the net proceeds
of this offering in high quality government and short-term investment grade,
interest bearing securities.
The foregoing represents the Company's best estimate of its allocation of
the proceeds of this offering based upon its present plans and business
conditions. However, there can be no assurance that unforeseen events or changed
business conditions will not result in the application of the proceeds of this
offering in a manner other than as described in this Prospectus. Any such
reallocation of the net proceeds of this offering would be substantially limited
to the categories set forth above.
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<PAGE> 18
CAPITALIZATION
The following table sets forth (i) the actual capitalization of the Company
at June 30, 1996; (ii) the pro forma capitalization giving effect to the
issuance of $14.3 million long-term debt; and (iii) the capitalization as
adjusted to give the effect to the estimated net proceeds of this offering of
$27.5 million. See "Use of Proceeds" and Consolidated Financial Statements
contained elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1996(1)
------------------------------------------
ACTUAL PRO FORMA(3) AS ADJUSTED
--------- ------------ -----------
(Dollars in thousands)
<S> <C> <C> <C>
SHORT-TERM DEBT:
Revolving line of credit............................. $ 6,700 $ -- $ --
Current portion of long-term debt.................... 4,891 4,891 2,848
------- ------- -------
11,591 4,891 2,848
------- ------- -------
LONG-TERM DEBT:
12% Senior Subordinated Notes Due December 1998...... 5,700 5,700 5,700
10% Senior Subordinated Convertible Notes due
September 1999.................................... 14,300 14,300
Mortgage notes and other(2).......................... 3,725 3,725 964
------- ------- -------
9,425 23,725 20,964
------- ------- -------
SHAREHOLDERS' EQUITY:
Preferred Stock, par value $.05 per share; 50,000,000
shares authorized; no shares outstanding and
1,200,000 shares as adjusted...................... -- -- 60
Common stock, par value $.01 per share; 50,000,000
shares authorized; 8,966,442 shares issued........ 90 90 90
Additional paid-in capital........................... 38,697 38,697 66,137
Retained earnings.................................... 6,105 6,105 6,105
------- ------- -------
44,892 44,892 72,392
Total capitalization................................... $ 65,908 $ 73,508 $96,204
======= ======= =======
</TABLE>
- ---------------
(1) Excludes shares of Common Stock reserved for issuance under stock option
plans, the Employee Stock Purchase Plan and an estimate of 850,000 shares of
Common Stock reserved for issuance upon conversion of the 10% Notes. See
"Management -- Stock Option Plans, "Management -- Employee Stock Purchase
Plan" and "Description of Other Capital Stock and Debt Securities."
(2) Consists of various loans payable, secured by property and equipment;
unsecured installment notes; and obligations under capital leases. See Note
8 to Consolidated Financial Statements.
(3) Actual June 30, 1996 amounts adjusted to reflect the issuance of $14.3
million of the 10% Notes in September 1996 and the use of proceeds to repay
the June 30, 1996 balance of the revolving line of credit.
17
<PAGE> 19
PRICE RANGE OF COMMON STOCK
The Company's Common Stock has been listed on the NYSE under the symbol
"SMU" since January 31, 1996. From October 14, 1993 until January 30, 1996, the
Company's Common Stock traded on the American Stock Exchange, and from April 14,
1992 until October 13, 1993, the Company's Common Stock traded on the Nasdaq
National Market System.
On September 28, 1995, the Company completed a 3-for-2 stock split for all
holders of record of the Company's Common Stock as of September 15, 1995,
thereby increasing the number of shares of the Company's Common Stock then
issued and outstanding from 5,904,647 to 8,856,952.
Giving effect to the stock split, the following table sets forth the
quarterly high and low closing prices of the Company's Common Stock for each
calendar quarter of the years indicated.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1995:
First Quarter...................................... $14.92 $12.83
Second Quarter..................................... 16.42 13.50
Third Quarter...................................... 25.13 14.83
Fourth Quarter..................................... 24.13 16.50
1996:
First Quarter...................................... $19.25 $12.75
Second Quarter..................................... 20.63 15.88
Third Quarter...................................... 18.38 15.75
Fourth Quarter..................................... 15.88 13.00
1997:
First Quarter (through March 5, 1997).............. 18.38 13.63
</TABLE>
The number of holders of the Common Stock of the Company, including
beneficial holders of shares held in street name, is estimated to be in excess
of 2,500. On March 5, 1997, the closing price of the Common Stock was $17.50 per
share.
DIVIDEND POLICY
The Company has never paid any cash dividends and does not plan to pay cash
dividends on its Common Stock in the foreseeable future. Instead, the Company
intends to apply any earnings to the expansion and development of its business.
Any payment of cash dividends on its Common Stock in the future will depend upon
the Company's earnings, financial condition, capital requirements, restrictions
imposed by creditors of the Company, including restrictions in the loan
agreement pertaining to the Company's Credit Agreement with Wells Fargo Bank
N.A. and in the Indenture governing the 12% Notes and the 10% Notes, and other
factors which the Board of Directors deems relevant.
18
<PAGE> 20
SELECTED CONSOLIDATED FINANCIAL DATA
(Dollars in thousands, except per share data)
The Selected Consolidated Financial Data presented below has been derived
from historical audited consolidated financial statements of the Company for
each of the five years in the period ended December 31, 1995 and the unaudited
interim consolidated financial statements of the Company for the six-month
periods ended June 30, 1995 and 1996. The financial statements included
elsewhere herein at December 31, 1994 and 1995 and for the three years in the
period ended December 31, 1995 have been audited by Deloitte & Touche LLP,
independent auditors. The interim consolidated financial statements for the
six-month periods ended June 30, 1995 and 1996 are unaudited, but in the opinion
of management of the Company, reflect all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the consolidated
financial data for such periods. Operating results for the six months ended June
30, 1996 are not necessarily indicative of the results that may be expected for
the year ending December 31, 1996. The following data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's Consolidated Financial Statements
and the Notes thereto.
19
<PAGE> 21
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------- -------------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenue.................................... $15,144 $18,833 $24,781 $41,158 $59,089 $28,802 $36,358
Cost of revenue............................ 9,967 12,135 15,728 27,709 36,622 18,587 27,795
------- ------- ------- ------- ------- ------- -------
Gross margin............................... 5,177 6,698 9,053 13,449 22,467 10,215 8,563
Administrative expenses.................... 3,088 4,311 5,469 8,265 15,609 6,656 8,076
Unusual item............................... -- -- 919 -- -- -- --
------- ------- ------- ------- ------- ------- -------
Operating income........................... 2,089 2,387 2,665 5,184 6,858 3,559 487
Interest income............................ -- 57 -- 22 440 191 --
Interest expense........................... 357 209 800 1,832 2,030 1,162 791
------- ------- ------- ------- ------- ------- -------
Income (loss) before taxes................. 1,732 2,235 1,865 3,374 5,268 2,588 (304)
Income tax expense (benefit)............... 965 744 1,260 1,166 1,035 (121)
------- ------- ------- ------- ------- ------- -------
Earning (loss) before cumulative effect of
change in accounting principle(1)........ 1,732 1,270 1,121 2,114 4,102 1,553 (183)
Cumulative effect of change in accounting
principle(1)............................. -- -- -- -- -- -- (3,240)
------- ------- ------- ------- ------- ------- -------
Net earnings (loss)(1)(2).................. $ 1,732 $ 1,270 $ 1,121 $ 2,114 $ 4,102 $ 1,553 $(3,423)
======= ======= ======= ======= ======= ======= =======
PER SHARE AMOUNTS:
Earnings (loss) before cumulative effect of
a change in accounting principle(1)(3)... $ .31 $ .29 $ .22 $ .37 $ .48 $ .20 $ (.02)
Cumulative effect of change in accounting
principle(1)............................. -- -- -- -- -- -- (.36)
------- ------- ------- ------- ------- ------- -------
Net earnings (loss)(1)(2).................. $ .31 $ .29 $ .22 $ .37 $ .48 $ .20 $ (.38)
======= ======= ======= ======= ======= ======= =======
Weighted Average shares outstanding(4)..... 3,571,940 4,608,825 5,024,679 5,704,926 8,576,817 7,748,819 8,916,287
Ratio of Earnings to Fixed Charges and
Preferred Dividends(5)................... 3.85x 5.86x 3.00x 2.67x 3.20x 2.97x --
OTHER DATA:
Research and development:
Funded by the Company.................... $ 127 $ 240 $ 376 $ 688 $ 1,419 $ 729 $ 338
Funded through contracts................. 1,161 4,529 1,813 3,165 4,722 2,023 1,958
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------- JUNE 30,
1991 1992 1993 1994 1995 1996
------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Assets:
Current assets..................................... $ 7,014 $ 9,616 $13,779 $20,594 $37,264 $46,467
Property and equipment............................. 1,330 7,540 7,803 13,199 15,779 18,445
Deferred costs..................................... 542 595 1,460 1,460 6,385 406
Intangibles, patents and licenses.................. -- 169 3,517 12,164 13,870 13,715
Other.............................................. 187 87 228 274 1,441 1,426
------- ------- ------- ------- ------- -------
Total assets......................................... $ 9,073 $18,007 $26,787 $47,691 $74,739 $80,459
======= ======= ======= ======= ======= =======
Liabilities:
Current liabilities................................ $ 4,817 $ 5,567 $ 5,570 $15,358 $15,788 $25,984
Long-term debt..................................... 1,456 4,839 12,794 15,339 11,261 9,425
Other.............................................. -- 369 345 345 158 158
------- ------- ------- ------- ------- -------
Total liabilities.................................... 6,273 10,775 18,709 31,042 27,207 35,567
Shareholders' equity................................. 2,800 7,232 8,078 16,649 47,532 44,892
------- ------- ------- ------- ------- -------
$ 9,073 $18,007 $26,787 $47,691 $74,739 $80,459
======= ======= ======= ======= ======= =======
</TABLE>
- ---------------
(1) During the second quarter of 1996, the Company adopted a new method of
accounting for pre-contract costs. These costs were previously deferred and
recovered over the revenue streams from the Company's
20
<PAGE> 22
customers. Effective January 1, 1996, these costs have been expensed. As a
result, periods prior to January 1, 1996 are not comparable. Net earnings
and earnings per share for the year ended December 31, 1995 and the six
month period ended June 30, 1995 would have been $1,658,299, $.19,
$1,116,402, and $.14, respectively, if the new method of accounting had been
adopted in such periods.
(2) Prior to the Company's April 1992 initial public offering, the Company was
an S corporation for tax purposes. Pro forma net earnings for 1991 and 1992,
reflecting pro forma tax provisions and the elimination of certain expenses,
were $1,123,000, and $1,313,000, respectively.
(3) Amounts for 1991 and 1992 are pro forma earnings per share reflecting pro
forma income noted in (2) above.
(4) The Company effected a 3-for-2 split of its Common Stock on September 28,
1995. As a result, all shares and related references have been restated for
all prior periods and transactions.
(5) Ratio of earnings to fixed charges and preferred dividends is computed by
dividing (i) earnings (loss) before income taxes plus fixed charges and
preferred stock dividend requirements by (ii) fixed charges and preferred
stock dividend requirements. Fixed charges consist of interest on
indebtedness, amortization of debt issuance cost, and the estimated interest
component (one-third) of rental and lease expense. There were no preferred
stock dividend requirements during the periods presented. Earnings were
insufficient to cover fixed charges by $304,000 for the six months ended
June 30, 1996.
21
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis provides information that the
Company's management believes is relevant to an assessment and understanding of
the Company's results of operations and financial condition for the three years
ended December 31, 1995 and the six months ended June 30, 1996 compared to the
same periods of the prior years. This discussion should be read in conjunction
with the Consolidated Financial Statements and the Notes thereto included
elsewhere in this Prospectus. This Prospectus contains certain forward-looking
statements and information. The cautionary statements made in this Prospectus
should be read as being applicable to all related forward-looking statements
wherever they appear in this Prospectus. The Company's actual results could
differ materially from those discussed herein. Factors that could cause or
contribute to such differences include those discussed under "Risk Factors," as
well as those discussed elsewhere herein. See "Business."
OVERVIEW
In 1993, management made a strategic decision to enter the commercial
aircraft seating market to bring its proprietary energy-absorption technologies
to a new industry and take advantage of positive industry trends. To implement
its decision, the Company completed three acquisitions that allowed it to
develop the necessary infrastructure to support future growth. In August 1993,
the Company acquired Airline Interiors, Inc. (the "Airline Acquisition"), which
was primarily involved with the refurbishment, reupholstery, reconditioning, and
reconfiguring of existing passenger seats. The Airline Acquisition provided
certain FAA certifications, enhanced the Company's management team and customer
base, and provided substantial assembly capacity. During 1994, the Company
acquired Coach and Car Equipment Corporation ("Coach and Car") and Artcraft
Industries Corp. ("Artcraft"). The acquisitions of Coach and Car and Artcraft
are collectively referred to as the 1994 Acquisitions. The 1994 Acquisitions'
existing operations included providing a majority of all manufacturing and
refurbishment of rail and mass transit seating systems in North America. The
1994 Acquisitions also provided the Company with substantial large-scale
manufacturing capacity and synergies, which will be utilized in the production
of its 16g Seat. The Company has taken advantage of the synergies between these
three entities in the manufacture of rail and mass transit seating systems.
While each of these businesses individually contribute to the consolidated
earnings of the Company, their full strategic value will not be realized until
the Company begins large scale manufacturing of its 16g Seat. As a result of the
size and timing of its acquisitions, the financial statements for the years
1993, 1994, and 1995 may not be directly comparable.
Simula's revenue has historically been derived from three sources: sales of
Company manufactured products; contract research and development for third
parties; and technology sales and royalties. A substantial portion of its
current revenue is accounted for under the percentage of completion method of
accounting. Under this method, revenue is recorded as production progresses so
that revenue less costs incurred to date yields the percentage of gross margin
estimated for each contract. Overall gross margin percentages can increase or
decrease based upon changes in estimated gross margin percentages over the lives
of individual contracts. During 1993, 1994, and 1995, the Company incurred costs
related to third-party contract research of $1.8 million, $3.2 million and $4.7
million, respectively. Technology sales and royalties in 1993, 1994, and 1995
totaled $100,000, $400,000 and $2,800,000, respectively.
The Company is a holding company for wholly owned subsidiaries, principally
including Simula Government Products, Inc. ("Simula Government Products"), an
entity conducting the Company's defense business, and Intaero, Inc. ("Intaero"),
an entity conducting the Company's commercial seating businesses. The Company
has established several developmental stage companies that engage primarily in
research and development activities, with only minimal current revenue. In 1995,
the Company established Simula Automotive Safety Devices, Inc. ("Simula ASD"),
an entity which conducts substantially all of the Company's operations
encompassing inflatable restraints for automobiles. Simula ASD will not have
significant operations until 1997.
22
<PAGE> 24
In order to prepare for the production of the 16g Seat in commercial
quantities and the commercial introduction of the ITS and bulkhead airbag, the
Company has incurred significant pre-contract costs, which have been charged to
expense in 1996. In prior years, such costs were capitalized. See Note 20 to the
Consolidated Financial Statements. In order to support the introduction and
production of these products, the Company has incurred plant start-up costs and
has also significantly increased expenses applicable to its corporate and sales
infrastructure, which expenses were necessary to develop markets and support the
production of these products that are anticipated to produce revenue in late
1996 and 1997. In addition, the Company has accelerated research and development
expenses applicable to potential new products related to these technologies. The
incurrence of all of these costs resulted in a loss before the cumulative effect
of the change in accounting principle of $183,000 for the six months ended June
30, 1996 and are anticipated to result in a net loss in the third quarter and
possibly the fourth quarter of 1996. The Company is unable to estimate the range
of loss at this time. The Company's contracts for the ITS and bulkhead airbag
provide for deliveries of commercial quantities in 1997.
RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- -------------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
REVENUE
Simula Government Products............. $21,344 $22,034 $25,533 $12,055 $18,752
Intaero................................ 3,437 18,093 29,609 15,051 16,702
Other.................................. 0 1,031 3,947 1,696 904
------- ------- ------- ------- -------
Total.......................... 24,781 41,158 59,089 28,802 36,358
======= ======= ======= ======= =======
GROSS MARGIN
Simula Government Products............. 8,210 8,652 9,632 4,914 5,399
Intaero................................ 843 4,944 9,952 4,464 3,879
Other.................................. 0 (147) 2,883 837 (715)
------- ------- ------- ------- -------
Total.......................... 9,053 13,449 22,467 10,215 8,563
======= ======= ======= ======= =======
ADMINISTRATIVE EXPENSES
Simula Government Products............. 4,760 5,114 6,337 2,852 3,186
Intaero................................ 709 2,775 6,885 2,544 3,763
Other.................................. 0 376 2,387 1,260 1,127
------- ------- ------- ------- -------
Total.......................... 5,469 8,265 15,609 6,656 8,076
======= ======= ======= ======= =======
OPERATING INCOME
Simula Government Products............. 2,448 3,038 3,295 2,062 2,213
Intaero................................ 217 2,168 3,067 1,920 116
Other.................................. 0 (22) 496 (423) (1,842)
------- ------- ------- ------- -------
Total.......................... 2,665 5,184 6,858 3,559 487
======= ======= ======= ======= =======
</TABLE>
23
<PAGE> 25
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the components
of the consolidated statements of income expressed as a percentage of revenues.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------- ---------------
1991 1992 1993 1994 1995 1995 1996
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Revenue.................................. 100% 100% 100% 100% 100% 100% 100%
Cost of revenue.......................... 66 64 63 67 62 65 76
Gross margin............................. 34 36 37 33 38 35 24
Administrative expenses.................. 20 23 22 20 26 23 22
Unusual item............................. 4
--- --- --- --- --- --- ---
Operating income......................... 14 13 11 13 12 12 2
=== === === === === === ===
</TABLE>
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
During the second quarter of 1996, the Company adopted a new method of
accounting for pre-contract costs as more fully described in Note 20 to the
Consolidated Financial Statements. Beginning in 1996, the Company now expenses
pre-contract costs as incurred rather than deferring these costs to be amortized
over the revenue streams from the Company's customers. This change resulted in a
cumulative catch-up adjustment for the effect of costs capitalized as of
December 31, 1995. The effect of the change on the six months ended June 30,
1996 was to increase cost of revenue by $3.1 million, resulting in a reduction
in net earnings before the cumulative effect of a change in accounting principle
of $1.8 million ($.21 per share) net of the related income tax benefit. In
addition, net income for the six months ended June 30, 1996 was reduced by $3.2
million ($.36 per share) for the cumulative effect on prior years (to December
31, 1995) of changing accounting for pre-contract costs. Assuming the change in
accounting had been applied retroactively to the six months ended June 30, 1995,
cost of revenue would have increased approximately $728,000 to $19.3 million and
gross margins would have decreased from 35% to 33%.
Revenue for the six months ended June 30, 1996 increased 26% to $36.4
million from $28.8 million for the comparable period in 1995. Revenue for Simula
Government Products increased 56%, or $6.7 million, primarily as a result of
increased contract activity, principally resulting from an armor contract
completed during the second quarter of 1996. Revenue for Intaero increased 11%,
or $1.6 million, primarily as a result of increased sales of the 16g Seat. Other
revenue decreased approximately $800,000, primarily as a result of the sale of
certain non-strategic assets in 1995.
Gross margins for the six months ended June 30, 1996 decreased 16% to $8.6
million from $10.2 million for the comparable period in 1995. As a percent of
sales, gross margin decreased to 24% from 35% for the comparable period in 1995.
As noted above, cost of revenue for the six-month period ended June 30, 1996
includes $3.1 million for pre-contract costs. This amount was significantly
greater than the pre-contract costs of approximately $728,000 incurred and
capitalized in the six months ended June 30, 1995. These costs primarily relate
to adaptations of the existing capabilities of the ITS and bulkhead airbag
products, which are not yet in production, and the 16g Seat, which is in the
initial phase of production. The inclusion of these costs is in part offset by
increased margins attributable to the increased revenue at Simula Government
Products. Excluding the effect of expensing pre-contract costs, the gross margin
percentage for the six months ended June 30, 1996 would have been 32%. The gross
margin percentage at Simula Government Products decreased from 41% to 29%,
primarily as a result of the expensing of pre-contract costs and the lower gross
margin percentages from the mix of contracts in process or completed during the
period including the armor contract completed in the second quarter of 1996,
which had lower than anticipated margins due to the accelerated delivery
requirements. The gross margin percentage at Intaero decreased from 30% to 23%,
primarily as a result of the expensing of pre-contract costs. Such decrease in
the gross margin percentage at Intaero also resulted from the lower gross margin
from the initial deliveries of the 16g Seat compared to the historic
24
<PAGE> 26
margins from aircraft seat refurbishment services, and the accelerated
completion of two lower-margin rail seating contracts that were committed to by
Coach and Car prior to its acquisition by the Company. The negative gross
margins in "Other" are the result of pre-contract and related product costs,
principally related to the ITS and 16g Seat, incurred by the Company's
subsidiaries that are not yet generating significant revenue.
Administrative expenses for the six months ended June 30, 1996 increased
21% to $8.1 million from $6.7 million for the comparable period in 1995. These
increases are primarily attributable to the continued expansion of the corporate
and sales infrastructure related to the commercial introduction of the Company's
technologies, principally the 16g Seat by Intaero. Administrative expenses also
include research and development costs related to the development of sensors. In
addition, general administrative expenses increased as a result of increased
activity.
Operating income for the six months ended June 30, 1996 decreased $3.1
million to $500,000. The reduction in operating income resulted primarily from
the reduction in gross margins attributable to the expensing of pre-contract
costs and increased administrative expenses noted above.
Interest expense net of interest income for the six months ended June 30,
1996 decreased 18% to approximately $800,000 from $1.0 million for the
comparable period in 1995 as a result of the higher level of debt outstanding in
1995 prior to the Company's public offering in April 1995, offset by interest
income earned on the proceeds from such offering in 1995.
The effective income tax rate approximates 40% for both the 1996 and 1995
periods.
1995 COMPARED TO 1994
Revenue for the year ended December 31, 1995 increased 44% to $59.1 million
from $41.2 million in 1994. Simula Government Products revenue increased 16%, or
$3.5 million, as a result of increased contract activity including increases in
funded research and development. Intaero revenue increased 64%, or $11.5
million, primarily as a result of the full year inclusion of the 1994
Acquisitions and the initial delivery of the 16g Seats. Other revenue increased
principally as a result of technology sales and royalties of approximately $2.0
million in 1995.
Gross margin for the year ended December 31, 1995 increased 67% to $22.5
million from $13.4 million for the comparable period in 1994. The increase is
attributable to increased revenue noted above. As a percent of sales, gross
margin increased to 38% from 33%. Gross margin percentages of Simula Government
Products in 1995 decreased to 38% from 39%. The gross margin percentage at
Intaero increased to 34% from 27% in 1994, primarily as a result of the full
integration of the 1994 Acquisitions, which allowed the Company to increase its
vertical integration, thereby eliminating several third-party vendors. These
benefits were offset to a certain extent by the acceleration of two low-margin
contracts that were committed to by Coach and Car prior to its acquisition by
the Company. The gross margin percentage of the Other category increased to 73%
from a negative margin of (14%) in 1994 as a result of the technology sales and
royalties.
Administrative expenses for the year ended December 31, 1995 increased 89%
to $15.6 million from $8.3 million for the comparable period in 1994. As a
percent of sales, administrative expenses increased to 26% from 20%. Research
and development expenses increased 106% to $1.4 million from approximately
$700,000 as a result of the Company's increased investment in several products
and developmental subsidiaries that are expected to begin generating revenue
subsequent to 1996. Depreciation and amortization expenses increased 86% to $3.1
million from $1.7 million, primarily as a result of amortization relating to the
1994 Acquisitions. Simula Government Products administrative expenses increased
24% or $1.2 million, primarily as a result of increased activity and increased
research and development. Intaero's administrative expenses increased 148% or
$4.1 million, primarily as a result of the inclusion of the acquired companies
for the entire 1995 period and the expansion of the corporate and sales
infrastructure necessary to support the anticipated increase in activity related
to the 16g Seat. Other administrative expenses increased 536% or $2.0 million,
primarily as a result of an increased investment in personnel and operations of
the Company's developmental subsidiaries.
25
<PAGE> 27
Operating income for the year ended December 31, 1995 increased 32% to $6.9
million from $5.2 million for the comparable period in 1994. Operating income
increased as a result of the increase in revenue and gross margin percentage,
partially offset by the increase in administrative costs.
Interest expense for the year ended December 31, 1995 increased by
approximately $200,000 over the comparable period in 1994 as a result of a
higher average debt balance in 1995. Additional debt was incurred to finance
working capital requirements and assumed in connection with the 1994
Acquisitions. Approximately $8.2 million of debt was retired in the second
quarter of 1995 with a portion of the proceeds of the Company's 1995 public
offering.
The effective income tax rate was approximately 22% for 1995 and 37% for
1994. The decrease in the effective tax rate in 1995 is attributable to the
realization of tax attributes of an acquired subsidiary. The effects of the tax
attributes of this acquired subsidiary were substantially recognized in 1995.
Accordingly, management does not expect that the remaining tax attributes will
have a significant impact on the Company's effective income tax rate in future
periods. See Note 10 to the Consolidated Financial Statements.
1994 COMPARED TO 1993
Revenue for the year ended December 31, 1994 increased 66% to $41.2 million
from $24.8 million for the comparable period in 1993. Revenue for Simula
Government Products increased approximately 3% or $700,000, primarily as of
result of increased activity in research and development contracts. Revenue for
Intaero increased 426%, or $14.7 million as a result of a full year's inclusion
of the Airline Acquisition and a partial year's inclusion of the 1994
Acquisitions. Other revenue increased $1.0 million as a result of the
establishment of several early-stage companies in 1994.
Gross margins for the year ended December 31, 1994 increased 49% to $13.4
million from $9.1 million for the comparable period in 1993. The increase was a
result of the increase in revenue noted above. As a percentage of sales, gross
margin decreased to 33% in 1994 from 37% in 1993. Gross margin percentage of
Simula Government Products in 1994 and 1993 was relatively constant at 39%. The
gross margin percentage at Intaero increased to 27% in 1994 from 25% in 1993,
primarily as a result of the partial year inclusion of the 1994 Acquisitions
which had a higher gross margin percentage.
Administrative expenses for the year ended December 31, 1994 increased 51%
to $8.3 million from $5.5 million in 1993. Research and development expense
increased 83% to $700,000 from $400,000 in 1993. Depreciation and amortization
expense increased $900,000 to $1.7 million from $800,000 as a result of the
Airline Interiors acquisition. Administrative expenses for Simula Government
Products increased 7% for 1994 from amounts for 1993 as a result of normal cost
increases. Administrative expenses for Intaero increased 291% or $2.1 million as
a result of the inclusion of administrative expenses of the acquired companies,
including amortization of intangibles resulting from their respective
acquisitions.
The unusual item in 1993 resulted from the Company's obligation to pay
certain settlement costs incurred in connection with a DCAA audit and the
related Settlement Agreement and Release dated and effective on September 17,
1993.
Operating income of the Company increased 95% in 1994 as compared to 1993.
Operating income of Simula Government Products increased in 1994 compared to
1993, primarily as a result of the absence of an unusual item in 1994. Operating
income of Intaero increased as a result of the incremental income recorded by
Intaero.
Interest expense for 1994 increased from 1993 as a result of the issuance
of the 12% Notes, the Series B 9% Convertible Notes (the "9% Notes"), and debt
incurred to finance the working capital of Intaero. The increase in interest
expense of Intaero represents the cost associated with debt incurred and assumed
in the Airline Acquisition and the 1994 Acquisitions.
The effective income tax rate approximated 40% for both such periods.
26
<PAGE> 28
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations through operating cash
flow, lines of credit, and debt and equity offerings. In August 1993, the
Company began to acquire companies, primarily with borrowed funds. The Company
issued $5.7 million of the 12% Notes in connection with the acquisition of
Airline Interiors in August 1993; the Company issued approximately $6.5 million
of the 9% Notes in connection with the acquisition of Coach and Car in June
1994; and the Company issued 67,228 shares Common Stock and assumed a bank line
of credit of $1.7 million, of which $650,000 was repaid simultaneously with the
closing, in connection with the acquisition of Artcraft in September 1994. But
for the acquisitions, the Company would have been able to satisfy its financial
needs through operating cash flow. These acquisitions resulted in substantially
increased working capital requirements to fund the large vendor payable balances
at the date of acquisition and to increase receivables and inventories for all
of the acquired companies after the respective dates of acquisition. In
addition, restrictive covenants under the Company's then existing bank line of
credit required the Company to seek alternative financing. In September 1994,
the Company obtained an aggregate of $6.2 million of financing from three
non-bank lenders, including $2.0 million from the Company's Chairman.
The 9% Notes were converted into Common Stock during 1994. The Company
completed a public offering of Common Stock, which closed and funded in April
1995. As a result of that offering, 2,328,750 shares were sold by the Company at
$12 per share. Approximately $8.2 million of indebtedness was repaid at that
time, including the $6.2 million described above.
In September 1996, the Company issued $14.3 million of Series C 10% Senior
Subordinated Convertible Notes (the "10% Notes") in a private placement to
accredited investors. The 10% Notes bear interest at 10% payable semi-annually
and are due in September 1999. The notes are convertible into Common Stock of
the Company at 103% of the average closing price of the Company's Common Stock
as quoted on the New York Stock Exchange for the 10 consecutive trading days
immediately preceding notice by the individual holder fixing the conversion
price. Based upon the average closing prices of the Company's common stock for
the 10 trading days ended March 5, 1997, the 10% Notes are convertible into
approximately 816,000 shares of the Company's Common Stock. The Company has the
right to call the 10% Notes at par plus accrued interest through the date of
redemption any time after June 15, 1997 and earlier under certain circumstances.
The Indenture relating to the 10% Notes and the Company's 12% Senior
Subordinated Notes, contains certain covenants including limitations on the
incurrence of additional indebtedness, limitation on sale of assets,
transactions with affiliates, and payment of dividends. In accordance with the
Indenture, the Company may incur indebtedness based upon the specified ratio of
cash flow, as defined, to interest expense. All of the Company's 1996
borrowings, including the availability under the Company's line of credit are
allowable borrowings under the terms of the Indenture. However, future losses
could limit the Company's ability to issue new debt instruments. Notwithstanding
the foregoing, the Company may incur indebtedness used to renew, extend,
refinance, refund or repurchase outstanding indebtedness and the Company is
currently in compliance with all material covenants and conditions under its
debt instruments.
On October 20, 1995, the Company executed a loan agreement with First
Interstate Bank, N.A. (now Wells Fargo Bank) to provide up to $15 million of
credit. Ten million dollars of the facility is available under a revolving
credit arrangement to finance working capital requirements and $5 million is
available under a five-year amortizing term loan for the financing of U.S. based
equipment. The outstanding balances of the revolving credit facility and
equipment facility at June 30, 1996 were $6.7 million and $3.1 million,
respectively. In September 1996, the Company issued $14.3 million of the 10%
Notes in a private placement. Proceeds from the 10% Notes were used to repay the
balance outstanding under the revolving line of credit at June 30, 1996. On
December 20, 1996, the Company entered into a modification of its existing loan
agreement with Wells Fargo Bank, N.A. This modification provides for an increase
in the existing revolving line of credit to $20 million and $1.5 million of
availability for equipment purchases. The modified agreement contains a covenant
that limits the Company's ability to incur additional indebtedness.
Specifically, the modified agreement allows the Company to incur up to $30.7
million of subordinated debt, a foreign loan facility of $5.0 million, computer
equipment financing, and certain refinancing indebtedness. In addition, the
modified
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agreement contains certain covenants that require the maintenance of various
financial ratios, including minimum tangible net worth of $45 million, a maximum
leverage ratio, a minimum current ratio of 1.5 to 1 and a minimum debt coverage
ratio.
The Company's liquidity is greatly impacted by the nature of the billing
provisions under its contracts. Generally, in the early period of contracts,
cash expenditures and accrued profits are greater than allowed billings, while
contract completion results in billing previously unbilled costs and profits.
Contract receivables, net of advances on contracts, increased $6.1 million for
the six months ended June 30, 1996 and $15.1 million for the year ended December
31, 1995, principally due to the timing of billings and increased volume at
Coach and Car and Simula Government Products.
Operating activities required the use of $8.1 million of cash during the
six months ended June 30, 1996 compared to the use of $7.3 million of cash
during the same period in 1995. This resulted primarily from the working capital
required for growth in contract activity and receivables noted above, the
funding of the $4.9 million investment in inventories, primarily at Simula
Government Products for upcoming contracts, and Airline Interiors for the 16g
Seat and pre-contract costs. Operating activities required the use of $14.5
million of cash during 1995 compared to $2.7 million of cash in 1994. This
resulted primarily from the working capital required for the growth in contract
activity and receivables noted above and from the funding of the pre-contract
costs for technologies being adapted to meet customers' requirements. The
majority of the pre-contract costs incurred in 1995 and 1996 related to the ITS,
16g Seat, and bulkhead airbag. See "Business" for a discussion of such products.
For the six months ended June 30, 1996, cash used in investing activities
was $3.9 million, which was expended primarily for the purchase of manufacturing
equipment for the ITS and computer and test equipment at Simula Government
Products. For 1995, cash used in investing activities was $3.4 million and was
expended primarily for the acquisition of fixed assets.
Cash provided by financing activities was $9.2 million for the six months
ended June 30, 1996, of which $6.7 million resulted from borrowings on the
revolving credit facility primarily for working capital needs. The Company also
borrowed $2.4 million under other borrowing arrangements, primarily for the
financing of fixed assets. Cash provided by financing activities for the year
ended December 31, 1995 was $20.1 million and primarily resulted from the sale
of the Company's Common Stock for $26.4 million offset by the net reduction of
borrowings of $6.3 million.
The Company believes that it will invest approximately $6.0 million in
property and equipment for the production of the l6g Seat and ITS over the next
year. In addition, the Company will invest approximately $17 million in working
capital related to the production and sales of such products. It is anticipated
that the cash flow from operations, borrowings under its bank credit facilities,
and the proceeds from this offering will be adequate to satisfy the Company's
capital requirements through 1997.
RESEARCH AND DEVELOPMENT
The Company's research and development occurs primarily under fixed-price,
government-funded contracts as well as Company-sponsored efforts. The revenue
received under government-funded contracts is recorded under the percentage
completion method of accounting, and the costs of independent research and
development efforts are expensed as incurred.
Historically, research and development efforts have fluctuated based upon
available government-funded contracts. As noted in Note 16 to the Consolidated
Financial Statements, the Company expended $2.2 million in unfunded research and
development in 1995 to advance its primary new commercial technologies.
SEASONALITY
The Company's operations and financial results are affected by the seasonal
variations in deliveries by suppliers. Historically, the Company has experienced
its highest level of deliveries of materials in the fourth quarter and its
lowest level of deliveries in the first quarter. Accordingly, the Company has
historically recorded its highest revenue in the fourth quarter and lowest
revenue in the first quarter.
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BUSINESS
OVERVIEW
The Company was formed in 1975 when its founder accepted a government
research contract to focus on engineering solutions that could be used to
protect the lives of American helicopter crews in crash situations. Because of
the rotary blade utilized by helicopters, helicopter pilots cannot eject in the
same manner as pilots in fixed-wing aircraft. The contract led to the Company's
development of a crashworthy seat, first introduced in the Army Blackhawk
helicopter.
The core technology developed under the Company's first contract was
energy-absorbing seating which, upon impact, absorbs shock that otherwise would
be directed onto the occupant. In the course of supplying the United States
armed forces and agencies with crashworthy seating, the Company performed years
of research and tests and developed proprietary databases with respect to how
materials stretch, bend, and break. Similarly, in an effort to provide
additional protection for pilots, the Company conducted extensive research and
development in the late 1970s on armor systems composed of a variety of
lightweight, high-strength composites and ceramics. Such lightweight armor
systems were eventually incorporated into most helicopter seating systems. This
armor technology has also led to the development of a variety of other armor and
occupant protection systems. In the 1980s, the Army asked the Company to develop
a solution to injuries suffered by pilots caused by contact with instrumentation
on hard landings or during crashes. From its extensive research, the Company
developed its inflatable restraint systems, which include harnesses, belts, and
other types of sophisticated airbags. The Company has leveraged this evolving
research and development into applications in a variety of technologies and
products.
Today, the Company, through its 11 operating subsidiaries, conducts
operations in three principal market segments: commercial transportation seating
systems, government and defense, and automobile safety systems. Operations can
be described in three phases: (i) providing contracted research and development
activities to third parties to solve specific safety related issues and
undertaking Company funded research to expand existing technologies to new
applications, (ii) leveraging such research into advanced, high-performance,
cost-efficient product solutions to influence market preferences in a wide range
of applications and industries, and (iii) manufacturing, selling, and marketing
such products.
OPERATING AND GROWTH STRATEGY
The Company's strategy is to maintain its leading position in creating and
applying proprietary technologies and advanced solutions to safety related
problems and to develop its products for commercial sale to a wide range of
customers. The key elements in executing this strategy are to (i) develop and
utilize technology to enhance current products and create new products, (ii)
focus on new product markets and regulatory requirements, (iii) expand
manufacturing capabilities and maximize internal synergies, and (iv) pursue
acquisitions and strategic alliances that complement existing businesses or
provide manufacturing or distribution opportunities.
TECHNOLOGY AND PRODUCT DEVELOPMENT
The Company focuses on the development of technologically advanced,
high-performance, cost-efficient solutions to influence existing markets to move
in new directions or create entirely new markets. The Company's growth strategy
is "engineering-driven," taking technologies learned, developed, and refined in
one arena, and applying them to another sector. Management's objective is to
selectively identify and manage engineering solutions to create market
opportunities rather than allow the Company's current product base to define the
Company's markets. The Company believes that its competitive advantage is
technology and innovation. The Company employs approximately 150 engineers and
scientists and maintains an active research and development program to enhance
its existing products and to develop new products and product applications. The
Company has a substantial data base, available to its biomechanical engineers,
based on which analysis is made regarding human body dynamics in crash
environments. Additionally, the Company's proprietary technologies are embodied
in numerous trade secrets, 13 patents, and 35 patents pending. The
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Company enhances and supports products by the development of a compatible family
of products, such as its various inflatable restraint technologies designed into
four automobile applications and three aircraft applications. The Company seeks
to pursue a diverse technology and product base that minimizes dependence on one
or a few products and technologies.
MARKET AND REGULATORY FOCUS
The Company endeavors to demonstrate the technological feasibility of new
standards, provide the basis for new regulations, and utilize its technological
expertise to develop and introduce products that meet these new standards and
regulations ahead of its competitors. The Company seeks to remain at the
forefront of industry developments by being proactive in developing industry
trends and regulatory guidelines. The Company's long-standing involvement with
governmental departments and agencies facilitates its ability to anticipate
regulatory safety requirements and consumer safety issues and to develop
products that address these concerns. In this regard, the Company authors the
"Aircraft Crash Survival Design Guide," a five-volume text published by the
United States Army regarding crash survival technology, which is commonly used
worldwide as a guide in the design of crashworthy aircraft. The Company also
co-authored "The Transport Seat Performance and Cost Benefit Study," a study
commissioned by the FAA to analyze the performance of seats in commercial
airliner accidents. This study, which was first published in October 1986, was
cited as a principal consideration in the FAA's changes in commercial airliner
seat design specifications. The Company also owns and operates the International
Center for Safety Education ("ICSE"), a Phoenix-based training school
established in 1958 that sponsors courses which have been attended by more than
5,000 safety investigators from United States and foreign government agencies,
armed services, the aircraft industry, and the field of aviation medicine. The
function of ICSE is to teach the analysis of aircraft behavior in a crash, the
causes of injury or death to passengers and crew, and the design and structural
changes that can be made to improve survivability. See "Risk
Factors -- Government Safety Regulations."
EXPANDING MANUFACTURING CAPABILITIES AND MAXIMIZING INTERNAL SYNERGIES
The Company seeks to maintain integrated testing and manufacturing capacity
for its products; however, the Company may also subcontract certain
non-proprietary components of its products and provide its proprietary products
for integration and sale in the final products of customers. Over the last two
years, the Company has significantly expanded its manufacturing capabilities and
infrastructure, through both acquisitions and internal development, to support
the commercial production of several new product lines. In addition, the Company
has vertically integrated the manufacturing of several components used in its
seating systems, which has positively impacted overall profitability. The
Company expects to continue to expand its manufacturing capabilities, to develop
its infrastructure to support its new product development programs, and to enter
into licensing relationships to facilitate the distribution of its products. See
"Risk Factors -- Dependence on Industry Relationships."
EXPLORING ACQUISITION AND STRATEGIC ALLIANCE OPPORTUNITIES
The Company explores acquisition opportunities as they arise and enters
into strategic alliances when it believes such acquisitions or alliances will
enable the Company to introduce new products or enhance existing products, to
exploit its technologies or acquire complementary technologies, to improve its
manufacturing capabilities, to broaden its distribution channels, or to obtain
components or supplies necessary for its products. In its last three fiscal
years, the Company has experienced substantial growth resulting from strategic
acquisitions to maximize the market potential of new technologies, wider
application of technologies, and new product introductions. The Company has no
present commitments or agreements with respect to any additional acquisitions or
alliances. See "Risk Factors -- Acquisitions."
OVERVIEW OF MARKET SEGMENTS AND INDUSTRIES
The Company believes that the entire transportation market is poised for
transformation as society's awareness of safety issues increases. Simula seeks
to position itself to benefit from consumer demand and
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government regulations requiring progressive safety equipment on all forms of
transportation, from automobiles and aircraft, to school buses and high speed
trains.
COMMERCIAL TRANSPORTATION SEATING
Airliner Seating Systems. At the end of 1995, there were approximately
11,000 passenger aircraft in operation worldwide, representing over 2.0 million
passenger seats. A study conducted by the Boeing Commercial Airplane Group
projects that 3,142 new passenger aircraft will be put into service during the
next five years, replacing 1,532 older aircraft and adding 1,610 additional
aircraft to airline fleets. The study further projects that 14,054 aircraft will
be manufactured and put into service over the next 20 years, representing over
3.2 million passenger seats.
Historically, annual production of new aircraft seats has been between
120,000 and 130,000 worldwide, exclusive of repaired and refurbished seats. The
Company believes that the recent growth of the airline industry, with the
resulting increase in passenger miles flown and the recent trend toward
installation of communication and entertainment systems in aircraft seats, will
increase demand for new seats. Additionally, there has been a recent significant
consolidation in the new seat industry, which the Company believes will benefit
it because of the desire of airlines to have a broader supplier base. Although
the Boeing study did not include refurbished seats, the Company also believes
that the demand for refurbished aircraft seats will grow as the airline industry
expands and new airlines purchase used aircraft.
Additionally, demand for both new and refurbished aircraft passenger seats
may further increase as new regulations are adopted or enforced that raise the
standards for crashworthiness in light of recent heightened attention to airline
safety and FAA initiatives. For example, the continued phase-in of FAA standards
requiring airliner passenger seats to withstand the force of 16g's (16 times the
force of gravity) in a crash is expected to create increased demand for new
aircraft seating systems meeting such requirements. Similarly, in 1988, the FAA
adopted regulations requiring that all passengers on an aircraft have a certain
specified level of head injury protection, as measured by Head Injury Criteria
("HIC"). Presently, most commercial aircraft certificated since the adoption of
the FAA regulations are flying under waivers granted by the FAA because such
aircraft do not meet the HIC criteria for passengers sitting immediately behind
bulkheads and other cabin partitions. The Company believes that the FAA waiver
policy will be reviewed and updated, thus creating an increased demand for
installation of inflatable bulkhead restraints on commercial aircraft to improve
the safety of passengers. See "Risk Factors -- Government Safety Regulations."
The FAA initiatives, and the resulting products of the Company focusing on
16g seats and bulkhead HIC standards, are intended to address injuries in
"survivable" crashes. According to NTSB statistics, there were 2,211 aviation
accidents in the United States in 1995. Commercial airlines were involved in 145
of such accidents, 20% of which had some fatalities and 80% of which resulted
only in injuries. Of these injuries, approximately 80% were to passengers and
20% to the crew. Common causes of aircraft accidents include overruns, hard
landings, and ground collisions with objects. These survivable accidents, which
have historically resulted in injuries, are the type for which the Company's
products increase safety and reduce the risk or severity of injuries on
commercial airliners.
Rail and Mass Transit Seating. The rail and mass transit industries are
undergoing significant changes, including growth in ridership and upgrading of
fleets. Demand for rail and mass transit seating results from the traveling
public's desire for safety and comfort as well as new laws and regulations, such
as the Clean Air Act Amendments of 1990 and the Americans with Disabilities Act,
which require that transit authorities and rail operators purchase new or
retrofit existing equipment.
The Company believes that the United States bus industry will purchase over
13,000 new buses between 1995 and 1998 and that railcar-purchasing agencies will
purchase up to 3,500 rail and mass transit cars during the same period. Rail and
mass transit seat manufacturers may also potentially benefit from the
development of lighter weight and high-speed rail systems in North America.
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GOVERNMENT AND DEFENSE
The Company believes that the United States government will continue to
fund a significant defense budget and will increasingly support high technology
and safety improvements. In part as a result of a shifting focus on tactical
weaponry designed to meet the needs of a military primarily adopting a
containment defense posture, certain strategic programs, such as the Stealth B-2
Bomber and the MX missile, have been cut or eliminated, while government
contract revenue for containment, mobile, and tactical programs has increased.
Certain technical military aircraft programs in which the Company is involved,
such as the Black Hawk helicopter, C-17 utility air transport, and Apache attack
helicopter, continue to be funded. The Company expects that pilot and passenger
safety will continue to be a critical part of these and other programs, although
no assurances can be offered in this regard. As part of the shifting focus of
the military, defense forces are more mobile than ever before, with the United
States and many foreign governments placing greater emphasis on transportation
safety. The United States is widely regarded as the world leader in military
safety and technology development, and expenditures in these areas are expected
to continue in the future as military forces become increasingly mobile. The
Company believes that there will be continued government spending on and demand
for military safety technology products, such as advanced energy absorbing
seating, lightweight armor systems, and inflatable restraints. See "Risk
Factors -- Substantial Reliance Upon Major Customers."
The Company regards its reputation and relationship with various military
branches and regulatory agencies throughout the world, including the FAA, NHTSA,
National Aeronautics and Space Administration ("NASA"), and the National
Transportation Safety Board ("NTSB") to be a significant asset and intends to
continue to pursue government-funded research and development when it can retain
proprietary rights. The Company intends to continue to expand its government
business; however, this segment's revenue has declined as a percentage of
overall Company revenue as demand for the Company's commercial products has
steadily increased.
AUTOMOBILE SAFETY SYSTEMS
Demand for automobile safety products results primarily from government
regulations and consumer demands. One regulation, adopted in 1984 by NHTSA,
provided the impetus for the development of the airbag market in the United
States by requiring installation of passive restraints in all new cars sold
after 1989. Passive restraints typically consist of either frontal airbags or
passive seat belt systems. Applicable 1991 regulations require the use of
airbags for both sides of the front passenger compartment of all new cars sold
in the United States by the 1998 model year. Frontal impact is the leading cause
of automobile injuries, accounting for approximately 51% of fatal and injury
automobile collisions. See "Risk Factors -- Government Safety Regulations."
Consumer demand has outpaced regulation as the primary impetus for the
growth of the airbag market. According to publicly available automotive industry
data, in the 1989 model year, only 7% of the automobiles produced in the United
States included an airbag. This percentage increased to 28% in 1990, 42% in
1991, 59% in 1992, and 71% in 1993. Industry sources estimate that standard
driver's side airbags were installed in approximately 90% of 1995 model year
autos sold in the United States and, to a lesser extent, overseas. This high
degree of penetration has been achieved in advance of the regulatory deadline as
a result of consumer demand.
Side-impact collisions comprise the second leading cause of injury,
accounting for approximately 30% of all serious and fatal automobile injuries,
with a significant majority of such injuries caused by impact to the head and
neck. Present United States side-impact safety standards address the use of foam
padding and/or structural beams. However, NHTSA is currently examining head
crash standards, measured in quantifiable HICs for side-impact collisions.
Rollover injuries are the third leading cause of injury, accounting for
approximately 15% of all automobile injuries. The Company's ITS is the only
available product designed specifically to protect the head and neck of vehicle
occupants in side-impact collisions and potentially provide containment of
occupants in rollover and secondary impact collisions. See "Inflatable Restraint
Systems -- Automobile Inflatable Restraint Systems."
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EMERGING TECHNOLOGIES
The Company believes that regulatory mandates and consumer demands will
continue to drive the demand for advanced safety products and technologies,
creating opportunities for the development of new technologies and products and
providing additional markets for existing technologies. The Company believes
that included among the products and technologies with significant present or
future market potential in which the Company is developing capabilities are (i)
sensor equipment for the deployment of airbags, (ii) remote sensing devices
programmed to analyze the failure characteristics of vehicles and structures,
(iii) advanced lightweight composite materials, and (iv) other advanced
materials, such as urethanes and polymers, with a wide variety of potential
product applications, including high-performance windows for aircraft and
automobiles, and protective lenses and visors.
THE COMPANY'S PRODUCTS AND EMERGING MARKETS
The Company's growth to date has resulted principally from its core
products and technologies involving energy-absorbing seating systems, armor, and
seat repair and refurbishment. More recently the Company has introduced new
products. The following table shows each of the Company's products currently in
production and each of the products the Company expects to commence delivery of
on the rollout schedule indicated.
PRODUCT AND TECHNOLOGY STATUS
<TABLE>
<CAPTION>
PRODUCT/TECHNOLOGY STATUS PRODUCT ROLLOUT
- ----------------------------------------- ------------------------------- ----------------------
<S> <C> <C>
Energy Absorbing Seating
Systems -- Military.................... In Production 1975 -- On-going
Composite Armor.......................... In Production 1985 -- On-going
Airliner Seat Repair and Refurbishment... In Production Acquired 1993 -- On-
going
Rail and Transit Seating................. In Production Acquired 1994 -- On-
going
New 16g Airliner Seats................... In Production 1996 -- On-going
Inflatable Tubular Structure............. Volume Production 1997
Bulkhead Airbag System................... Certified/Ready for Production 1997
Cockpit Airbag System.................... Ready for Production 1997
Inflatable Body and Head Restraint
System................................. Ready for Production 1997
</TABLE>
SEATING SYSTEMS AND COMPONENTS
Military Aircraft Seating Systems. The Company has been a major supplier
of energy-absorbing seating systems for military helicopters and other military
aircraft to various branches of the United States armed forces and their prime
defense contractors for approximately 20 years. The seating systems focus on
reducing injury and increasing survivability in crashes involving aircraft.
These crashworthy seating systems contain proprietary energy-absorbing
components and devices that activate upon crash impact to absorb shock that
otherwise would be absorbed by the seat occupant.
Based on publicly available information and industry sources, the Company
believes that it is the leading provider of crashworthy helicopter seats
purchased by the United States armed forces, being the sole supplier for 11
helicopter programs. Aircraft for which the Company has designed and
manufactured seat assemblies for pilots, flight crews, troops, or SONAR
operators include the AH-64A Apache attack helicopter; UH-60A Blackhawk
transport and cargo helicopter; SH-60B Sea Hawk reconnaissance helicopter; SH-3
Sea King utility helicopter; CH-53 Sea Stallion transport and cargo helicopter;
V-22 Osprey tilt-roar aircraft; Indian Hindustan Aeronautics, Ltd. ALH utility
helicopter; and C-17 fixed wing utility aircraft. Aircraft manufacturers in the
Company's customer base include the Boeing Company, McDonnell Douglas
Corporation, and Sikorsky Aircraft.
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Commercial Airliner Seating Systems. The Company, through its wholly owned
subsidiary Airline Interiors, manufactures and sells commercial airline seating
systems that comply with FAA-mandated 16g standards for airline seats and
repairs, refurbishes, and retrofits commercial aircraft seats. With the
acquisition of Airline Interiors in 1993, the Company obtained FAA
certifications and an established customer base of commercial airlines as well
as the operations to repair, refurbish, and retrofit commercial aircraft seats.
The Company's entrance into the airline seating market is an outgrowth of both
the Company's technologies and Airline Interiors' traditional core
business -- the repair, refurbishment, and retrofitting of commercial aircraft
seats.
The 16g Seats are designed to absorb 16 times the force of gravity upon
impact. The prices and features of the Company's new 16g Seats are competitive
with more established 16g seat suppliers, but exceed existing and currently
anticipated industry and regulatory standards for crashworthiness. The Company's
16g Seats have been tested, approved, and certified for use in numerous classes
of commercial aircraft. The Company's customer base for its 16g Seats includes
Air Transit, The Boeing Company, GATX Leasing, International Leasing Finance
Corp., Onur Air, Flying Colors Airlines, and two other major U.S. carriers. The
Company currently has more than $40 million in bid proposals outstanding for
proposed seating contracts with international, national, and regional airlines.
There can be no assurance, however, that the Company will be awarded these or
other seating contracts. See "Risk Factors -- Entry into New Markets," "Risk
Factors -- Competition," and "Business -- Overview of Markets and
Industry -- Commercial Airliner Safety Systems.")
The Company also repairs, refurbishes, and retrofits existing commercial
aircraft seats. Its services include (i) the supply of seat components,
including upholstery, cushioning, and fiber blocking; (ii) the overhaul and
modification of seat assemblies, including arm rests and tray tables; and (iii)
the design and integration of communication and entertainment systems into
aircraft seats. Customers of Airline Interiors for such services include America
West Airlines, Continental Airlines, Southwest Airlines, and United Airlines.
The Company believes that various developments in the airline industry may
increase the demand for new energy-absorbing seats and for the repair,
refurbishment, and retrofitting of existing airliner seats. These factors
include the potential for increased federal regulation requiring improvements in
passenger seat crashworthiness, increased safety concerns by passengers, the
growth of airline travel, restructurings and reorganizations of air carriers,
the need to reconfigure and upgrade existing aircraft interiors, the delivery of
new aircraft, and the growth of demand for communications and entertainment
features in aircraft seats.
Rail and Other Mass Transit Seats. The Company's acquisition of Coach and
Car and Artcraft in 1994 brought to the Company an established seat
manufacturing identification, contract backlog, and additional manufacturing
capacity for airline seats. In addition to these synergies with Airline
Interiors and its seat technology, the Company became, and continues to be, the
leading North American provider of seating systems for rail and other mass
transit vehicles. Through an integrated design, development, and production
capability, the Company supplies seating in a variety of styles, materials,
colors, configurations, and optional features. The Company produces stainless
steel, plastic, and fiberglass seating systems for subways, cushioned and
upholstered seating for other mass transit vehicles, and deluxe recliners for
railroad cars. The seating systems feature lightweight construction; ease of
installation and maintenance; vandal resistant, durable, and long-lasting
components; reinforced structures for superior strength and support; fire and
smoke resistance; sound and energy absorption; and passenger safety and comfort.
Customers include Amtrak, ABB Traction, Inc., Bombardier, Inc., Amerail
(formerly Morrison Knudsen Corporation), Siemens Duewag Corporation, Kawasaki
Rail Car, Inc., and the metropolitan transit authorities in major North American
cities.
The Company believes that additional opportunities exist in its seating
business as a result of the need to expand and modernize mass transit systems
across the United States, the Company's pursuit of international business, and
potentially the application of various aspects of the Company's
energy-absorption and other safety technologies to rail and other mass transit
vehicles, including high-speed trains.
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INFLATABLE RESTRAINT SYSTEMS
The Company developed its core inflatable restraint technology under a
contract with the United States government and, commencing in late 1997, will
use this technology to manufacture an inflatable body and head restraining
system ("IBAHRS") for military helicopter crew members. As customary with
government contracts, the Company retained the proprietary commercial rights to
the IBAHRS technology and has expanded and developed such technology into
numerous other applications in various products and industries. As an outgrowth
of IBAHRS, the Company currently produces or is developing four types of
inflatable restraint systems for automobiles and three systems for commercial
and military aircraft.
Automobile Inflatable Restraint Systems. The Company developed, patented,
and is manufacturing the ITS, which is an automobile inflatable restraint
system. The ITS occupies a stored position above a side window and inflates upon
impact to extend diagonally across the side window, which provides protection
against head and neck injuries from side-impact collisions. An automobile may be
equipped with an ITS at each side window. The Company's ITS technology recently
comprised two of the 36 finalists out of 4,000 technology entrants submitted for
Discovery Magazine's "Technology of the Year Award."
The ITS provides protection in certain side-impact collisions beyond that
provided by conventional airbags currently utilized in automobiles. Unlike a
conventional airbag, which must be trapped by a structure such as a steering
wheel, dashboard, or door, the ITS is attached to and supported by the structure
of the vehicle frame and door pillars. During a side-impact crash, a tube
located above the door inflates and becomes shorter in length, which causes it
to drop out of its molding and form a tight diagonal structure across the side
window. As a result, the ITS provides protection despite the window being open
or breaking upon impact, while a conventional airbag would not have adequate
support in these situations. Therefore, the ITS is able to substantially reduce
head rotation to the side, preventing contact with vehicle components.
Additionally, the diagonal arrangement of the activated ITS offers protection
for occupants of different sizes, weights, and seating positions, and in
different types of side-impact collisions, as well as in rollover, secondary
impact, and ejection situations.
Recent tests have shown that a side-impact collision at approximately 30
miles per hour with a combination of the most extensive safety protection
systems available in 1996 model automobiles (consisting of a seat belt and
shoulder harness along with conventional frontal and side impact airbags)
results in a HIC of about 1500, which is an impact sufficient to cause a fatal
injury to the vehicle occupant. Conversely, tests performed under the same
conditions with the addition of an ITS resulted in a HIC of only approximately
560, which, barring injury to other parts of the anatomy not addressed by the
ITS, would allow the occupant to survive the crash.
The Company has developed various additional applications for the ITS.
Through different configurations, the ITS provides protection to other parts of
the body and in other types of collisions. Such applications include the
inflatable tubular cushion ("ITC"), a seat mounted torso protection system, the
inflatable tubular bolster ("ITB"), a system to protect knees and legs, and the
inflatable tubular torso restraint ("ITTR") which utilizes the ITS in an
inflatable restraint harness and seat belt application.
The Company, through Autoliv GmbH, is currently preparing to provide the
ITS to BMW, a major European automobile manufacturer, for inclusion in certain
1997 models of its automobiles. The Company also has agreements with another
first tier auto supplier to provide ITS to a second automobile manufacturer and
to provide a different application of the ITS technology to another automobile
manufacturer. The Company has a low-volume production facility in Phoenix and a
high volume European manufacturing plant, located in Northumberland County in
the northeast of England.
Alone and with Autoliv GmbH, Morton International, and other first tier
component suppliers, the Company is actively pursuing ITS and other product
applications with other automobile manufacturers. The Company has entered into
strategic alliances with these first tier component suppliers because the
Company is able to leverage off of the size and industry strength of such large
manufacturers and benefit from their market contacts. Further, such
relationships facilitate the marketing and distribution of the ITS and related
products through the combined marketing and manufacturing efforts of the Company
and the strategic partners.
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Although the first tier component suppliers produce airbag products, the ITS and
related technologies are unique proprietary products and not mere auto part
commodities as are most forms of traditional airbags. There can be no assurance,
however, that the Company will be successful in its efforts to expand the
markets for ITS and other product applications. See "Risk Factors -- Entry into
New Markets" and "Risk Factors-- Dependence on Industry Relationships."
Aircraft Inflatable Restraint Systems. The Company has completed
development of and plans to market various inflatable restraint systems for
military and commercial aircraft. These systems include the IBAHRS for the
protection of military helicopter crew members, a cockpit airbag system ("CABS")
for the protection of the flight crew in military aircraft, and a bulkhead
airbag system ("BABS") for the protection of passengers sitting immediately
behind the bulkhead and other cabin partitions in commercial aircraft.
Under a contract with the United States Army, the Company served as the
prime contractor for the development of the IBAHRS. Following the completion of
the initial development, the Company was awarded a contract to serve as the
prime contractor to complete the development, perform production design, produce
hardware, and perform testing procedures for the IBAHRS. During a crash, the
airbags inflate between the aviator and the seat harness, causing the aviator to
be pushed back into the seat and providing support under the aviator's chin to
reduce the forward rotation of the head. The Company anticipates that it will
commence production of the IBAHRS in late 1997.
The Company is engaged in research and development efforts for CABS under a
contract with the United States Army. CABS incorporates airbags in a
configuration surrounding the aviator that inflate following sensor detection of
crash impact from a variety of directions. CABS then retracts following
deployment and thereby protects against mishaps caused by accidental deployment
during the normal operations of the aircraft. The Company anticipates that it
will complete the research and development project and commence production of
CABS in late 1997.
The Company developed BABS at its own expense to provide a product that
satisfies FAA regulations requiring protection against head injuries to
passengers sitting immediately behind the bulkhead and other cabin partitions in
commercial aircraft certificated after 1988, which includes only complete new
aircraft designs, representing a small percentage of aircraft currently in
service. Prior to BABS, no other company had introduced a product that satisfied
the FAA regulations, and newly certified aircraft have operated under FAA
waivers from the regulations. In addition, the regulations have not been
extended to aircraft certificated prior to 1988. Although the Company believes
that BABS satisfies the FAA regulations, the Company cannot assess weather the
FAA will withdraw its waivers as a result of the forthcoming availability of
BABS and extend its regulations to apply to presently exempt commercial
aircraft. The Company has a contract with Jetstream Aircraft Ltd. ("Jetstream"),
to manufacture and sell BABS for implementation of the system in the Jetstream
J.-41. With its introduction of BABS in Jetstream aircraft in 1997, the Company
believes that the FAA waiver policy will be reviewed by the agency. The Company
is also discussing the introduction of BABS with other aircraft manufacturers.
See "Inflatable Restraint Systems -- Aircraft Inflatable Restraint."
The Company is also developing the related systems for sensors,
electronics, and other applications for its inflatable restraint technology.
COMPOSITE MATERIALS
As an outgrowth of its military aircraft seating systems, the Company
developed an expertise in armor, which comprises a significant portion of both
materials in and costs of such seating systems. In addition, the Company has
developed a variety of other composite materials for integration in its existing
and proposed products and for sale as raw material to customers. Composites are
structures, typically made of layered materials, glues, resins, metal alloys,
and ceramics, which provide advantages in terms of weight, flexibility, and
strength over traditional metal components. Composite materials often much
lighter than conventional materials such as basic metals, and by their complex
nature are generally more expensive than such materials. Composite materials
have a wide variety of product applications, ranging from shaped or molded
plastic structures to advanced, lightweight, protective ballistic armor systems.
Advanced composite materials with which the Company has expertise include
silicon carbide, aluminum, and ceramics matched with fiber
36
<PAGE> 38
reinforcements of Kevlar, carbon, Spectra, S-glass, E-glass, and hybrid weaves.
The Company also has the capability to process thermoset resins including
epoxies, polyesters, and vinyl esters.
The Company's principal composite products are high-strength, lightweight
armor systems that have been incorporated into a variety of United States armed
forces vehicles, including aircraft, naval landing craft, and personnel
carriers. The Company is a principal supplier of such lightweight armor systems
in the United States. The Company develops and manufactures armor systems for
seats as well as for structural and other vital components of military aircraft.
Aircraft components incorporating armors developed or produced by the Company
include V-22 Osprey crew seats; C-17 cockpit components; AH-64A Apache crew
seats; Blackhawk crew seats and floor armor; CH-53 Sea Stallion crew seats;
United States Navy landing craft air cushion pilot station armor; and
high-mobility, multi-wheeled vehicles ("HMMWV") and transport vehicles
("HEMTT"). Other products include oil and cable armor and ballistic radomes. The
Company has an on-site ballistics firing range, enabling it to conduct tests on
armor products.
The Company has recently developed a number of commercial applications for
its composites technology, including high-strength transparent armors and
portable armor kits for use in police cars and other vehicles, high-performance
equipment such as archery bows, bicycle components, and 16g Seat backs. The
Company believes that composite materials will increasingly be incorporated in a
wide range of goods requiring strong, advanced, or lightweight components.
DEVELOPMENTAL STAGE TECHNOLOGIES
Smart Structures. The Company has recently combined its composite
technologies with its neural network computer capabilities as part of the
development of products known as "smart structures." Smart structures contain
sensors and fiber optics that communicate through computers to monitor the
integrity or status of a system or structure. As an example, military vehicles
equipped with sensors incorporating smart structure technology can be remotely
monitored for battlefield status. Similarly, structures such as bridges and
overpasses can be remotely monitored to detect early signs of deterioration in
structural integrity. The Company is exploring the development of smart system
sensors that have potential in a variety of product applications, including
crash sensors for airbag and other safety systems in both automobiles and
aircraft.
Parachutes. Under contract with the United States Navy, the Company
recently applied its technologies and overall knowledge of materials and
structures to develop a parachute that solves numerous functional problems
attendant to traditional military parachutes. Specifically, many parachutes
traditionally used by the military have (i) been large and heavy, (ii) been
unable to be worn during flight or by females, and (iii) had limited shelf life,
requiring the labor intensive process of unpacking and repacking parachutes
every six months. The parachute developed by the Company is small, lightweight,
unisex, capable of being worn during flight, and vacuum-packed so that it
maintains more than a five-year shelf life without repacking. The Company plans
to commence initial production of its parachute in 1997.
Other Advanced Materials. As an outgrowth of its development of a
proprietary "bladder" for the ITS, the Company has recently developed and tested
a number of advanced proprietary materials, including polymers and urethanes,
possessing a wide variety of potential product applications. Such materials are
generally highstrength and lightweight and can be developed to withstand extreme
temperatures. Potential uses for such materials include laser protective
aircraft canopies, high-performance windows for aircraft and automobiles, and
protective lenses and visors.
PROPRIETARY TECHNOLOGY
The Company maintains a design, development, research, testing, and
engineering staff whose duties include the modification and improvement of
existing products and the development of new products and applications. The
Company regards its research, development, and engineering capabilities as a
particular strength and intends to continue to emphasize this aspect of its
business.
The Company retains proprietary rights in the products and services it
develops, including those initially financed under government contracts. As an
integral component of its strategy, the Company seeks to transfer
37
<PAGE> 39
all of its technology to product applications. The Company's costs for research
and development in 1994, 1995, and 1996 were approximately $3.9 million, $6.1
million, and $ million respectively. These amounts include
government-funded, other customer-funded, and Company-funded research and
development contracts.
Since much of its research and development generates proprietary
technology, the Company has patent protection on certain products. The Company's
ability to compete effectively depends, in part, on its ability to maintain the
proprietary nature of its technologies. The Company also relies on unpatented
proprietary information and know-how, typically protecting such information as
trade secrets, but there can be no assurance that others will not develop such
information and know-how independently or otherwise obtain access to the
Company's technology. See "Risk Factors -- Dependence on Proprietary
Technology."
The Company holds 13 patents, including those recently issued for its ITS
and 16g Seat technologies. In addition, the Company has 35 patent applications
pending for such items as its ITB and ITC technologies and various of its
advanced materials. The Company is also currently developing five additional
patent applications for filing. Patents protect inventions for up to a period of
20 years after the application is first filed. All of the Company's patents
issued or applied for regarding its principal products, including ITS, ITC, ITB,
and 16g seats, have been issued or pending for three years or less. The Company
does not presently own or maintain any trademarks which are material to its
business.
PRODUCTION, MANUFACTURING, AND LICENSING
The Company intends to consolidate certain operations, expand and upgrade
its existing manufacturing capabilities, and establish new manufacturing
facilities in connection with the expansion of its 16g Seating and inflatable
restraint businesses. The Company began implementing its expansion plans in 1996
and has established a high-volume manufacturing plant for the production of
inflatable restraints in England, with production of inflatable restraints
commencing in 1997. The Company currently is expanding its airline seat
manufacturing capacity in its Chicago and San Diego facilities. In addition, in
1996 the Company consolidated its sewing and upholstery operations, and placed
airline and train seat parts manufacturing in a central location. Such steps
were taken for efficiency purposes and did not have a material effect on the
Company's financial condition or results of operation. If demand for the
Company's products grows faster than it is able to expand its manufacturing
capacities, the Company may consider entering into licensing arrangements with
third-party manufacturers of related products, pursuant to which it would
receive a royalty on all items manufactured. See "Risk Factors -- Entry Into New
Markets," "Risk Factors -- Management of Growth," and "Risk
Factors -- Production Risks and Manufacturing Experience."
The Company's production and manufacturing consist principally of the
bending and welding, molding, ceramic and composites composition and processing,
sewing, upholstery, component fabrication, and final assembly, along with airbag
and restraint assembly. After assembly, products are functionally tested on a
sample basis as required by applicable contracts. The Company's manufacturing
capability features computer-integrated manufacturing programs which, among
other things, schedule and track production, update inventories, and issue work
orders to the manufacturing floor. Products manufactured for government programs
must meet rigorous standards and specifications for workmanship, process, raw
materials, procedures, and testing. Customers, and in some cases the United
States government as the end user, perform periodic quality audits of the
manufacturing process. Certain customers, including the United States
government, periodically send representatives to the Company's facilities to
monitor quality assurance.
MARKETING AND SALES
Depending upon the product, the Company typically employs one of four
methods for marketing: (i) direct sales, which it utilizes in the marketing of
its 16g Seats, (ii) technical teams, typically comprised of a combination of
administrative personnel and development engineers, which it utilizes in the
marketing of inflatable restraints, rail and mass transit seating, and advanced
materials, (iii) strategic alliances with first tier component suppliers, which
it utilizes in the marketing of inflatable restraints and (iv) responses to
formal requests for proposals in bidding for governmental contracts.
38
<PAGE> 40
In marketing its commercial seating and restraint products, the Company
endeavors to maintain close relationships with existing customers and to
establish new customer relationships. Ongoing relationships and repeat customers
are an important source of business for the Company's current and new products.
For example, the Company believes that its aircraft seat refurbishment customers
are excellent prospects for its proposed new aircraft seats. Similarly, the
Company will rely in part on forming strategic alliances to gain the established
marketing capabilities of first tier component suppliers in connection with the
distribution of the Company's automobile restraint systems. See "Risk
Factors -- Dependence on Industry Relationships."
The Company's marketing and sales activities in the government sector focus
primarily upon identifying research and development and other contract
opportunities with various agencies of the United States government or with
others acting as prime contractors on government projects. Key members of the
Company's engineering, contracts, and project management staffs maintain close
working relationships with representatives of the United States armed forces and
their prime contractors. Through these relationships, the Company monitors
needs, trends, and opportunities within current or potential military product
lines.
The Company estimates that approximately % of its total revenue in
1996 resulted from products sold internationally, either directly by the Company
or indirectly through sales made to the United States government or domestic
prime contractors for export. These sales were predominantly to England,
Germany, and Japan. Historically, as United States government contracts are
awarded and filled, prime contractors have thereafter typically marketed their
products to foreign military allies, resulting in sales of the Company's
products abroad. The Company has also recently entered into development
contracts directly with foreign military organizations. Accordingly, the Company
anticipates that its international defense sales will continue to grow. The
initial customer of the ITS is BMW, a European automobile manufacturer. The
Company believes that there are opportunities for additional sales of the ITS,
and for sales of commercial aircraft and rail seating systems, in foreign
markets and is conducting marketing efforts internationally. Countries in which
the Company is actively marketing include Germany, France, England, and other EU
countries, as well as Japan, India, Korea, Italy, Singapore, Australia, Canada,
and China. See "Risk Factors -- International Trade and Currency Exchange."
CUSTOMERS
Sales of the Company's products to the United States government represented
approximately % of the Company's revenue in 1996. No other customer
accounted for more than 10% of the Company's revenue during 1996.
The Company's historical and acquired businesses have relied to a great
extent on relatively few major customers, although the mix of major customers
has varied from year to year depending on the status of then existing contracts.
The Company believes that historical customers, such as the United States Army
and other branches of the United States armed forces, to which the Company has
supplied products for approximately 20 years, will continue to represent major
customers although the percentage of the Company's revenue attributable to them
can be expected to decrease as a result of the Company's expanding commercial
operations. Other historical customers of the Company include the Boeing
Company, McDonnell Douglas Corporation, and Sikorsky Aircraft. The loss of or
reduction in sales to a major customer may have a more adverse effect on the
Company's operations or financial condition than if the Company's revenue was
less concentrated by customer. See "Risk Factors -- Reliance Upon Major
Customers."
As the Company has applied its technologies to additional products and
markets and grown through strategic acquisitions, the list of customers for the
Company's commercial products has expanded rapidly in recent years. Among
current customers of the Company include, in addition to its historical
customers, America West Airlines, Amtrak, Autoliv GmbH, BMW, Continental
Airlines, Morton International, Southwest Airlines, TRW, United Airlines, and
the metropolitan transit authorities in major North American cities. Auotliv
GmbH, Morton International, and TRW are first tier component suppliers. See
"Risk Factors -- Dependence on Industry Relationships."
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<PAGE> 41
COMPETITION
The Company is the largest worldwide supplier of seating systems for
military helicopters. Numerous suppliers compete for government defense
contracts as prime contractors or subcontractors. Competition relates primarily
to technical know-how, cost, and marketing efforts. The competition for
government contracts relates primarily to the award of contracts for the
development of proposed products rather than for the supply of products that
have been developed under contracts.
The Company also is the largest supplier of transit and rail seating
systems in North America and a prominent provider of airline seat refurbishment.
The commercial airliner seat market is highly concentrated and currently is
dominated by Weber Aircraft, Inc., the newly merged Burns Aerospace Corporation
and B.E. Aerospace, Inc., and Sicma Aero.
The worldwide automobile airbag market is currently dominated by TRW,
Morton International, Inc., Allied Signal, Inc., Takata, Inc., and Autoliv GmbH,
all of which are producing airbag systems in commercial quantities. The market
served by the Company's inflatable restraint systems is intensely competitive.
As a result of the proprietary nature of the Company's ITS and related
technologies, the Company has entered into strategic alliances with a number of
the largest suppliers of conventional automotive airbags, including Morton,
Autoliv, and others, to market and produce the Company's products. Under these
arrangements, the Company acts as licensor and supplier and, thus, does not
compete with first tier automotive suppliers. The Company does not intend to
compete as a first tier supplier of a broad range of safety devices. Autoliv and
Morton recently announced a proposed business combination relating to their
respective airbag operations. The Company does not believe that any such
combination will adversely affect its business relationship with these
companies.
Most of the Company's competitors have greater marketing capabilities and
financial resources than the Company. The Company's present or future products
could be rendered obsolete by technological advances by one or more of its
competitors or by future entrants into its markets. See "Risk
Factors -- Competition."
RAW MATERIALS AND SUPPLIES
The Company purchases raw materials, components, devices, and subassemblies
from a wide variety of sources. Principal raw materials used by the Company
include urethanes, ceramics, Kevlar, aluminum, steel, upholstery and fabric
products, and fire blocking foam. Components include restraints, harnesses, and
gas generators for inflatable restraint products. The Company does not depend
upon any single supplier. Because of multiple sources of supply, the Company has
not experienced difficulties in obtaining components and raw materials for its
manufacturing and assembly processes. The Company is not party to any formal
contracts regarding the delivery of its supplies and components, but instead
generally purchases such items pursuant to individual or blanket purchase
orders. Blanket purchase orders usually provide for the purchase of a large
amount of items at fixed prices for delivery and payment on specific dates.
BACKLOG
The Company's backlog at December 31, 1994 and 1995 was approximately $53
million and $58 million, respectively. The backlog at December 31, 1995
consisted of approximately $24 million under defense contracts and approximately
$34 million with commercial customers. At December 31, 1996, the Company's
backlog was approximately $ million.
The backlog includes contracts for major current products as well as for
supplies and replacement components. Backlog does not include any agreements for
the sale of ITS or related inflatable restraint technologies, including the
Company's agreement to supply the ITS for certain of BMW's 1997 models. In the
case of government contracts, backlog consists of aggregate contract values for
firm product orders, exclusive of the portion previously included in operating
revenue utilizing the percentage completion accounting method. All orders
included in the backlog are believed to be firm and are expected to be filled
over the period from the date of this Prospectus to December 31, 1997.
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<PAGE> 42
EMPLOYEES
The Company has over 700 full-time employees at its locations in Arizona,
California, Illinois, New York, North Carolina, Wisconsin, and the United
Kingdom. This number includes engineers and research and development personnel,
manufacturing personnel, and administrative and other personnel. The Company
believes that its continued success depends on its ability to attract and retain
highly qualified personnel.
PERSONNEL PROFILE
<TABLE>
<CAPTION>
APPROXIMATE NUMBER
CLASSIFICATION OF EMPLOYEES
----------------------------------------------------------- ------------------
<S> <C>
Research and Development; Scientists; Engineers; Technical
Support.................................................. 150
Manufacturing.............................................. 310
Administration............................................. 190
Other...................................................... 65
</TABLE>
In connection with its 1994 acquisition of Coach and Car, the Company
executed a collective bargaining agreement with the United Electrical Workers.
The predecessor corporation's work force was similarly represented by the
collective bargaining unit. The Company's other employees are not represented by
a labor union, and the Company has no knowledge of any organizing activities.
The Company has never suffered a work stoppage and considers its relations with
employees to be excellent.
ENVIRONMENTAL REGULATIONS
The Company's operations are subject to a variety of federal, state, and
local environmental regulations, including laws regulating air and water quality
and hazardous materials and regulations implementing those laws. The Company's
principal environmental focus is the handling and disposal of paints, solvents,
and related materials in connection with product finishes, welding, and
composite fabrication. The Company contracts with a qualified waste disposal
company for services. The Company regards its business as being subject to
customary environmental regulations, but does not believe it faces unique or
special problems. The cost to the Company of complying with environmental
regulations is not significant. See "Risk Factors -- Environmental Regulations."
LITIGATION
The Company is not a party to any material threatened or pending
litigation.
PROPERTIES
The Company is currently expanding its manufacturing and administrative
facilities in order to meet the expected demand for its products. The Company is
presently establishing a high-volume production facility in England for the
manufacture of inflatable restraints and intends to expand existing or establish
new manufacturing facilities for certain of its other products, such as
commercial airline seating systems. The Company is also studying the acquisition
of land and construction of a building northwest of Phoenix for production of
aircraft inflatable restraint products and armor products. Upon the completion
of such expansion, the Company believes that its manufacturing and
administrative facilities will be adequate for the foreseeable future. See "Use
of Proceeds."
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<PAGE> 43
FACILITIES PROFILE
<TABLE>
<CAPTION>
SQUARE
COMPANY LOCATION FUNCTION FOOTAGE
- ------------------------- --------------------- ---------------------------------- -------
<S> <C> <C> <C>
Simula, Inc.............. Phoenix, AZ (1) Corporate Headquarters 10,000
Simula Technologies,
Inc.................... Phoenix, AZ (2) Research and Development 5,000
Simula Government
Products, Inc.......... Tempe, AZ (2) Manufacturing and Administration 60,000
Tempe, AZ (1) Manufacturing and Administration 30,000
Tempe, AZ (1) Manufacturing and Administration 8,000
Tempe, AZ (1) Manufacturing and Administration 14,000
Simula ASD, Inc. ........ Phoenix, AZ (1) ITS Low Rate Production; Testing; 7,000
Administration
Simula ASD, Ltd. ........ Northumberland, U.K. ITS Volume Production 30,000
(1)
Airline Interiors,
Inc.................... San Diego, CA (1) Airliner Seat Refurbishment and 50,000
New Seat Assembly; Administration
Coach and Car Equipment
Corporation............ Chicago, IL (1) Airline, Rail and Transit Seat 70,000
Manufacturing; Administration
Albany, NY (1) Rail Seat Assembly 20,000
Aircraft Industries
Corp................... Milwaukee, WI (1) Rail and Airline Seat 45,000
Refurbishment and Upholstery
ViaTech, Inc............. Tempe, AZ (1) Composites Research; Fabrication 14,000
for Commercial Products;
Administration
Safety Equipment, Inc.... Asheville, NC (1) Research and Development; Survival 3,000
Equipment Manufacturing;
Potentially Parachute
Manufacturing
Sedona Scientific,
Inc.................... Sedona, AZ (1) Research and Development; Sensors, 5,000
Smart Systems, Fiber Optics
</TABLE>
- ---------------
(1) Denotes leased facility
(2) Denotes Company-owned facility
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<PAGE> 44
MANAGEMENT
The following sets forth certain information with respect to directors and
executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
----------------------- --- ---------------------------------------------------------
<S> <C> <C>
Stanley P.
Desjardins........... 66 Chief Executive Officer and Chairman of the Board of
Directors
Donald W. Townsend..... 57 President and Director
Bradley P. Forst....... 43 Vice President, General Counsel, Secretary, and Director
Sean K. Nolen.......... 34 Vice President of Finance, Treasurer, and Director
James C. Withers....... 62 Director
Robert D. Olliver...... 70 Director
Scott E. Miller........ 37 Director
</TABLE>
Stanley P. Desjardins founded the Company in 1975 and has served as its
Chief Executive Officer and Chairman since that time. He was President from 1975
until October 1994. Mr. Desjardins pioneered crashworthy seating technology for
the United States armed forces and continues to work on technology development
as a recognized world expert in the field. He has over 35 years of experience in
research and development of aerospace systems and components, including over 20
years in research and development of technology for improving survival in
vehicle crashes. Prior to forming the Company, Mr. Desjardins was Manager of
Aircraft Safety for a division of Ultrasystems, Inc., where he managed research
programs involving the crashworthiness of aircraft seating and restraint
systems. From 1958 to 1968, he held various positions in missile programs with
Thiokol Chemical Corporation. His work has resulted in several United States
patents related to energy-absorption and rocket nozzle design. He is the author
or co-author of 26 technical articles related to his research. Mr. Desjardins is
a member of the American Helicopter Society, the Survival and Flight Equipment
Association, the Arizona Innovation Network, the Center for Aerospace Safety
Education, and the Governor's Science and Technology Council (Arizona).
Donald W. Townsend has served as President since October 1994 and a
Director since 1989. He was Executive Vice President from 1989 to 1994 and
Treasurer and Secretary from 1986 until 1994. Prior to joining the Company in
1985, Mr. Townsend was employed by Walled Lake Door Company, a manufacturer of
wooden doors, in positions as Vice President of Finance, Chief Financial
Officer, Director, and Controller. Mr. Townsend also acted as President of
Pulsar Corporation, a research and development company affiliated with Walled
Lake Door Company, at the same time as he served as Vice President of Finance
for Walled Lake Door Company. Mr. Townsend is a Certified Public Accountant. Mr.
Townsend also currently serves on the Board of Directors of Meadow Valley
Corporation, a publicly held construction company specializing in highways,
bridges and overpasses.
Bradley P. Forst joined the Company as Vice President and General Counsel
in early 1995 and became Secretary and a Director in August 1995. From 1985
until joining the Company in 1995, Mr. Forst was engaged in the private practice
of law in Phoenix, Arizona. Included among his clients was the Company, for
which he provided corporate, finance, and securities legal services for a number
of years. Prior to entering private practice in Phoenix, Mr. Forst was an
attorney in the head office legal department of Shell Oil Company based in
Houston, Texas.
Sean K. Nolen joined the Company as Vice President of Finance, Chief
Financial Officer, Treasurer, and as a Director in April 1996. From 1984 until
joining the Company in 1996, Mr. Nolen was employed by Deloitte & Touche LLP,
most recently as an Audit Senior Manager, in which capacity Mr. Nolen provided
auditing, planning, and other assistance and consultation to numerous privately
and publicly held companies, including the Company. Mr. Nolen is a Certified
Public Accountant.
James C. Withers has served as a Director of the Company since 1992. Mr.
Withers is the President and Chief Executive Officer of Materials and
Electrochemical Research Corporation based in Tucson, Arizona.
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<PAGE> 45
He has served in that capacity since 1986. From 1986 to 1988, Mr. Withers was
President and Chief Executive Officer of Keramont Research Corporation, also
based in Tucson, Arizona.
Robert D. Olliver has served as a Director of the Company since 1992. Mr.
Olliver is the Director of Risk Management Services for Acordia of Arizona based
in Phoenix, Arizona. Mr. Olliver has over 46 years experience in the insurance
business. Mr. Olliver, through his affiliates, has been the general agent for
the Company's insurance program since 1987.
Scott E. Miller has served as a Director of the Company since January 1995.
Mr. Miller is a Director of Investment Banking of HD Brous & Co., Inc. From 1991
to 1994, Mr. Miller was Director of Investment Banking of W.B. McKee Securities,
Inc., Phoenix, Arizona, which was the managing underwriter of the Company's
initial public offering. From 1987 to 1991, Mr. Miller was the Director of
Investments of Bellmar Partners, an investment fund. Mr. Miller also currently
serves on the Board of Directors of Meadow Valley Corporation, a publicly held
construction company specializing in highways, bridges, and overpasses. See
"Certain Transactions."
All members of the Board of Directors hold office until the next annual
meeting of the shareholders of the Company or until their successors are duly
elected and qualified. All officers are elected annually and serve at the
discretion of the Board of Directors. The Board of Directors of the Company have
several standing committees. The Audit Committee presently consists of Messrs.
Withers, Miller and Olliver. The Audit Committee meets with appropriate Company
financial and legal personnel and independent public accountants and reviews the
internal controls of the Company and the objectivity of its financial reporting.
This Committee recommends to the Board the appointment of independent public
accountants to serve as auditors in examining the corporate accounts of the
Company. The independent public accountants periodically meet privately with the
Audit Committee and have access to the Committee at any time.
The Compensation Committee reviews and advises management, makes
recommendations to the Board, and reviews and approves proposals regarding the
establishment or change of benefit plans, salaries, and compensation afforded
the executive officers and other employees of the Company. Messrs. Miller,
Olliver, and Withers currently serve as members of the Committee.
The Company has identified James A. Saunders, Donald R. Rutter, Randall L.
Taylor, and Joseph W. Coltman as key employees.
James A. Saunders is a Vice President of the Company and President of its
subsidiary, Simula Automotive Safety Devices, Inc. From 1989 to 1995, Mr.
Saunders was Chief Executive Officer of SouthTech, Inc., a supplier of
high-purity silicon carbide ceramics to the electronics industry. SouthTech was
a subsidiary of the Company from 1994 to 1995. Mr. Saunders previously held
management positions at Pillar Financial Corporation and DMS, Inc.
Donald R. Rutter is President of the Company's subsidiary Simula
Transportation Equipment Corporation, a holding company for the Company's
commercial passenger seat operating subsidiaries, Airline Interiors, Inc., Coach
and Car Equipment Corporation, and Aircraft Industries Corp. From 1983 until
joining the Company in 1993, Mr. Rutter was Vice President and General Manager
for Burns Aerospace Corporation. From 1979 until 1982, Mr. Rutter was Vice
President and General Manager for PTC Aerospace, a B.E. Aerospace, Inc.
subsidiary. Mr. Rutter was also previously employed by United Airlines.
Randall L. Taylor joined the Company in 1977 and serves as Vice President.
He coordinates certain aspects of corporate development and international
programs. Prior to this position, Mr. Taylor held numerous positions with the
Company's subsidiary, Simula Government Products, Inc. Mr. Taylor's past
employment includes experience with Sperry Flight Systems, a division of Sperry
Rand, and The Boeing Company Defense & Space Group.
Joseph W. Coltman is President of the Company's subsidiary Simula
Technologies, Inc., which operates as the Company's research and technology
development organization. Mr. Coltman joined the Company in 1979 and prior to
his present position, held numerous management and technical positions within
the Company.
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EXECUTIVE COMPENSATION
The following table sets forth the total compensation received by the
Company's Chief Executive Officer and other most highly compensated executive
officers whose total remuneration exceeded $100,000 for services rendered in all
capacities to the Company during the last three fiscal years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ---------------
----------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS(2) COMPENSATION(3) OPTIONS/SARS(#)(6)
- ------------------------------ ---- --------- -------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Stanley P. Desjardins......... 1996 $ 200,000
Chief Executive Officer and 1995 200,000
Chairman of the Board 1994 158,000
Donald W. Townsend............ 1996 200,000 Tax Assistance(3) 70,000
President 1995 180,000 40,000 Tax Assistance(3) 60,000
1994 108,000 75,000
Bradley P. Forst.............. 1996 140,000 50,000
Vice President, General
Counsel, 1995 140,000 56,250
and Secretary(4)
Sean K. Nolen................. 1996 120,000 25,000
Vice President of Finance,
Chief
Financial Officer, and
Treasurer(5)
</TABLE>
- ---------------
(1) Included as salary are nominal amounts which the Company contributes to the
401(k) accounts of Messrs. Desjardins and Townsend. See
"Management -- 401(k) Profit Sharing Plan."
(2) The Compensation Committee declared a bonus for Mr. Townsend for services in
1994 and 1995, which was paid in late 1995.
(3) In 1995, the Compensation Committee adopted policies to encourage executive
management of the Company to exercise stock options and thereby become
equity owners of the Company. In order to exercise such options, members of
management were required to sell such underlying shares in the market to
provide the funds to pay for the option exercises. Because of the immediate
exercise and sale, incentive tax aspects of the options, under relevant IRS
rules, were eliminated. Accordingly, taxes on such sales were immediately
due and payable. As part of the policy, the Committee determined to pay such
taxes for the accounts of the executives. Such payments by the Company were
fully deductible as a compensation expense and such amounts did not accrue
to the individuals, but were paid to state and federal taxing authorities.
The amounts of such tax assistance on behalf of Mr. Townsend were $231,367
and $211,500 for the fiscal years 1995 and 1996, respectively.
(4) Mr. Forst was not employed by the Company for the entire fiscal year 1995.
The salary figure contained in the column for 1995 reflects the salary Mr.
Forst would have received had he been employed by the Company for the entire
year. Mr. Forst's actual salary compensation for 1995 was $60,000.
(5) Mr. Nolen was not employed by the Company for the entire fiscal year 1996.
The salary figure contained in the column for 1996 reflects the salary Mr.
Nolen would have received had he been employed by the Company for the entire
year. Mr. Nolen's actual salary compensation for 1996 was $80,000.
(6) Messrs. Townsend, Forst, and Nolen were granted 238,200, 93,750, and 150,000
additional options to purchase Common Stock, respectively, on January 1,
1997.
45
<PAGE> 47
EMPLOYMENT AGREEMENTS
The Company has a five-year employment agreement with Mr. Desjardins. The
agreement requires Mr. Desjardins to devote his full time to the Company and
provides for compensation of $200,000 annually, subject to annual increases upon
the agreement of Mr. Desjardins and the majority of the disinterested members of
the Board of Directors. The agreement is renewable annually for prospective
one-year terms. The agreement may not be terminated unilaterally by the Company
except for cause, which includes absence, disability, or failure of performance
as determined by the Board.
Mr. Desjardins' employment agreement provides that during the term thereof,
including renewals, in the event of his resignation or a termination of his
employment for any reason following a "change in control" of the Company, the
compensation required to be paid by the Company to him under the employment
agreement shall continue to be paid as though the agreement had not been
terminated. This provision does not apply however to an early termination of the
agreement upon Mr. Desjardins' death, termination following a conviction for the
willful and intentional commission of a crime, or retirement. A "change of
control" under the agreement is deemed to occur when any person acquires,
directly or indirectly, beneficial ownership of equity securities of the Company
representing in excess of 20% of the outstanding shares of any class, or when
any person who has acquired, directly or indirectly, beneficial ownership of
equity securities of the Company in excess of 10% of the outstanding shares of
any class seeks to nominate and cause to be elected to the Board of Directors
any person who has not been nominated for election of the board by the majority
of the then incumbent directors. If Mr. Desjardins dies during the term of his
employment, the Company under the agreement will pay to his estate compensation
including any bonus which would otherwise be payable to the time of death and
thereafter, for a period of three years.
The Company also has an agreement with Mr. Townsend, under which the
Company retains Mr. Townsend under the same terms as those contained in Mr.
Desjardins' employment agreement. Under the agreement, Mr. Townsend's annual
compensation is $200,000.
In addition to the foregoing, the Company has also entered into change in
control employment agreements with six members of executive management,
providing for severance pay, the immediate vesting of stock options, and tax
assistance payments, in the event of a change in control of the Company. See
"Executive Compensation -- Stock Options."
DIRECTOR COMPENSATION
Directors who are not executive officers receive $5,000 annual cash
compensation for their services in that capacity to cover expenses. Directors
who are executive officers do not receive such additional compensation for their
services as Directors. Directors are also awarded options to purchase 15,000
shares upon commencement of service on the Board and 1,500 additional shares on
an annual basis thereafter.
STOCK OPTIONS
STOCK OPTION PLANS
In 1992, the Company and its then sole shareholder adopted the 1992 Stock
Option Plan. The 1992 Plan provided for the issuance of up to 360,000 shares of
the Company's Common Stock pursuant to grants made under the 1992 Plan. As of
January 1, 1997, all 360,000 options had been granted pursuant to the 1992 Plan.
In August 1994, the Board of Directors adopted the 1994 Stock Option Plan, which
was subsequently approved by the shareholders of the Company at the annual
meeting in June 1995, and amended by the shareholders of the Company at the
annual meeting in June 1996. The 1994 Plan reserves up to 1,545,000 shares of
Common Stock for issuance under the Plan. Through January 1, 1997,
options had been granted pursuant to the 1994 Plan.
The 1992 Plan and the 1994 Plan (together hereafter referred to as the
"Plans") authorize the Company to grant to key employees of the Company (i)
incentive stock options to purchase shares of Common Stock, and (ii)
non-qualified stock options to purchase shares of Common Stock. The objectives
of the Plans are to provide incentives to key employees to achieve financial
results aimed at increasing shareholder value and
46
<PAGE> 48
attracting talented individuals to the Company. Although the Plans do not
specify what portion of the shares may be awarded in the form of incentive stock
options or non-statutory options, a substantially greater number of incentive
stock options have been awarded under the Plans. The incentive stock options are
qualified stock options under the Internal Revenue Code. Persons eligible to
participate in the Plans are those employees and others of the Company whose
performance can have significant effect on the success of the Company.
The Plans are administered by the Compensation Committee of the Board of
Directors, which has the authority to interpret the Plans' provisions, to
establish and amend rules for their administration, to determine the types and
amounts of awards made pursuant to the Plans, subject to the Plans' limitations,
and to approve recommendations made by management of the Company as to who
should receive awards. The Compensation Committee of the Board of Directors must
consist of disinterested Directors.
Incentive stock options may be granted under the Plans for terms of up to
10 years and at an exercise price at least equal to 100% of the fair market
value of the Common Stock as of the date of grant, and 85% of the fair market
value in the case of non-statutory options, except that incentive options
granted to any person who owns stock possessing more than 10% of the combined
voting power of all classes of the Company's stock or of any parent or
subsidiary corporation must have an exercise price at least equal to 110% of the
fair market value of the Company's Common Stock on the date of grant. The
aggregate fair market value, determined as of the time an incentive stock option
is granted, of the Common Stock with respect to which incentive stock options
are exercisable by an employee for the first time during any calendar year may
not exceed $100,000. There is no aggregate dollar limitation on the amount of
non-statutory stock options which may be exercisable for the first time by an
employee during any calendar year. Payment of the exercise price is to be in
cash, although the Compensation Committee may, in its discretion, allow payment
in the form of shares of the Company's Common Stock under certain circumstances.
Any option granted under the Plans will expire at the time fixed by the
Committee, which will not be more than 10 years after the date it is granted.
Any employee receiving a grant must remain continuously employed by the Company
for a period of 12 months after the date of the grant, as a condition to the
exercise of the option. The Compensation Committee may also specify when all or
part of an option becomes exercisable, but in the absence of such specification,
the option will ordinarily be exercisable in whole or part at any time during
its term. In addition, optionees who are directors or executive officers of the
Company may not exercise any portion of an option within six months of the date
of grant. Subject to the foregoing, the Compensation Committee may accelerate
the exercisability of any option in its discretion.
The Plans presently provide that options granted under the Plans are not
assignable. Options may be exercised only while the optionee is employed by the
Company or within 12 months after termination by reason of death, within 12
months after the date of disability, or within 10 days after termination for any
other reason.
The Company may assist optionees in paying the exercise price of options
granted under the Plans by either the extension of a loan by the Company for
payment by the optionee of the exercise price in installments, or a guarantee by
the Company of a loan obtained by the optionee from a third party. The terms of
any loan, installment payments or guarantees, including the interest rate and
terms of repayment and collateral requirements, if any, will be determined by
the Compensation Committee in its sole discretion.
In addition to the foregoing, the 1994 Plan provides that in the event of a
change in control of the Company, that all issued but unvested options become
immediately vested and exercisable. The 1994 Plan also provides that in
connection with such immediate exercises made by executive officers of the
Company, the Company provide tax assistance to supply the funds necessary for
those individuals to pay taxes resulting from the loss of tax incentives due to
such accelerated exercises and sales. Any such payments by the Company would be
fully deductible as a compensation expense and such amounts would not accrue to
the individuals exercising the options, but would be paid to state and federal
taxing authorities. See "Management -- Employment Agreements."
47
<PAGE> 49
1992 RESTRICTED STOCK PLAN
In February 1992, the Company adopted the 1992 Restricted Stock Plan
("Restricted Stock Plan") authorizing the Company to grant to key employees of
the Company and other individuals who provide services to the Company the right
to purchase up to an aggregate of 19,500 shares of Common Stock at $.01 per
share. The Restricted Stock Plan is intended to allow the Company to provide
awards of Common Stock to directors or long-term employees who have provided
valuable past services to the Company. The Restricted Stock Plan authorizes
disinterested members of the Board of Directors to determine the persons to whom
awards under the Restricted Stock Plan will be granted and the terms and
conditions and restrictions of such awards. To date, 4,500 shares have been
awarded under the Restricted Stock Plan.
OPTIONS GRANTED UNDER PLANS
In March 1996, October 1996, and January 1997, the Board of Directors
approved recommendations of the Compensation Committee and granted certain
incentive stock options under the Plans to key employees. The options granted
are exercisable, or when vested will be exercisable, for a total of 1,825 shares
under the 1992 Plan and 1,020,625 shares under the 1994 Plan.
The following table sets forth information regarding options granted in
fiscal 1996 to executive officers named in the Summary Compensation Table:
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(Individual Grants)
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED
NUMBER OF TOTAL ANNUAL RATES
SECURITIES OPTIONS/ OF STOCK PRICE
UNDERLYING SARS EXERCISE APPRECIATION FOR
OPTIONS/ GRANTED TO OR BASE OPTION TERM(2)
SARS EMPLOYEES IN PRICE EXPIRATION -----------------------
NAME GRANTED(1) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
- -------------------------------- ---------- ------------ -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Donald W. Townsend(3)........... 70,000 20% 12.75 2006 $1,453,883 $2,315,145
Bradley P. Forst(4)............. 50,000 14% 12.75 2006 1,038,488 1,653,675
Sean K. Nolen(5)................ 25,000 7% 16.13 2006 656,691 1,045,706
</TABLE>
- ---------------
(1) All options contained in the table which were granted to named executive
officers in 1996 become exercisable for the first time in March 1997. In
addition to the options shown in the table, 201,250 options were granted to
key employees of the Company in 1996.
(2) Calculated from a base price equal to the exercise price of each option,
which was the fair market value of the Common Stock on the date of grant.
The amounts represent only certain assumed rates of appreciation. Actual
gains, if any, on stock option exercises and Common Stock holdings cannot be
predicted, and there can be no assurance that the gains set forth on the
table will be achieved. Further, the number shown is the gross dollar value
of the Common Stock, but does not give effect to the payment of the purchase
price to exercise the option, and thus does not represent the net value or
net gain. The amount also does not reflect the taxes payable on such gain.
(3) In addition to the 1996 option grant listed in the table, Mr. Townsend owns
334,800 options with various vesting periods.
(4) In addition to the 1996 option grant listed in the table, Mr. Forst owns
150,000 options with various vesting periods.
(5) In addition to the 1996 option grant listed in the table, Mr. Nolen owns
150,000 options with various vesting periods.
48
<PAGE> 50
FISCAL YEAR END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT FISCAL YEAR END OPTIONS/SARS AT FISCAL YEAR END
NAME (#) EXERCISABLE/UNEXERCISABLE ($)(1) EXERCISABLE/UNEXERCISABLE
- ------------------------------------ ------------------------------- ----------------------------------
<S> <C> <C>
Donald W. Townsend(2)............... 96,600/70,000 $ 240,938/52,500
Bradley P. Forst(3)................. 56,250/50,000 -0-/37,500
Sean K. Nolen(4).................... -0-/25,000 -0-/-0-
</TABLE>
- ---------------
(1) Calculated by multiplying the number of shares underlying outstanding
in-the-money options by the difference between the last sales price of the
Company's Common Stock on December 31, 1996 ($13.50 per share) and the
exercise prices for both exercisable and unexercisable shares. See also,
footnote (2) immediately above.
DEFINED BENEFIT PENSION PLAN
The Company adopted a non-contributory defined benefit pension plan as of
November 1, 1980. To be eligible, participants must have completed six months of
continuous service and have attained the age of 21. Benefits are based on the
length of service and the participants' final pay (averaged over the five
highest consecutive years of his last 10 years of participation). The Company
makes contributions to the plan based on actuarially determined amounts. Both
Mr. Desjardins and Mr. Townsend are participants in the plan consistent with the
normal terms and conditions of the plan.
The following table sets forth the estimated annual benefits payable on
retirement for specified earnings and years of service categories for
participants.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF SERVICE(1)
-------------------------------------------------------
REMUNERATION 15 20 25 30 35
- ------------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
$ 50,000 $17,500 $17,500 $17,500 $17,500 $17,500
75,000 26,250 26,250 26,250 26,250 26,250
100,000 35,000 35,000 35,000 35,000 35,000
150,000 52,500 52,500 52,500 52,500 52,500
200,000 70,000 70,000 70,000 70,000 70,000
</TABLE>
- ---------------
(1) As of December 31, 1996, Mr. Desjardins' and Mr. Townsend's credited years
of service were 16 and 11, respectively.
(2) Benefits are calculated on a straight-life annuity basis. The compensation
covered by the retirement plan includes all wages and salaries but excludes
bonuses. Benefits under the retirement plan are not subject to deduction for
Social Security or other offset amounts.
401(k) PROFIT SHARING PLAN
The Company's 401(k) Profit Sharing Plan (the "PSP") is qualified under
Sections 401(a) and 401(k) of the Internal Revenue Code. The PSP was adopted
effective November 1, 1989. The PSP is administered under a trust, and the
Company's directors are currently serving as its trustees. All employees of the
Company who are 21 years or older, including its executive officers, are
eligible to participate in the PSP after six months of employment with the
Company.
Under the PSP, participating employees have the right to elect their
contributions to the PSP be made by reductions from compensation owed to them by
the Company. In addition, the Company at its discretion can make contributions
to the PSP of a percentage of a participant's annual compensation. Participating
employees are entitled to full distribution of their share of the Company's
contributions under the PSP upon death, disability or when they reach retirement
age. If their employment is terminated earlier, their share of
49
<PAGE> 51
the Company's contributions will depend on the number of years of employment
with the Company. All participating employees have the right to receive 100% of
their own contributions to the PSP upon any termination of employment. Apart
from the Company's and the employee's contributions, they may receive investment
earnings related to the funds in their account under this plan.
EMPLOYEE STOCK PURCHASE PLAN
At the 1996 Annual Meeting, the Company's Board of Directors and
shareholders adopted the Employee Stock Purchase Plan ("ESPP" or "Plan"). The
ESPP provides eligible employees with the opportunity to acquire a stock
ownership interest in the Company through periodic payroll deductions. The
purpose of the Plan is to provide incentive to employees of the Company to
perform in a manner which enhances the value of the Company's Common Stock by
providing a direct ownership stake in the Company's performance.
The ESPP reserves 400,000 shares of the Company's Common Stock to be issued
to employees eligible to participate in the Plan. Employees of the Company and
its subsidiaries are eligible to participate in the Plan following 30 days of
continuous service with the Company, provided that such employees work in excess
of 20 hours per week and greater than five months per calendar year. The
Company, at its discretion, need not include all of its operating subsidiaries
in the ESPP.
Eligible employees invest in the Plan through regular payroll deductions of
up to 10% of their gross earnings, deducted net of taxes, for each semi-annual
period of participation, provided that no employee may purchase greater than
$25,000 worth of the Company's Common Stock in any given calendar year. At each
semi-annual purchase date, payroll deductions are credited to an account
established in each participating employee's name and shares of the Company's
Common Stock are automatically purchased on behalf of participating employees on
the last business day of each semi-annual period of participation at the lesser
of (i) 85% of the market price per share of Common Stock on an individual's
entry date into the Plan (subject to certain limitations), or (ii) 85% of the
market price per share on the semi-annual purchase date.
The Company commenced operation of the ESPP on October 1, 1996. The Plan
provides for semi-annual purchase dates to occur on March 31 and September 30 of
each year.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Compensation Committee consists of Messrs. Miller, Olliver
and Withers, all of whom are independent disinterested directors for purposes of
administering the stock option plans under SEC Rule 16b-3. These individuals do
not serve on the Compensation Committees of other corporations.
CERTAIN TRANSACTIONS
In 1995 it was determined by management that the regulatory burdens that
were imposed on its subsidiary, Comfab, Inc. ("Comfab") in connection with its
role as a government subcontractor, were not reasonable under a cost-benefit
analysis. In connection with this assessment, it was also determined that the
business of Comfab no longer was completely aligned with the Company's overall
strategic plan. Consequently, on November 1, 1995, Desjardins Engineering, a
proprietorship owned and operated by Mr. Desjardins, purchased the assets of
Comfab. The transaction was approved by the independent members of the Board of
Directors. In June 1996, Desjardins Engineering sold the assets of Comfab to an
unrelated third party for the price of approximately $1,050,000. No gain inured
to the benefit of Mr. Desjardins in connection with the sale of Comfab.
Mr. Miller, a director of the Company since 1995, is a Director of
Investment Banking of HD Brous & Co, Inc., headquartered in Great Neck, New
York. Mr. Miller is the principal in the office located in Phoenix, Arizona. HD
Brous & Co.,Inc. is an Underwriter of this offering. See "Underwriting." HD
Brous & Co., Inc. acted as an underwriter in the Company's offering of Common
Stock in April 1995 and as a placement agent in the private placement issuance
of $14.3 million principal amount of the Company's 10% Notes issued in September
1996. Prior to joining HD Brous & Co., Inc. in 1994, Mr. Miller was Director of
Investment Banking of W.B. McKee Securities, Inc., Phoenix, Arizona, which
served as the managing underwriter of the
50
<PAGE> 52
Company's initial public offering of Common Stock in 1992. Since that date, Mr.
Miller has consulted with the Company as its investment banker in connection
with equity and debt financing and mergers and acquisitions. See "Management."
The Board of Directors has a policy that provides that all transactions
between the Company and its executive officers, directors, employees, and
affiliates are subject to the approval of a majority of disinterested directors
of the Board of Directors and will be on terms that are no less favorable to the
Company than those that could be negotiated with unaffiliated parties.
LIMITATION ON LIABILITY OF DIRECTORS
The General Corporation Law of Arizona, under which the Company is
incorporated, was amended in full effective January 1, 1996. Subsequent to such
modification of the Arizona Corporate Code, the Company's Board of Directors
recommended, and its shareholders approved, amended and restated Articles of
Incorporation of the Company providing for the limitation or elimination of
potential monetary liability of directors of the Company to the fullest extent
permitted by Arizona law.
The Arizona Corporate Code limits or eliminates the liability of a director
of a corporation for money damages for any action taken or not taken as a
director in all instances except (i) instances where a director receives
financial benefits to which he is not entitled; (ii) any intentional infliction
of harm on the corporation or its shareholders; (iii) the making of unlawful
distributions; and (iv) intentional violations of criminal law.
51
<PAGE> 53
PRINCIPAL SHAREHOLDERS
The following table sets forth information with respect to the number of
shares of Common Stock of the Company, as of March 5, 1997, beneficially owned
by individual directors of the Company, the named executive officers, all
directors and named executive officers of the Company as a group, as well as
information regarding the ownership of such shares after this offering assuming
the conversion of the Convertible Preferred Stock.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
SHARES BENEFICIALLY OWNED OWNED
PRIOR TO OFFERING AFTER OFFERING(10)
--------------------------- ---------------------
NAME OF BENEFICIAL OWNER NUMBER(1) PERCENTAGE(2) NUMBER PERCENT
--------------------------------- --------- ------------- --------- -------
<S> <C> <C> <C> <C>
Stanley P. Desjardins(3)......... 3,543,052 39% 3,543,052
Donald W. Townsend(4)............ 450,000 5% 450,000
Bradley P. Forst(5).............. 151,050 2% 151,050
Sean K. Nolen(6)................. 25,000 * 25,000
James C. Withers(7).............. 24,900 * 24,900
Robert D. Olliver(8)............. 24,922 * 24,922
Scott E. Miller(9)............... 26,050 * 26,050
All directors and executive
officers
as a group (nine persons)...... 4,244,974 47% 4,244,974
</TABLE>
- ---------------
* Less than 1% of the outstanding Common Stock
(1) The number of shares shown in the table, including the notes thereto, have
been rounded to the nearest whole share. Includes, when applicable, shares
owned of record by such person's spouse and by other related individuals
and entities over whose shares of Common Stock such person has custody,
voting control, or power of disposition. Also includes shares of Common
Stock that the identified person had the right to acquire within 60 days of
March 5, 1997 by the exercise of stock options.
(2) The percentages shown include the shares of Common Stock that the person
will have the right to acquire within 60 days of March 5, 1997. In
calculating the percentage of ownership, all shares of Common Stock that
the identified person will have the right to acquire within 60 days of
March 5, 1997 upon the exercise of stock options are deemed to be
outstanding for the purpose of computing the percentage of shares of Common
Stock owned by such person, but are not deemed to be outstanding for the
purpose of computing the percentage of the shares of Common Stock owned by
any other person.
(3) The address of Mr. Desjardins and all other beneficial owners is 2700 North
Central Avenue, Suite 1000, Phoenix, Arizona 85004.
(4) Includes options to purchase 404,800 shares of Common Stock, which are
presently exercisable, or which will be exercisable within 60 days of March
5, 1997.
(5) Includes options to purchase 150,000 shares of Common Stock, which are
presently exercisable, or which will be exercisable within 60 days of March
5, 1997, but does not include options to purchase 50,000 shares of Common
Stock, which are not exercisable before January 1997.
(6) Includes options to purchase 25,000 shares of Common Stock which are
exercisable within 60 days of March 5, 1997, but does not include options
to purchase 150,000 shares of Common Stock which have various vesting
periods starting January 1998.
(7) Includes options to purchase 24,000 shares of Common Stock, which are
presently exercisable, or which will be exercisable within 60 days of March
5, 1997. Does not include options for 1,500 shares not exercisable before
January 1998.
(8) Includes options to purchase 21,903 shares of Common Stock, which are
presently exercisable, or which will be exercisable within 60 days of March
5, 1997. Does not include options for 1,500 shares not exercisable before
January 1998.
52
<PAGE> 54
(9) Includes options to purchase 24,000 shares of Common Stock, which are
presently exercisable, or which will be exercisable within 60 days of March
5, 1997. Does not include options for 1,500 shares not exercisable before
January 1998.
(10) Does not include up to 180,000 shares of Convertible Preferred Stock which
may be sold by the Company upon exercise of the over-allotment option
granted to the Underwriters. See "Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE
As of March 5, 1997, the Company had 8,998,948 outstanding shares of Common
Stock, of which 3,669,349 shares are "restricted securities" as that term is
defined in Rule 144 under the Act (the "Restricted Shares"). Such Restricted
Shares may be subject to volume and other resale limitations described below.
The directors and executive officers have agreed with the Company at the
request of the Representative not to sell or otherwise dispose of any shares of
Common Stock in the public market for a period of 90 days after the date of this
Prospectus without the prior written consent of the Representative.
In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated for purposes of Rule 144) who beneficially owns
restricted securities with respect to which at least two years have elapsed
since the later of the date the shares were acquired from the Company or from an
affiliate of the Company, is entitled to sell, within any three-month period, a
number of shares that does not exceed the greater of (i) 1% of the then
outstanding shares of Common Stock of the Company or (ii) the average weekly
trading volume in Common Stock during the four calendar weeks preceding such
sale. Sales under Rule 144 also are subject to certain manner-of-sale provisions
and notice requirements and to the availability of current public information
about the Company. A person who is not an affiliate, has not been an affiliate
within three months prior the sale, and who beneficially owns restricted
securities with respect to which at least three years have elapsed since the
later of the date the shares were acquired from the Company or from an affiliate
of the Company, is entitled to sell such shares under Rule 144(k) without regard
to any of the volume limitations or other requirements described above.
In September 1996, the Company issued $14.3 million principal amount of 10%
Notes in a private placement. Based on the ten (10) day average of the closing
prices for the Company's Common Stock ending March 5, 1997, the 10% Notes are
convertible into approximately 816,000 shares of Common Stock. The Company filed
a registration statement, which is currently pending before the Securities and
Exchange Commission, in November 1996 covering resales by the holders of the
Common Stock issuable upon conversion of the 10% Notes. In addition, for the
term of the 10% Notes, the holders of at least 25% of the 10% Notes, or Common
Stock if converted, may require the Company to file, on more than one occasion,
a registration statement under the Act with respect to the Common Stock
underlying the Notes. The Company also committed to use its best efforts to
cause such registration statement to become effective and will bear the expenses
associated with the registration.
53
<PAGE> 55
DESCRIPTION OF CONVERTIBLE PREFERRED STOCK
GENERAL
Under the Company's Amended and Restated Articles of Incorporation, the
Company's Board of Directors is authorized, without further shareholder action,
to provide for the issuance of up to 50 million shares of preferred stock, $.05
par value, in one or more series, with such voting powers or without voting
powers, and with such designations, powers, preferences and relative,
participating, optional or other special rights, and qualifications, limitations
or restrictions, as shall be set forth in the resolutions providing therefor. As
of the date of this Prospectus, the Company has no shares of preferred stock
outstanding.
Set forth below is a summary of all material provisions of the Convertible
Preferred Stock. Further details are available by reference to the provisions of
the Statement Pursuant to Arizona Revised Statutes sec.10-602 (the "Certificate
of Designations") relating to the Convertible Preferred Stock, a copy of which
has been filed as an exhibit to the Registration Statement of which this
Prospectus constitutes a part.
The Convertible Preferred Stock will, when issued, be fully paid and
nonassessable. The transfer agent, registrar, redemption agent, and conversion
agent for shares of the Convertible Preferred Stock will be American Stock
Transfer & Trust Company, New York, New York.
DIVIDENDS
Holders of shares of Convertible Preferred Stock will be entitled to
receive, when and as declared by the Board of Directors of the Company out of
assets of the Company legally available for payment, a cumulative annual cash
dividend of $ per share. Dividends accrue from the date of original
issuance and are payable quarterly on the 30th day of January, April, July, and
October (or if such day is not a business day, on the business day immediately
succeeding such 30th day), commencing January 30, 1997, to the person in whose
name the Convertible Preferred Stock is registered at the close of business on
the 15th day of the month next preceding such dividend payment date, or if any
such date is not a business day, on the next succeeding day that is a business
day.
Dividends will be computed on the basis of a 360-day year of twelve 30-day
months, with each dividend payment to be rounded to the nearest whole cent.
Dividends on the Convertible Preferred Stock will accumulate to the extent they
are not paid on the dividend payment date for the period for which they accrued
whether or not the Company has earnings, whether or not there are funds legally
available for the payment of such dividends, and whether or not such dividends
are declared. Dividends on the Convertible Preferred Stock will be cumulative
from the date issued. Such dividends will be payable when and as declared by the
Board of Directors of the Company out of assets of the Company legally available
for payment. Accrued dividends, whether current or in arrears, are payable on
Convertible Preferred Stock that is converted into Common Stock only if such
dividend has been declared and is payable as of a record date prior to the
Conversion Date (as hereinafter defined).
No dividends shall be declared, paid, or set apart for payment on Common
Stock, or the preferred stock of any series ranking, as to dividends, junior to
the Convertible Preferred Stock, for any period unless full cumulative dividends
have been or contemporaneously are declared and paid (or declared and a sum
sufficient for the payment thereof set apart for payment) on the Convertible
Preferred Stock for all dividend payment periods terminating on or prior to the
date of payment of such dividends. When dividends are not paid in full upon the
Convertible Preferred Stock and any other preferred stock ranking on a parity as
to dividends with the Convertible Preferred Stock, all dividends declared upon
shares of Convertible Preferred Stock and any other preferred stock ranking on a
parity as to dividends will be declared pro rata so that in all cases the amount
of dividends declared per share on the Convertible Preferred Stock and such
other preferred stock shall bear to each other the same ratio that accumulated
dividends per share on the shares of Convertible Preferred Stock and such other
preferred stock bear to each other.
No dividends on the Convertible Preferred Stock can be paid if at the time
of payment or immediately after giving effect to such payment the Company is in
default under, including the maintenance of certain
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prescribed debt coverage ratios, the loan agreement pertaining to the Company's
credit facilities with Wells Fargo Bank, N.A. and its Indenture dated December
17, 1993 governing the issuance of the 12% due and the 10% Notes due 1999. To
date, the Company has never been in default under its debt instruments or failed
to comply with any prescribed debt coverage ratios. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
LIQUIDATION RIGHTS
In the event of any involuntary liquidation, dissolution, or winding up of
the Company, the holders of shares of Convertible Preferred Stock are entitled
to receive out of assets of the Company available for distribution to the
shareholders, before any distribution of assets is made to holders of Common
Stock or other stock of the Company ranking junior to the Convertible Preferred
Stock, liquidating distributions in the amount of $25 per share plus accrued and
unpaid dividends. If upon any voluntary or involuntary liquidation, dissolution,
or winding up of the Company, the amounts payable with respect to the
Convertible Preferred Stock and any other shares of stock of the Company ranking
as to any such distribution on a parity with the Convertible Preferred Stock are
not paid in full, the holders of the Convertible Preferred Stock and of such
other shares will share ratably in any such distribution of assets of the
Company in proportion to the full respective preferential amounts to which they
are entitled. After payment of the full amount of the liquidating distribution
to which they are entitled, the holders of shares of Convertible Preferred Stock
will not be entitled to any further participation in any distribution of assets
of the Company. Such liquidation rights are not triggered by (i) any
consolidation or merger of the Company with or into any other corporations, (ii)
any dissolution, liquidation, winding up or reorganization of the Company
immediately followed by reincorporation of another corporation or creation of a
partnership, or (iii) a sale or other disposition of all or substantially all of
the Company's assets to another corporation or a partnership, provided that in
each case effective provision is made in the certificate of incorporation of the
resulting and surviving corporation or the articles of partnership, or
otherwise, for the protections of the rights of the holders of Convertible
Preferred Stock.
CONVERSION RIGHTS
Each share of the Convertible Preferred Stock is convertible at any time
after the date of this Prospectus, unless previously redeemed, at the option of
the holder thereof into shares of the Company's Common Stock,
equivalent to a conversion price of $ per share of Common Stock,
subject to adjustment as set forth below. A holder of Convertible Preferred
Stock may convert his shares by surrendering to the conversion agent each
certificate covering shares to be converted together with a statement of the
name or names in which the shares of Common Stock shall be registered upon
issuance (the date of such surrender, the "Conversion Date"). Every such notice
of election to convert will constitute a contract between the holder giving such
notice and the Company whereby such holder will be deemed to subscribe for the
shares of Common Stock he will be entitled to receive upon such conversion and,
in payment and satisfaction of such subscription, to surrender the shares of
Convertible Preferred Stock to be converted and to release the Company from all
further obligation thereon and whereby the Company will be deemed to accept the
surrender of such shares of Convertible Preferred Stock in full payment of the
shares of Common Stock so subscribed for and to be issued upon such conversion.
As promptly as practicable after the Conversion Date, the Company shall issue
and deliver to the converting holder of the Convertible Preferred Stock a
certificate representing the number of shares of Common Stock into which the
Convertible Preferred Stock was converted together with dividends, if any,
payable on the Convertible Preferred Stock so converted as may be declared and
made payable to holders of record of Convertible Preferred Stock on the record
date immediately preceding the Conversion Date. If a holder of Convertible
Preferred Stock elects to convert only a portion of his Convertible Preferred
Stock, upon such conversion the Company shall also deliver to the holder of the
Convertible Preferred Stock a new Convertible Preferred Stock certificate
representing his unconverted Convertible Preferred Stock. In lieu of fractional
shares of Common Stock, there will be paid to the holder of the Convertible
Preferred Stock at the time of conversion an amount in cash equal to the same
fraction of the current market value of a share of Common Stock of the Company.
This current market value will be deemed the closing price of the Common Stock
on the NYSE on the last trading day preceding the Conversion Date.
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The Conversion Rate is subject to adjustment upon the issuance of shares of
Common Stock or other securities of the Company as a dividend or distribution on
shares of Common Stock of the Company to the holders of all of its outstanding
shares of Common Stock; subdivisions, combinations, or certain reclassifications
of shares of Common Stock of the Company; the issuance of shares of Common Stock
of the Company or of rights, options, or warrants to subscribe for or purchase
shares of Common Stock of the Company at less than the effective Conversion
Price of the Convertible Preferred Stock; or the distribution to the holders of
shares of Common Stock of the Company generally of evidences of indebtedness or
assets (excluding cash dividends and distributions made out of current or
retained earnings) or rights, options, or warrants to subscribe for securities
of the Company other than those mentioned above. No adjustment in the Conversion
Rate will be required to be made with respect to the Convertible Preferred Stock
until cumulative adjustments amount to 1% or more; however, any such adjustment
not required to be made will be carried forward and taken into account in any
subsequent adjustment. No accrued and unpaid cumulative dividends will be paid
upon conversion of the Convertible Preferred Stock unless the conversion occurs
after the record date for such dividend.
In the event of any consolidation with or merger of the Company into
another corporation, or sale of all or substantially all of the properties and
assets of the Company to any other corporation, or in case of any reorganization
of the Company, each share of Convertible Preferred Stock would thereupon become
convertible only into the number of shares of stock or other securities, assets,
or cash to which a holder of the number of shares or Common Stock of the Company
issuable (at the time of such consolidation, merger, sale, or reorganization)
upon conversion of such share of Convertible Preferred Stock would have been
entitled upon such consolidation, merger, sale or reorganization.
VOTING RIGHTS
The holders of the Convertible Preferred Stock are not entitled to vote,
except as set forth below and as provided by law. On matters subject to a vote
by holders of the Convertible Preferred Stock, the holders are entitled to one
vote per share.
If the equivalent of six consecutive quarterly dividends payable on the
Convertible Preferred Stock, or on any other series of preferred stock ranking
on a parity with the Convertible Preferred Stock as to dividends or liquidation
rights and having similar voting rights, are in arrears, the number of directors
of the Company will be increased by two and the holders of all outstanding
series of parity preferred stock, voting as a single class without regard to
series, will be entitled to elect the additional two directors until all
dividends in arrears have been paid or declared and set apart for payment.
Without the consent of the holders of Convertible Preferred Stock, the
Company may issue other series of preferred stock which are pari passu with, or
junior to, the Convertible Preferred Stock as to dividends and liquidation
rights. Without the approval of the holders of at least a majority of the number
of shares of Convertible Preferred Stock then outstanding, voting or consenting
separately as a class, the Company may not issue preferred stock which is senior
to the Convertible Preferred Stock as to dividends or liquidation rights, or
amend, alter or repeal any of the voting rights, designations, preferences or
other rights of the holders of the Convertible Preferred Stock so as adversely
to affect such voting rights, designations, preferences or other rights.
OPTIONAL REDEMPTION
If not earlier converted or redeemed, the Convertible Preferred Stock is
redeemable by the Company in whole or in part on a pro rata basis at $ per
share plus accrued dividends payable through the redemption date, upon 30 days
written notice to the holders, mailed within 15 days after the closing price of
the Company's Common Stock as quoted on the NYSE has equaled or exceeded
$ for any 10 consecutive trading days. Holders will have the right to
convert their shares at any time until the close of business on the day prior to
the date fixed for redemption. The redemption price will be paid within 45 days
of the redemption date.
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CHANGE OF CONTROL REDEMPTION
Within 30 days following the occurrence of any Change of Control, the
Company shall offer ("Change of Control Offer") to purchase all outstanding
Convertible Preferred Stock at a purchase price of $25 per share plus accrued
and unpaid dividends to the date of the Change of Control Offer. The Change of
Control Offer shall be deemed to have commenced upon mailing of notice to the
holders of Convertible Preferred Stock and shall terminate 20 business days
after its commencement, unless a longer offering period is then required by law.
Promptly after the termination of the Change of Control Offer ("Change of
Control Payment Date"), the Company shall purchase and mail or deliver payment
for all shares tendered in response to the Change of Control Offer. If the
Change of Control Payment Date is on or after a dividend payment record date and
on or before the related dividend payment date, any accrued and unpaid dividends
will be paid to the Person in whose name a share is registered at the close of
business on such record date, and no additional dividends will be payable to
holders who tender shares pursuant to the Change of Control Offer.
Change of Control means any event or series of events by which (i) any
Person as such term is used in Sections 13(d) and 14(d) of the Securities
Exchange Act of 1934, as amended is or becomes the "beneficial owner" (as
defined in Rules 13d-3 and 13d-5 under the exchange Act) of 50% of more of the
total voting power of the voting stock of the Company; (ii) the Company
consolidates with or merges or amalgamates with or into another Person or
conveys, transfers, or leases all or substantially all of its assets to any
Person, or any Person consolidates with, or merges or amalgamates with or into
the Company, in any such event pursuant to the transaction in which the
outstanding voting stock of the Company is changed into or exchanged for cash,
securities or other property, other than any such transaction where (A) the
outstanding voting stock of the Company is changed or exchanged for voting stock
of the surviving corporation and (B) the holders of the Voting Stock of the
Company immediately prior to such transaction own, directly or indirectly, not
less than a majority of the Voting Stock of the surviving corporation
immediately after such transaction; or (iii) the shareholders of the Company
approve any plan of liquidation or dissolution of the Company.
CERTAIN RESTRICTIONS UPON REDEMPTION AND PAYMENT OF DIVIDENDS
The Company's ability to pay dividends on and to redeem the Convertible
Preferred Stock is subject to the terms of the Indenture relating to its
issuance of the 12% Notes, and the 10% Notes, which is filed as an Exhibit to
the Registration Statement of which this Prospectus is a part. The Indenture
provides that the Company may not (i) pay any dividends or distributions on its
capital stock (other than those payable in capital stock) or (ii) purchase,
redeem, or otherwise acquire or retire for value any of its capital stock if at
the time of such action an Event of Default shall have occurred and be
continuing. An Event of Default, as defined in the Indenture, includes (a)
default by the Company in the payment of principal or interest on Notes issued
under the Indenture, (b) defaults on other indebtedness of the Company, if any,
having an individual or aggregate minimum principal amount of $900,000 or
greater, (c) default or breach of covenants and agreements contained in the
Indenture upon notice thereof and failure to remedy such default or breach
within 60 days, (d) entry against the Company of judgments in excess of $500,000
net of insurance, (e) unauthorized terminations of subsidiary guarantees, and
(f) certain specified bankruptcy proceedings. Within 30 days following the
occurrence of any change of control, as defined in the Indenture, the Company is
required to offer to purchase all the 12% Notes and the 10% Notes at a purchase
price equal to 101% of the aggregate principal amount of such Notes, plus
accrued and unpaid interest to the date of purchase.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The federal income tax discussion set forth below is a brief description of
certain federal income tax aspects of this offering. It is for general
information only, and does not consider the federal income tax consequences of
the offering that may be relevant to individuals in various circumstances
related to their personal financial situation, or to all classes of taxpayers,
such as banks, insurance companies and foreign individuals and entities. The
Company has not obtained an opinion of qualified tax counsel with respect to the
conclusions herein. Purchasers of the Convertible Preferred Stock offered hereby
should consult their own tax advisors as to the income tax consequences to them
of an investment therein, including the applicability and effect of state, local
and other tax laws.
DIVIDENDS ON CONVERTIBLE PREFERRED STOCK
Dividends paid on the Convertible Preferred Stock will be taxable as
ordinary income to the extent that the Company has either current or accumulated
earnings and profits as determined for federal income tax purposes. Preferred
Shareholders should be aware that a dividend may be taxable as ordinary income
because the Company has current earnings and profits for federal income tax
purposes even though the current earnings and profits are insufficient to
eliminate an accumulated deficit in earnings and profits and even if the Company
has a net loss for the year for financial reporting purposes. Subject to
Sections 243, 246 (relating to certain holding period requirements), and 246A
(relating to debt financed portfolio stock) of the Internal Revenue Code of
1986, as amended (the "Code"), to the extent of current or accumulated earnings
and profits, a dividend payment will be eligible for the 70% dividends-received
deduction allowable to corporate shareholders (for corporate shareholders owning
less than 20% of the Company).
To the extent any dividends paid on the Convertible Preferred Stock exceed
the Company's current or accumulated earnings and profits, the amount received
will be a return of capital. Any such distributions will reduce, on a
share-by-share basis, the shareholder's adjusted basis in his Convertible
Preferred Stock and, to the extent in excess of the shareholder's adjusted
basis, will be treated as gain from the sale or exchange of property. Such gain
will be capital gain if the Convertible Preferred Stock is held as a capital
asset, and will be long-term capital gain if the holding period for the
Convertible Preferred Stock were to exceed one year.
REDEMPTION OF CONVERTIBLE PREFERRED STOCK
A redemption of the Convertible Preferred Stock for cash will constitute a
taxable transaction for federal income tax purposes to the shareholders. A
redemption of Convertible Preferred Stock for cash will be treated (subject to
Code Section 1059, relating to certain extraordinary dividends on preferred
stock), under Section 302 of the Code, as a distribution that is taxable as a
dividend (to the extent of the Company's current and accumulated earnings and
profits), unless the redemption (a) results in a "complete termination" of the
shareholder's stock interest in the Company under Section 302(b)(3) of the Code;
(b) is a "substantially disproportionate" distribution with respect to the
shareholder under Section 302(b)(2) of the Code; or (c) is "not essentially
equivalent to a dividend" with respect to the shareholder under Section
302(b)(1) of the Code. In determining whether any of these tests has been met,
each share of Convertible Preferred Stock and Common Stock considered to be
owned by the shareholder by reason of certain constructive ownership rules set
forth in Section 318 of the Code, as well as shares actually owned, must
generally be taken into account. If any of these tests are met with respect to a
particular shareholder, the redemption of Convertible Preferred Stock for cash
would result, as to that shareholder, and subject to Code Section 1059, in
taxable gain or loss equal to the difference between the amount of cash received
and the shareholder's adjusted basis in the Convertible Preferred Stock
redeemed. Any gain or loss realized by the shareholder will be recognized in the
shareholder's current taxable year. Such gain or loss would be capital gain or
loss if the holding period for the Convertible Preferred Stock exceeds one year.
EXTRAORDINARY DIVIDENDS TREATMENT
Under Section 1059(a) of the Code, a corporate holder of the Convertible
Preferred Stock that receives an "extraordinary dividend" will be required, if
the Convertible Preferred Stock has not been held for more
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than two years as of the date the dividend was announced, to reduce the
corporate holder's adjusted basis at the time the corporate holder disposes of
the Convertible Preferred Stock by the portion of the extraordinary dividend
that was not taxed because of the dividends received deduction. The primary
definition of an "extraordinary dividend" is found in Section 1059(c) of the
Code. The definition is complex and subject to numerous exceptions, which are
not described herein. However, in general, an "extraordinary dividend" means any
preferred stock dividend that exceeds a rate of 5% of the shareholder's adjusted
basis in such stock. In general, all dividends with ex-dividend dates within the
same 85-day period are aggregated for purposes of this threshold. In addition,
all dividends with ex-dividend dates within the same 365-day period that exceed
20% of a corporate shareholder's adjusted basis in the preferred stock also are
aggregated. Thus, accrued dividends paid in arrears on the Convertible Preferred
Stock may be treated as "extraordinary dividends," depending upon the amount and
timing of the payment of the dividend arrearages and also depending upon a
Preferred Shareholder's adjusted basis in the Convertible Preferred Stock.
CONVERSION OF CONVERTIBLE PREFERRED STOCK
Generally, no gain or loss will be recognized for federal income tax
purposes on the conversion of Convertible Preferred Stock into Common Stock of
the Company. Taxable gain will be realized upon the receipt of cash paid in lieu
of fractional share of Common Stock. Taxable gain also may be realized in the
amount of any unpaid dividend arrearages at the time of the conversion. In
general, the tax basis for Common Stock received on conversion will be equal to
the tax basis of the Convertible Preferred Stock converted and, provided that
such Convertible Preferred Stock was held as a capital asset, the holding period
of the shares of Common Stock will include the holding period of such
Convertible Preferred Stock.
REDEMPTION PREMIUM
The Convertible Preferred Stock is subject to redemption at the option of
the Company in the event of a Change of Control and also under circumstances
where the price of the Company's Common Stock has attained certain thresholds.
See "Description of Convertible Preferred Stock -- Optional Redemption and
Change in Control Redemption." Under Section 305 of the Code, a redemption
premium payable with respect to optionally redeemable preferred stock may be
treated as a "constructive dividend" reportable over time as taxable income by
the holder of the preferred stock. The application of Section 305 under new
Treasury regulations is uncertain; however, for the reasons stated below, the
Company intends to take the position that "constructive dividend" treatment is
not applicable.
Under the Treasury regulations, a redemption premium will be treated as a
"constructive dividend" only if, based upon all of the facts and circumstances,
the redemption of the Convertible Preferred Stock is more likely than not to
occur. Because it is speculation to predict the probability of either event that
would trigger an optional redemption, the Company believes that it is not at
this time more likely than not that an optional redemption will occur in the
future. Furthermore, even if either or both of such events were viewed by the
Internal Revenue Service as more likely than not to occur, "constructive
dividend" treatment under the Treasury regulations should not result if the
redemption premium is solely in the nature of a penalty for a premature
redemption of the Convertible Preferred Stock. The Company intends to take the
position that the redemption premium is such a penalty because the Treasury
regulations generally provide for such treatment if a redemption premium is
payable as a result of changes in economic or market conditions over which
neither the Company nor any holder of the Convertible Preferred Stock has any
legal or practical control.
ADJUSTMENT OF CONVERSION PRICE
As noted above, Section 305 of the Code treats as a taxable dividend
certain actual or constructive distributions of stock. Treasury regulations
treat holders of convertible preferred stock as having received such a
constructive distribution where the conversion price is adjusted to reflect
certain taxable distributions with respect to the stock into which such
preferred stock is convertible. Thus, under certain circumstances an adjustment
in the conversion price of the Convertible Preferred Stock may be taxable to the
holders thereof as a dividend.
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BACKUP WITHHOLDING
Under Section 3406 of the Code and applicable Treasury regulations, a
holder of Convertible Preferred Stock may be subject to backup withholding at
the rate of 31% with respect to dividends paid, or the proceeds of a sale,
exchange or redemption of, Convertible Preferred Stock, unless such holder (a)
is a corporation or is otherwise exempt from backup withholding or (b) provides
a taxpayer identification number, certifies that such number is correct and
otherwise complies with applicable requirements of the backup withholding rules.
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DESCRIPTION OF OTHER CAPITAL STOCK AND DEBT SECURITIES
COMMON STOCK
The Company is authorized to issue 50,000,000 shares of Common Stock, par
value $.01 per share, of which 8,998,948 shares were issued and outstanding as
of March 5, 1997.
Holders of the Common Stock are entitled to one vote for each share owned
for all matters to be voted on by the Preferred Shareholders. As required under
Arizona law, there is cumulative voting in the election of directors.
Accordingly, each shareholder is entitled to vote the number of shares owned by
him for as many persons as there are directors to be elected, or to cumulate his
votes by giving one candidate as many votes as the number of such directors
multiplied by the number of his shares, or by distributing votes on the same
principle among any number of candidates. Holders of Common Stock are entitled
to receive such dividends as may be declared from time to time by the Board of
Directors out of funds legally available therefor and, in the event of
liquidation, dissolution, or winding up of the Company, to share ratably in all
assets remaining after payment of liabilities. The holders of Common Stock have
no preemptive or conversion rights. The holders of Common Stock are not subject
to further calls or assessments. There are no redemption or sinking fund
provisions applicable to the Common Stock. The rights of the holders of the
Common Stock are subject to any rights that may be fixed for holders of
preferred stock. The Common Stock currently outstanding is, and the Common Stock
underlying the Convertible Preferred Stock offered by the Company hereby will,
when issued, be validly issued, fully paid, and nonassessable.
PREFERRED STOCK
The Company is authorized to issue 50,000,000 shares of preferred stock,
par value $.05 per share. No preferred stock is issued or outstanding. The
preferred stock may, without action by the shareholders of the Company, be
issued by the Board of Directors from time to time in one or more series for
such consideration and with such relative rights, privileges, and preferences as
the Board may determine. Accordingly, the Board has the power to fix the
dividend rate and to establish the provisions, if any, relating to voting
rights, redemption rate, sinking fund, liquidation, preferences, and conversion
rights for any series of preferred stock issued in the future. See "Description
of Preferred Stock."
SENIOR SUBORDINATED NOTES
In December 1993, the Company issued $5.7 million principal amount of 12%
Notes. The 12% Notes were issued pursuant to an Indenture dated December 17,
1993. These Notes are not convertible and are non-callable. The 12% Notes are
listed on the NYSE. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." In September, 1996, the Company issued, in
a private placement, $14.3 million principal amount of 10% Notes. The 10% Notes
were issued pursuant to the Company's Indenture dated December 17, 1993 and a
supplemental indenture dated September, 1996. See Management's Discussion and
Analysis of Financial Condition and Results of Operations." The 10% Notes were
sold pursuant to exemptions from registration under the '33 Act, Section 4(2),
and Regulation D in reliance on Rule 506 thereunder, and comparable provisions
of states' securities laws. The 10% Notes are convertible to Common Stock of the
Company at a conversion price which may be fixed by each Noteholder at the
equivalent of 103% of the average closing price of the Company's Common Stock on
the NYSE for the 10 day period immediately preceding notice to the Company of
such an election to fix the conversion price. If not earlier converted, the
Notes are redeemable by the Company in whole or in part on a pro rata basis, at
par value plus all accrued interest payable through the date of redemption, at
any time upon 30 days written notice to the Noteholders in accordance with the
following: (i) from September 12, 1996 until June 15, 1997, the Notes may be
redeemed by the Company after the closing price of the Company's Common Stock as
quoted on the NYSE has equaled or exceeded $25.00 for any 10 consecutive trading
days and (ii) after June 15, 1997, the Company may redeem the Notes at any time
at par value plus all accrued interest payable through the date of redemption.
As of the date of this Registration Statement, no 10% Notes have been converted
into Common Stock.
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ARIZONA ANTI-TAKEOVER STATUTE
The Arizona Corporate Takeover Act (the "Act") was adopted in 1987. The
policy of the Act is to prevent unfriendly corporate takeover attempts by third
parties. Article I of the Act deals with, among other things, the prohibition of
"green mail." Article II deals with limitation on voting rights of certain
individuals acquiring shares in the market, and Article III regulates certain
business combinations respecting corporate transactions proposed by insiders and
as part of a takeover plan. Arizona corporations may elect to not be governed by
Articles II or III of the Act and by doing so may elect to not be subject to the
considerable restrictions on a possible tender offer or other takeovers.
Pursuant to a 1995 amendment to the Company's Articles of Incorporation, the
Company affirmatively approved its coverage under Articles II and III of the
Act.
TRANSFER AGENT AND REGISTRAR
The Company's Transfer Agent and Registrar for the Common Stock and the
Convertible Preferred Stock is American Stock Transfer & Trust Company, New
York, New York.
LISTING
The Common Stock is currently listed and traded on the NYSE under the
symbol "SMU". The Convertible Preferred Stock will be listed on the NYSE under
the symbol "SMU-PfA."
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UNDERWRITING
The Underwriters named below (the "Underwriters"), have severally agreed,
subject to the terms and conditions set forth in the underwriting agreement (the
form of which is filed as an exhibit to the Company's Registration Statement of
which this Prospectus is a part) among the Company and the Underwriters (the
"Underwriting Agreement"), to purchase from the Company and the Company has
agreed to sell to the Underwriters, the respective number of shares of
Convertible Preferred Stock set forth opposite their names below:
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME TO BE PURCHASED
---------------------------------------------------------- ----------------
<S> <C>
HD Brous & Co., Inc.......................................
Brean Murray Securities Inc...............................
L.H. Friend, Inc..........................................
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters to purchase the shares of Convertible Preferred Stock are subject
to certain conditions. The Underwriters are committed to purchase all of the
shares of Convertible Preferred Stock offered hereby (other than the shares
covered by the over-allotment option described below) if any are purchased.
The Company has been advised that the Underwriters propose to offer the
shares of Convertible Preferred Stock to the public at the public offering price
set forth on the cover page of this Prospectus, and to certain securities
dealers at such price less a concession not in excess of $ per share.
The Underwriters may allow and such dealers may re-allow to other dealers,
including any Underwriter, a discount not in excess of $ per share.
After the public offering, the public offering price and concessions and
discounts may be changed by the Underwriters.
The Company has agreed to indemnify the Underwriters and their controlling
persons against certain liabilities in connection with the offer and sale of the
shares of Convertible Preferred Stock, including liabilities under the
Securities Act and to contribute to payments the Underwriters may be required to
make in respect thereof.
The Underwriters have obtained an option from the Company, exercisable
during the 45-day period after the date of this Prospectus, under which they may
purchase up to additional shares of Convertible Preferred Stock at the
same price per share which the Company will receive for the shares being
purchased by the Underwriters. The Underwriters may exercise the option only to
cover over-allotments to the extent that the Underwriters exercise such option,
each of the Underwriters will be committed, subject to certain conditions, to
purchase a number of option shares proportionate to such Underwriter's initial
commitment as indicated in the preceding table.
The Underwriters have informed the Company that the Underwriters do not
intend to confirm sales of shares of Convertible Preferred Stock offered hereby
to accounts over which they exercise discretionary authority.
The Company, its directors, and executive officers have agreed not to
offer, issue, sell, grant any option for the sale of or otherwise dispose of (or
announce any offer, issuance, sale, grant of option to purchase or other
disposition) of any shares of Common Stock, or any securities convertible into
an exercisable or exchangeable for shares of Common Stock shares for the 90 day
period from the date of this Prospectus unless released earlier by the
Underwriters.
Mr. Miller, a director of the Company since 1995, is a Director of
Investment Banking of HD Brous & Co, Inc. headquartered in Great Neck, New York.
Mr. Miller is the principal in the office located in Phoenix, Arizona. HD Brous
& Co., Inc. is an Underwriter of this offering. See "Certain Transactions."
63
<PAGE> 65
LEGAL OPINIONS
The validity of the shares being offered hereby has been passed upon for
the Company by Streich Lang, P.A., Phoenix, Arizona and for the Underwriters by
O'Connor, Cavanagh, Anderson, Killingsworth & Beshears, P.A., Phoenix, Arizona.
EXPERTS
The consolidated financial statements of Simula, Inc. as of December 31,
1994 and 1995 and for each of the three years in the period ended December 31,
1995 included in this Prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports appearing herein and elsewhere
in the Registration Statement and have been so included in reliance upon the
reports of such firm given upon their authority as experts in accounting and
auditing.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission are
incorporated herein by reference: (1) the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1995; (2) the Company's Amended Annual
Report on Form 10-K/A for the fiscal year ended December 31, 1995; (3) the
Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September
30, 1996; (4) the Company's Amended Quarterly Report on Form 10-Q/A for the
fiscal quarter ended September 30, 1996; (5) the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended June 30, 1996; (6) the Company's Amended
Quarterly Report on Form 10-Q/A for the fiscal quarter ended June 30, 1996; (7)
the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March
31, 1996; and (8) the Company's Registration Statement on Form 8-A under the
Securities Exchange Act of 1934 with respect to the Common Stock, including any
amendment or reports filed for the purpose of updating such description.
All documents filed by the Company with the Commission pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date hereof and
prior to the termination of the offering of the Convertible Preferred Stock
registered hereby shall be deemed to be incorporated by reference into this
Prospectus and to be a part hereof from the date of filing such documents. Any
statements contained in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statements. Any statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom this
Prospectus is delivered, upon a written request of such person, a copy of any or
all of the foregoing documents incorporated by reference into this Prospectus
(other than exhibits to such documents, unless such exhibits are specifically
incorporated by reference into such documents). Requests for such copies should
be delivered to the Simula, Inc. Investor Relations Department, 2700 North
Central Avenue, Suite 1000, Phoenix, Arizona 85004, phone number (602) 631-4005.
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the Securities
and Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy and
information statements and other information may be inspected and copied at the
public reference facilities maintained by the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the following Regional Offices of the
Commission: New York Regional Office, Seven World Trade Center, New York, New
York 10048, and Chicago Regional Office, 500 West Madison Street, Chicago,
Illinois 60661. Copies of such material can be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W.,
64
<PAGE> 66
Washington, D.C. 20549 upon payment of the prescribed fees. The Commission also
maintains a Web site that contains reports, proxy and information statements and
other materials that are filed through the Commission's Electronic Data
Gathering Analysis, and Retrieval system. This Web site can be accessed at
http://www.sec.gov. The Common Stock is listed on the NYSE. The foregoing
information concerning the Company may be inspected at the NYSE at 20 Broad
Street, New York, New York 10005.
The Company will distribute to holders of the shares of Convertible
Preferred Stock being offered hereby, annual reports containing audited
financial statements and quarterly reports containing unaudited summary
financial information for each of the first three fiscal quarters of each fiscal
year.
This Prospectus constitutes a part of a Registration Statement on Form S-3
(herein, together with all amendments and exhibits, referred to as the
"Registration Statement") filed by the Company with the Commission under the
Securities Act of 1933. This Prospectus does not contain all of the information
set forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. For further
information with respect to the Company and the shares of Convertible Preferred
Stock offered hereby, reference is hereby made to the Registration Statement.
Statements contained herein concerning the provisions of any document are not
necessarily complete, and each such statement is qualified in its entirety by
reference to the copy of such document filed with the Commission.
65
<PAGE> 67
SIMULA, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report.......................................................... F-2
Consolidated Balance Sheets as of December 31, 1995 and 1994 and Unaudited June 30,
1996................................................................................ F-3
Consolidated Statements of Earnings for the years ended December 31, 1995, 1994 and
1993 and Unaudited for the six months ended June 30, 1996 and 1995.................. F-4
Consolidated Statements of Shareholders' Equity for the years ended December 31, 1995,
1994 and 1993 and Unaudited for the six months ended June 30, 1996.................. F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994 and
1993 and Unaudited for the six months ended June 30, 1996 and 1995.................. F-6
Notes to Consolidated Financial Statements............................................ F-8
</TABLE>
F-1
<PAGE> 68
INDEPENDENT AUDITORS' REPORT
Directors and Shareholders
Simula, Inc. and Subsidiaries
Phoenix, Arizona
We have audited the accompanying consolidated balance sheets of Simula, Inc. and
subsidiaries (the "Company") as of December 31, 1995 and 1994, and the related
consolidated statements of earnings, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Simula, Inc. and subsidiaries at
December 31, 1995 and 1994, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1995 in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
March 21, 1996
Phoenix, Arizona
F-2
<PAGE> 69
SIMULA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- JUNE 30,
1994 1995 1996
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................. $ 1,051,177 $ 3,175,172 $ 375,404
Contract and trade receivables -- net (Notes 9 and
15)................................................ 12,389,003 25,221,504 28,872,320
Income taxes receivable............................... 2,281,000
Inventories (Note 4).................................. 6,732,043 8,104,194 13,607,759
Deferred income taxes (Note 10)....................... 23,000
Prepaid expenses and other............................ 399,019 762,836 1,330,161
----------- ----------- -----------
Total current assets.......................... 20,594,242 37,263,706 46,466,644
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS -- Net
(Notes 5 and 8)....................................... 13,198,567 15,778,819 18,445,477
DEFERRED COSTS (Note 6)................................. 1,460,382 6,385,328 405,689
PATENTS AND LICENSES.................................... 187,518 518,644 593,179
INTANGIBLES -- Net (Notes 3 and 6)...................... 11,976,773 13,351,361 13,121,898
OTHER ASSETS............................................ 273,481 1,441,278 1,426,525
----------- ----------- -----------
TOTAL......................................... $47,690,963 $74,739,136 $80,459,412
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving line of credit.............................. $ 6,700,000
Trade accounts payable................................ $ 6,114,887 $ 7,884,141 8,505,490
Other accrued liabilities (Note 11)................... 2,572,789 2,607,849 4,417,381
Advances on contracts................................. 2,529,988 3,920,533 1,463,051
Deferred income taxes (Note 10)....................... 8,000 8,000
Current portion of long-term debt (Note 8)............ 1,089,665 1,367,187 4,891,402
Short-term debt (Note 12)............................. 3,050,000 0 0
----------- ----------- -----------
Total current liabilities..................... 15,357,329 15,787,710 25,985,324
LONG-TERM DEBT -- Less current portion
(Notes 8 and 13)...................................... 15,339,206 11,261,365 9,424,615
DEFERRED INCOME TAXES (Note 10)......................... 345,000 158,000 158,000
----------- ----------- -----------
Total liabilities............................. 31,041,535 27,207,075 35,567,939
----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 13)
SHAREHOLDERS' EQUITY (Notes 2 and 14)
Preferred stock, $.05 par value -- authorized,
50,000,000 shares; no shares issued or
outstanding........................................
Common stock, $.01 par value -- authorized, 50,000,000
shares; issued, 6,468,845, 8,970,627 and 8,966,442
shares............................................. 64,688 89,706 89,664
Additional paid-in capital............................ 11,226,503 37,981,759 38,696,635
Retained earnings..................................... 5,638,075 9,740,434 6,105,174
Treasury stock -- at cost, 82,500 shares.............. (279,838) (279,838) 0
----------- ----------- -----------
Total shareholders' equity.................... 16,649,428 47,532,061 44,891,473
----------- ----------- -----------
TOTAL......................................... $47,690,963 $74,739,136 $80,459,412
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 70
SIMULA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
--------------------------------------- -------------------------
1993 1994 1995 1995
----------- ----------- ----------- -----------
(UNAUDITED) 1996
-----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue (Notes 3, 15 and 17).... $24,780,591 $41,157,794 $59,088,613 $28,801,970 $36,358,342
Cost of Revenue................. 15,728,061 27,708,610 36,621,471 18,587,083 27,794,969
----------- ----------- ----------- ----------- -----------
Gross margin.................. 9,052,530 13,449,184 22,467,142 10,214,887 8,563,373
Administrative Expenses (Notes
11, 13 and 16)................ 5,468,586 8,264,864 15,609,005 6,656,088 8,076,618
Unusual Item (Note 13).......... 919,389 0 0 0 0
----------- ----------- ----------- ----------- -----------
Operating Income................ 2,664,555 5,184,320 6,858,137 3,558,799 486,755
Interest Expense (Note 8)....... (800,255) (1,831,505) (2,029,854) (1,161,874) (791,251)
Interest Income................. 0 21,608 440,076 191,447 0
----------- ----------- ----------- ----------- -----------
Income (Loss) Before Taxes...... 1,864,300 3,374,423 5,268,359 2,588,372 (304,496)
Income Tax Expense (Benefit)
(Note 10)..................... 743,500 1,260,000 1,166,000 1,035,300 (121,000)
----------- ----------- ----------- ----------- -----------
Earnings (Loss) before
cumulative effect of a change
in accounting principle....... 1,120,800 2,114,423 4,102,359 1,553,072 (183,496)
----------- ----------- ----------- ----------- -----------
Cumulative effect on prior years
(to December 31, 1995) of
changing accounting for
pre-contract costs -- Net of
related income tax benefit of
$2,160,000.................... 0 0 0 0 3,239,948
----------- ----------- ----------- ----------- -----------
Net Earnings (Loss)............. $ 1,120,800 $ 2,114,423 $ 4,102,359 $ 1,553,072 $(3,423,444)
=========== =========== =========== =========== ===========
Per share amounts:
Earnings (loss) before
cumulative effect of a
change in accounting
principle.................. $ .22 $ .37 $ .48 $ .20 $ (.02)
Cumulative effect on prior years
(to December 31, 1995) of
changing accounting for
pre-contract costs............ 0 0 0 0 (.36)
----------- ----------- ----------- ----------- -----------
Net Earnings (Loss)............. $ .22 $ .37 $ .48 $ .20 $ (.38)
=========== =========== =========== =========== ===========
Average Shares Outstanding...... 5,024,679 5,704,926 8,576,817 7,748,819 8,916,287
=========== =========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 71
SIMULA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
THREE YEARS ENDED DECEMBER 31, 1995 AND UNAUDITED SIX MONTH PERIOD
ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
CLASS A
COMMON STOCK ADDITIONAL TOTAL
------------------- PAID-IN RETAINED TREASURY SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS STOCK EQUITY
--------- ------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1993............ 5,071,940 $50,720 $ 4,094,851 $ 3,086,378 $ 7,231,949
Net earnings...................... 1,120,800 1,120,800
Common shares issued.............. 1,500 15 5,235 5,250
Purchase of common shares for
treasury....................... 0 0 0 0 $(279,838) (279,838)
--------- ------- ----------- ---------- --------- -----------
BALANCE, DECEMBER 31, 1993.......... 5,073,440 50,735 4,100,086 4,207,178 (279,838) 8,078,161
Net earnings...................... 2,114,423 2,114,423
Conversion of Series B 9% Senior
Subordinated Convertible Notes
for common shares.............. 967,236 9,672 5,721,578 5,731,250
Issuance of common shares for
warrants and options........... 158,525 1,585 610,361 611,946
Issuance of common shares in
connection with:
Acquisition of SOUTHtech....... 178,582 1,786 44,388 (683,526) (637,352)
Acquisition of Artcraft........ 67,228 672 464,328 465,000
Acquisition of Sedona
Scientific, Inc.............. 23,834 238 285,762 0 0 286,000
--------- ------- ----------- ---------- --------- -----------
BALANCE, DECEMBER 31, 1994.......... 6,468,845 64,688 11,226,503 5,638,075 (279,838) 16,649,428
Net earnings........................ 4,102,359 4,102,359
Secondary offering of common
shares............................ 2,328,750 23,288 25,544,534 25,567,822
Issuance of common shares for
warrants and options.............. 173,032 1,730 847,256 848,986
Tax benefit from exercise of
stock options..................... 0 0 363,466 0 0 363,466
--------- ------- ----------- ---------- --------- -----------
BALANCE, DECEMBER 31, 1995.......... 8,970,627 $89,706 $37,981,759 $ 9,740,434 $(279,838) $47,532,061
Issuance of common shares for
options........................... 78,315 783 782,073 782,856
Net loss............................ (3,423,444) (3,423,444)
Retirement of treasury stock........ (82,500) (825) (67,197) (211,816) 279,838 0
--------- ------- ----------- ---------- --------- -----------
BALANCE, JUNE 30, 1996
(Unaudited)....................... 8,966,442 $89,664 $38,696,635 $ 6,105,174 $ 0 $44,891,473
========= ======= =========== ========== ========= ===========
</TABLE>
See note to consolidated financial statements.
F-5
<PAGE> 72
SIMULA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
YEARS ENDED DECEMBER 31,
-------------------------------------------- ---------------------------
1993 1994 1995 1995 1996
----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net earnings (loss)........................ $ 1,120,800 $ 2,114,423 $ 4,102,359 $ 1,553,072 $(3,423,444)
Adjustments to reconcile net earnings
(loss) to net cash (used) provided by
operating activities:
Depreciation and amortization............ 798,754 1,651,118 3,064,833 1,227,819 1,375,119
Deferred income taxes.................... (171,000) 256,000 (156,000)
Cumulative effect of change in
accounting............................. 5,399,948
Changes in net assets and
liabilities -- net of effects from
acquisitions:
Contract and trade receivables........... (272,393) (1,358,328) (15,059,956) (6,871,545) (6,108,298)
Income tax receivable.................... (2,281,000)
Inventories.............................. (330,623) (2,681,370) (1,372,151) (533,615) (4,944,680)
Prepaid expenses and other............... 81,473 94,635 (363,817) (426,401) (567,325)
Deferred costs........................... (114,538) (1,083,476) (5,572,295) (727,784)
Other assets............................. 40,035 (1,089,933) (275,072) 14,753
Trade accounts payable................... (385,990) (146,991) 1,769,254 (2,356,748) 621,349
Other accrued liabilities................ 525,975 (1,538,783) 163,526 1,156,684 1,809,532
----------- ----------- ------------ ----------- -----------
Net cash (used) provided by operating
activities........................... 1,252,458 (2,652,737) (14,514,180) (7,253,590) (8,104,046)
----------- ----------- ------------ ----------- -----------
INVESTING ACTIVITIES:
Purchase of property and equipment......... (564,752) (1,256,852) (3,843,133) (1,419,194) (3,481,464)
Proceeds from sale of property and
equipment................................ 743,671
Costs incurred to obtain patents, licenses
and intangibles.......................... (115,000) (271,212) (342,528) (867,951) (384,579)
Cash paid to acquire Coach & Car........... (5,352,982)
Cash paid to acquire SOUTHtech............. (4,606)
Cash paid to acquire Artcraft -- net of
cash acquired............................ (628,948)
Cash paid to acquire Sedona Scientific,
Inc...................................... (93,000)
Cash paid to acquire Airline
Interiors -- net of cash acquired........ (1,835,251) 0 0 0 0
----------- ----------- ------------ ----------- -----------
Net cash used in investing
activities........................... (2,515,003) (7,607,600) (3,441,990) (2,287,145) (3,866,043)
----------- ----------- ------------ ----------- -----------
FINANCING ACTIVITIES:
Net borrowings (repayments) under
short-term debt and line of credit
agreement................................ (797,035) 2,000,000 (3,050,000) 6,700,000
Borrowings under other debt arrangements... 1,173,401 10,799,940 4,407,628 2,627,473 2,444,200
Principal payments under other debt
arrangements............................. (1,952,102) (3,611,047) (7,694,271) (8,246,890) (756,735)
Issuance of common shares -- net of
expenses................................. 611,946 26,416,808 11,685 782,856
Prepaid offering costs..................... 25,615,949
Issuance of 12% Notes -- net of issuance
costs.................................... 4,934,332
Advances to the Chairman -- net............ (303,427)
Purchases of treasury stock................ (279,838)
Real estate -- net of payment to the
Chairman................................. (266,639)
Dividends paid to the Chairman............. (28,758) 0 0 0 0
----------- ----------- ------------ ----------- -----------
Net cash provided by financing
activities........................... 2,479,934 9,800,839 20,080,165 20,008,217 9,170,321
----------- ----------- ------------ ----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS................................ 1,217,389 (459,498) 2,123,995 10,467,482 (2,799,768)
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD..................................... 293,286 1,510,675 1,051,177 1,051,177 3,175,172
----------- ----------- ------------ ----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD..... $ 1,510,675 $ 1,051,177 $ 3,175,172 $11,518,659 $ 375,404
=========== =========== ============ =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid............................ $ 758,666 $ 1,515,844 $ 1,691,712 $ 1,078,599 $ 437,081
=========== =========== ============ =========== ===========
Taxes paid............................... $ 804,000 $ 441,700 $ 1,365,826 $ 852,500 $ 277,700
=========== =========== ============ =========== ===========
</TABLE>
F-6
<PAGE> 73
SIMULA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------
1993 1994 1995
----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Property and equipment acquired under
capital leases........................... $ 924,324
============
Tax benefits from exercise of stock
options.................................. $ 363,466
============
Purchase accounting adjustments related to
the acquisitions of Coach & Car and
Artcraft:
Additional liabilities offset against
seller note payable.................... $ 1,438,000
============
Additional liabilities recognized upon
final allocation of purchase price..... $ 2,415,000
============
Conversion of notes:
Conversion of $6,475,000 Series B 9%
Senior Subordinated Convertible Notes
and accrued interest of $136,600 less
deferred note issuance costs of
$880,350 for
967,236 shares......................... $ 5,731,250
===========
Coach & Car acquisition:
Fair value of assets acquired............ $11,422,148
Liabilities assumed...................... (7,069,166)
Seller note payable...................... (1,500,000)
Covenants not to compete................. 2,500,000
-----------
Cash paid to acquire Coach & Car........... $ 5,352,982
===========
SOUTHtech acquisition:
Fair value of assets acquired............ $ 378,014
Liabilities assumed...................... (1,010,760)
Common stock issued...................... 637,352
-----------
Cash paid to acquire SOUTHtech............. $ 4,606
===========
Artcraft acquisition:
Fair value of assets acquired............ $ 4,103,924
Liabilities assumed...................... (2,988,924)
Common stock issued...................... (465,000)
Cash acquired............................ (21,052)
-----------
Cash paid to acquire Artcraft -- net of
cash acquired............................ $ 628,948
===========
Sedona Scientific, Inc. acquisition:
Fair value of assets acquired............ $ 471,277
Liabilities assumed...................... (92,277)
Common stock issued...................... (286,000)
-----------
Cash paid to acquire Sedona Scientific,
Inc...................................... $ 93,000
===========
Airline Interiors acquisition:
Fair value of assets acquired............ $ 3,270,480
Liabilities assumed...................... (2,106,318)
Covenants not to compete................. 2,700,000
Liability for covenants not to compete... (1,864,162)
Cash acquired............................ (164,749)
-----------
Cash paid to acquire Airline
Interiors -- net of cash................. $ 1,835,251
===========
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE> 74
SIMULA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 AND
UNAUDITED SIX MONTH PERIODS ENDED JUNE 30, 1996 AND 1995
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION -- The consolidated financial statements include the
accounts of Simula, Inc. ("Simula") and its subsidiaries (collectively the
"Company"). All of the subsidiaries are wholly owned. All intercompany
transactions are eliminated in consolidation.
The Company announced a 3 for 2 split of its common stock to shareholders
of record as of September 15, 1995; which shares were issued on September 28,
1995. As a result, all shares and related references have been restated for all
prior periods and transactions.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- These consolidated financial
statements are prepared in accordance with generally accepted accounting
principles. Described below are those accounting principles particularly
significant to the Company, including those selected from acceptable
alternatives.
a. 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.
b. Revenue related to government contracts and most commercial contracts
results principally from long-term fixed price contracts and is recognized on
the percentage-of-completion method calculated utilizing the cost-to-cost
approach. The percent deemed to be complete is calculated by comparing the costs
incurred to date to estimated total costs for each contract. This method is used
because management considers costs incurred to be the best available measure of
progress on these contracts. However, adjustments to this measurement are made
when management believes that costs incurred materially exceed effort expended.
Contract costs include all direct material and labor costs, along with certain
overhead costs related to contract production.
Provisions for any estimated total contract losses on uncompleted contracts
are recorded in the period in which it is concluded that such losses will occur.
Changes in estimated total contract costs will result in revisions to contract
revenue. These revisions are recognized when determined.
Revenue derived from sales of some commercial products is recognized at
contractual amounts when the product is shipped.
c. Inventories include raw materials and work-in-process applicable to
commercial products. Inventories are recorded at cost and are carried at the
lower of cost or net realizable value. Amounts are removed from inventory using
the estimated average cost per unit.
d. Property, equipment and leasehold improvements are stated at cost.
Amortization of capital leases and leasehold improvements is calculated on a
straight-line basis over the life of the asset or term of the lease, whichever
is shorter. Depreciation on equipment and buildings is calculated on a
straight-line basis over the estimated useful lives of three to thirty years.
e. Deferred costs include amounts applicable to products and technologies
which represent adaptations of existing capabilities to the particular
requirements of the Company's customers. These costs are recovered over the
specific or estimated revenue streams from these customers. Deferred costs also
include costs applicable to bids in process. These costs are deferred when
management believes that it is probable that future contracts will be obtained
and are transferred to contract costs when contracts are awarded or are expensed
when the contract award is no longer considered probable.
F-8
<PAGE> 75
SIMULA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
f. Intangibles are recorded at cost. The Company acquires intangible assets
in the normal course of business and in business combinations. The Company
periodically reviews for changes in circumstances to determine whether there are
conditions that indicate that the carrying amount of such assets may not be
recoverable. If such conditions are deemed to exist, the Company will determine
whether estimated future undiscounted cash flows are less than the carrying
amount of such assets, in which case the Company will calculate an impairment
loss. Any impairment loss will be recorded as a component of operating earnings.
Intangibles are amortized on a straight-line basis over the following periods:
<TABLE>
<S> <C>
Goodwill....................................................... 10 - 25 years
Covenants not to compete....................................... 10 years
Other.......................................................... 7 years
</TABLE>
g. Net income per common and equivalent share has been computed using the
weighted average number of common shares and common share equivalents
outstanding during each period. Stock options and warrants have been included in
the computations as common equivalent shares utilizing the treasury stock method
only when their effect is dilutive.
h. Statements of Cash Flows -- Cash and cash equivalents presented in the
statements of cash flows consist of cash on hand and highly liquid investments
with a maturity of six months or less.
i. Reclassifications -- Certain reclassifications have been made to the
1994 and 1993 financial statements to conform to the 1995 presentation.
2. SHAREHOLDERS' EQUITY
The Company completed a secondary offering of common stock which closed and
was funded the second quarter of 1995. As a result of this offering, 2,328,750
shares were sold by the Company at $12 per share. The net proceeds from the
offering totaled $25,567,822.
3. ACQUISITIONS
On August 2, 1993, the Company acquired certain assets and covenants not to
compete from Airline Interiors, Inc. ("Airline Interiors") for cash, a long-term
note and the assumption of certain liabilities. Airline Interiors remodels and
refurbishes airline interiors. This acquisition of Airline Interiors has been
accounted for using the purchase method of accounting, and the results of
operations of Airline Interiors have been included in the consolidated financial
statements subsequent to the acquisition. The excess of the purchase price over
the fair value of net assets acquired of $1,059,554 and covenants not to compete
of $2,489,356 are being amortized over 10 years.
On June 14, 1994, the Company purchased covenants not to compete and
substantially all of the assets of Coach and Car Equipment Corporation ("Coach &
Car") for cash, an installment note and the assumption of substantially all of
the Coach & Car liabilities. Coach & Car is a manufacturer of seats for trains,
subways, mass transit and other vehicles which are principally operated by local
government authorities. The acquisition of Coach & Car has been accounted for
using the purchase method of accounting, and the results of operations of Coach
& Car have been included in the consolidated financial statements subsequent to
the acquisition. The excess of purchase price over the fair value of net assets
acquired of $5,281,038 is being amortized over 25 years, and covenants not to
compete of $2,500,000 are being amortized over 10 years.
F-9
<PAGE> 76
SIMULA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Consideration for this transaction consisted of the following:
<TABLE>
<S> <C>
Cash paid............................................................... $ 3,000,000
Seller note............................................................. 1,500,000
Liabilities assumed -- including $2,352,982 of bank debt paid at
closing............................................................... 9,422,148
-----------
Total......................................................... $13,922,148
===========
</TABLE>
The assets acquired have been recorded as follows:
<TABLE>
<S> <C>
Current assets.......................................................... $ 2,923,585
Intangibles............................................................. 7,781,038
Property and equipment.................................................. 3,217,525
-----------
Total......................................................... $13,922,148
===========
</TABLE>
On July 1, 1994, the Company purchased SOUTHtech, Inc. ("SOUTHtech") which
was a corporation owned by the Company's Chairman (the "Chairman") (96%), and
two unrelated minority shareholders (4%). SOUTHtech is a ceramics manufacturer
that provides parts for silicon wafer manufacturing by the semiconductor
industry. In determining the acquisition consideration, the Company obtained a
valuation opinion from an independent investment banker and the transaction was
approved by the disinterested members of the board of directors of the Company.
The acquisition consideration consisted of 178,582 shares of the Company's
common stock, of which 171,472 shares were issued to the Chairman and 7,110
shares were issued to one of the unrelated minority shareholders, and $4,606
cash, in lieu of stock, to the other unrelated minority shareholder. Because the
Company and SOUTHtech were entities under the common control of the Chairman,
the shares issued to the Chairman have been recorded at the basis of his
investment in SOUTHtech and the shares issued to minority shareholders have been
recorded at fair value. The excess of the Chairman's basis over his
proportionate share of SOUTHtech's net assets of $683,526 has been recorded as a
reduction in retained earnings. The accounts of SOUTHtech have been included in
the consolidated financial statements subsequent to the acquisition.
Assets acquired and liabilities assumed in connection with the SOUTHtech
transaction were as follows:
<TABLE>
<S> <C>
Assets acquired......................................................... $ 378,014
Liabilities assumed..................................................... (1,010,760)
-----------
Net liabilities assumed....................................... $ (632,746)
===========
</TABLE>
Consideration was recorded as follows:
<TABLE>
<S> <C>
Shares issued to the Chairman............................................ $(682,383)
Shares issued to minority shareholders................................... 45,031
Cash issued to minority shareholders..................................... 4,606
---------
Total.......................................................... $(632,746)
=========
</TABLE>
During 1995, the ceramics technology used in the semiconductor industry and
associated assets of SOUTHtech were sold to a third party effective August 31,
1995. As a result, the Company received cash of $1,328,720 and is entitled to
guaranteed payments of $1,500,000 and contingent payments up to a maximum of
$1,750,000 based upon the future sales of the SOUTHtech ceramic product within
the semiconductor industry. The Company retained the ceramics technology and
assets associated with armor products and certain key employees. In connection
with this transaction, the Company reported $1,977,000 of technology sales and
royalty revenue in 1995.
F-10
<PAGE> 77
SIMULA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On September 30, 1994, the Company purchased all of the operating assets of
Artcraft Industries Corp. ("Artcraft") for 67,228 shares of common stock valued
at $465,000 and the assumption of certain liabilities. Artcraft is engaged in
the manufacture, assembly and sale of railway and mass transit seating systems.
The acquisition has been accounted for using the purchase method of accounting,
and results of operations of Artcraft have been included in the consolidated
financial statements subsequent to the acquisition. The excess of the purchase
price over the fair value of net assets acquired of $734,531 is being amortized
over 25 years.
Consideration for the transaction consisted of the following:
<TABLE>
<S> <C>
67,228 shares of common stock............................................ $ 465,000
Liabilities assumed -- including $650,000 bank debt paid at closing...... 3,638,924
----------
Total.......................................................... $4,103,924
==========
</TABLE>
The assets acquired have been recorded as follows:
<TABLE>
<S> <C>
Current assets........................................................... $1,669,393
Intangibles.............................................................. 734,531
Property and equipment................................................... 1,700,000
----------
Total.......................................................... $4,103,924
==========
</TABLE>
In addition, the Company acquired another small company for $93,000 in cash and
23,833 shares of common stock.
During 1995, the Company completed its identification and quantification of
certain preacquisition contingencies related to its acquisitions of Artcraft and
Coach & Car. As a result, the Company adjusted the original purchase allocation
of these acquisitions resulting in an increase in goodwill of $2,415,000, a net
increase in accrued liabilities and advances on contracts of $3,853,000 and a
decrease in debt owed to seller of $1,438,000.
The following summarizes unaudited pro forma operating results for the
Company for the two years ended December 31, 1994, assuming the acquisitions had
occurred at the beginning of the immediately preceding year.
<TABLE>
<CAPTION>
1993 1994
----------- -----------
<S> <C> <C>
Revenues................................................ $50,559,000 $55,512,000
=========== ===========
Net earnings............................................ $ 1,188,000 $ 2,362,000
=========== ===========
Net earnings per share.................................. $ .20 $ .37
=========== ===========
</TABLE>
4. INVENTORIES
At December 31 inventories consisted of the following:
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Raw materials........................................... $ 3,544,116 $ 3,319,958
Work in process......................................... 3,187,927 4,711,256
Finished goods.......................................... 0 72,980
----------- -----------
Total inventories............................. $ 6,732,043 $ 8,104,194
=========== ===========
</TABLE>
F-11
<PAGE> 78
SIMULA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
At December 31 property, equipment and leasehold improvements consisted of
the following:
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Land.................................................... $ 3,022,819 $ 3,022,819
Buildings and leasehold improvements.................... 4,193,622 4,467,697
Equipment............................................... 10,717,234 13,408,041
----------- -----------
Total................................................... 17,933,675 20,898,557
Less accumulated depreciation........................... 4,735,108 5,119,738
----------- -----------
Property, equipment and leasehold
improvements -- net......................... $13,198,567 $15,778,819
=========== ===========
</TABLE>
6. INTANGIBLES AND DEFERRED COSTS
At December 31, intangibles consisted of the following:
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Covenants not to compete (Note 2)....................... $ 5,178,655 $ 4,989,356
Excess of cost over net assets acquired (Note 2)........ 7,124,760 9,540,110
Other................................................... 407,347 435,163
----------- -----------
Total................................................... 12,710,762 14,964,629
Less accumulated amortization........................... 733,989 1,613,268
----------- -----------
Intangibles -- net............................ $11,976,773 $13,351,361
=========== ===========
</TABLE>
At December 31, deferred costs included the following:
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Deferred product costs -- net........................... $ 5,430,179
Deferred financing costs -- net......................... $ 794,033 487,980
Deferred bid costs...................................... 666,349 467,169
----------- -----------
Total deferred costs.......................... $ 1,460,382 $ 6,385,328
=========== ===========
</TABLE>
7. REVOLVING LINE OF CREDIT
The Company has a $10,000,000 unsecured Revolving Line of Credit with a
bank, interest at prime or LIBOR plus 1.75%. There was no outstanding balance on
this line of credit as of December 31, 1995. The loan agreement encompassing
this line of credit and the $5,000,000 amortizing term loan (Note 8) contains
certain covenants that require the maintenance of a minimum tangible net worth
and certain defined financial ratios.
F-12
<PAGE> 79
SIMULA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. DEBT
Long-term debt at December 31 consisted of the following:
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
12% Senior Subordinated Notes........................... $ 5,700,000 $ 5,700,000
Mortgage notes payable, interest at 9% and 10.4%,
secured by land and buildings with a carrying amount
of $6,034,442, due through 2017....................... 3,049,242 2,990,329
Various loans payable, secured by property and
equipment............................................. 3,121,151 3,020,703
Obligations under capital leases, interest at 4% to
14.5% (Note 13)....................................... 358,478 917,520
Long-term debt repaid in 1995........................... 4,200,000 0
----------- -----------
Total................................................... 16,428,871 12,628,552
Less current portion.................................... 1,089,665 1,367,187
----------- -----------
Long-term debt................................ $15,339,206 $11,261,365
=========== ===========
</TABLE>
In December 1993, the Company completed the sale of $5,700,000 of 12%
Senior Subordinated Notes ("12% Notes"), due in 1998. The 12% Notes are not
subject to redemption prior to maturity. The Indenture relating to the 12% Notes
contains certain covenants including limitations on incurrence of additional
indebtedness, limitation on sale of assets, transactions with affiliates and
payment of all dividends.
The Company has a $5,000,000 amortizing term loan under the same loan
agreement encompassing the line of credit (Note 7) for the financing of U.S.
based equipment with an outstanding balance at December 31, 1995 of $1,946,780.
Interest is payable at the LIBOR rate in effect at the time of the drawdown plus
1.75%. The average interest rate on the outstanding balance at December 31, 1995
is 7.8%.
In June 1994, the Company completed the private placement of $6,475,000
principal amount of 9% Senior Subordinated Convertible Notes (the "Convertible
Notes"), due in 2001, convertible into common stock at $6.83 per share. The
proceeds from the placement were used to acquire Coach & Car and for working
capital. During 1994, all of the Convertible Notes and $136,600 of accrued
interest were converted into 967,236 shares of the Company's common stock.
The aggregate principal payments required for the five years subsequent to
December 31, 1995 are:
<TABLE>
<S> <C>
1996.................................................... $ 1,367,187
1997.................................................... 1,393,212
1998.................................................... 6,742,969
1999.................................................... 417,595
2000.................................................... 122,469
Thereafter.............................................. 2,585,120
-----------
Total......................................... $12,628,552
===========
</TABLE>
Interest expense for the years ended December 31 is comprised of the
following:
<TABLE>
<CAPTION>
1993 1994 1995
-------- ---------- ----------
<S> <C> <C> <C>
Interest........................................ $788,405 $1,651,881 $1,679,086
Amortization of deferred finance cost........... 11,850 179,624 350,768
-------- ---------- ----------
Interest expense...................... $800,255 $1,831,505 $2,029,854
======== ========== ==========
</TABLE>
F-13
<PAGE> 80
SIMULA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Based on borrowing rates currently available to the Company and the quoted
market price for the 12% Notes, the fair value of long-term debt at December 31,
1995 is approximately $12,800,000.
9. RECEIVABLES
At December 31, receivables include the following:
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
United States Government:
Billed receivables...................................... $ 2,247,270 $ 2,926,891
Costs and estimated earnings in excess of billings...... 4,592,286 4,541,878
----------- -----------
Total United States Government............................ 6,839,556 7,468,769
----------- -----------
Other contracts:
Billed receivables...................................... 3,262,514 2,942,647
Costs and estimated earnings in excess of billings...... 1,652,121 10,244,769
----------- -----------
Total other contracts..................................... 4,914,635 13,187,416
----------- -----------
Other trade receivables................................... 871,812 4,708,319
----------- -----------
Less allowance for doubtful accounts...................... (237,000) (143,000)
----------- -----------
Contract and trade receivables -- net........... $12,389,003 $25,221,504
=========== ===========
</TABLE>
Costs and estimated earnings in excess of billings are net of $23,659,464
and $40,396,365 of progress billings for United States Government and other
governmental agencies at December 31, 1995 and 1994, respectively.
Costs and estimated earnings in excess of billings on uncompleted contracts
represent revenue recognized on long-term contracts in excess of billings
because amounts were not billable at the balance sheet date. Amounts receivable
from the United States Government or receivable under United States Government
related subcontracts will generally be billed in the following month or when the
contract and all options thereunder are completed. Amounts due on other
contracts are generally billed as shipments are made, subject to retainages. It
is estimated that substantially all of such amounts will be billed and collected
within one year, although contract extensions may delay certain collections
beyond one year.
10. INCOME TAXES
The provisions for income taxes for the years ended December 31 are as
follows:
<TABLE>
<CAPTION>
1993 1994 1995
--------- ---------- ----------
<S> <C> <C> <C>
Current........................................ $ 914,500 $1,004,000 $1,322,000
Deferred....................................... (171,000) 256,000 (156,000)
--------- ---------- ----------
Provision for income taxes........... $ 743,500 $1,260,000 $1,166,000
========= ========== ==========
</TABLE>
F-14
<PAGE> 81
SIMULA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's effective income tax rate differs from the federal statutory
tax rate at December 31 as follows:
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- -----
<S> <C> <C> <C>
Federal statutory income tax rate............................ 34.0% 34.0% 34.0%
State income taxes........................................... 6.0 4.6 6.0
Tax credits and other........................................ (0.1) (1.2) 0.7
Utilization of tax losses.................................... 0 0 (18.6)
---- ---- -----
Effective rate............................................... 39.9% 37.4% 22.1%
==== ==== =====
</TABLE>
The provision for deferred income taxes consists of the following:
<TABLE>
<CAPTION>
1993 1994 1995
--------- -------- ---------
<S> <C> <C> <C>
Accruals......................................... $ (41,000) $216,000 $ 24,000
Depreciation expense............................. (130,000) 40,000 268,000
Change in valuation allowance for
tax loss carryforwards......................... 0 0 (448,000)
--------- -------- ---------
Total.................................. $(171,000) $256,000 $(156,000)
========= ======== =========
</TABLE>
The significant tax effected temporary differences comprising deferred
taxes at December 31 are as follows:
<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
Current:
Accrued vacation and pension costs......................... $ 149,000 $ 177,000
Other...................................................... (126,000) (185,000)
--------- ---------
Total current deferred tax asset (liability)................. 23,000 (8,000)
--------- ---------
Long-term:
Excess of tax over book depreciation....................... (50,000) (346,000)
Recognition of contract revenue............................ (289,000) (166,000)
Utilization of tax loss carryforwards...................... 448,000
Other...................................................... (6,000) (94,000)
--------- ---------
Total long-term deferred tax liability....................... (345,000) (158,000)
--------- ---------
Net deferred tax liability......................... $(322,000) $(166,000)
========= =========
</TABLE>
The valuation allowances associated with tax loss carryforwards as of
December 31 are as follows:
<TABLE>
<CAPTION>
1994 1995
----------- ---------
<S> <C> <C>
Tax asset for loss carryforward............................ $ 1,200,000 $ 669,000
Valuation allowance........................................ (1,200,000) (221,000)
----------- ---------
Net long-term deferred tax asset................. $ 0 $ 448,000
=========== =========
</TABLE>
At December 31, 1995, the Company had approximately $1.6 million of net
operating loss carryforward of an acquired subsidiary which expires through
2008.
11. BENEFIT PLANS
The Company has a noncontributory defined benefit pension plan (the "Plan")
for employees. To be eligible to participate, employees must have completed six
months of continuous employment and have
F-15
<PAGE> 82
SIMULA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
attained the age of 21. Benefits are based on length of service and the
employee's final pay (averaged over the five highest consecutive years of the
last ten years of participation). The Company makes contributions to the Plan
based upon actuarially determined amounts.
Net periodic pension cost includes the following:
<TABLE>
<CAPTION>
1993 1994 1995
-------- -------- ---------
<S> <C> <C> <C>
Service cost -- benefit earned during the year.... $120,147 $205,195 $ 169,835
Interest cost on projected benefit obligation..... 75,001 113,496 116,660
Actual return on Plan assets...................... (54,024) (70,053) (257,497)
Net amortization and deferral..................... (14,529) 15,907 172,970
-------- -------- ---------
Net periodic pension cost............... $126,595 $264,545 $ 201,968
======== ======== =========
</TABLE>
The Plan's funded status and amounts recognized in the Company's balance
sheet at December 31 are as follows:
<TABLE>
<CAPTION>
1994 1995
--------- ----------
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested benefits............................................. $ 856,257 $1,310,868
Nonvested benefits.......................................... 79,747 237,163
--------- ----------
Accumulated benefit obligation................................ 936,004 1,548,031
Effect of projected future compensation increases............. 436,713 364,997
--------- ----------
Projected benefit obligation.................................. 1,372,717 1,913,028
Plan assets at fair value..................................... 891,304 1,375,252
--------- ----------
Plan assets less than projected benefit obligation............ 481,413 537,776
Unrecognized prior service cost............................... 15,028 24,383
Unrecognized loss............................................. (381,331) (293,362)
Unrecognized transition liability............................. 101,746 96,094
--------- ----------
Accrued pension cost........................................ $ 216,856 $ 364,891
========= ==========
</TABLE>
Assumptions at December 31 used in the accounting for the Plan were as
follows:
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Discount or settlement rate.................................... 7.25% 8.25% 7.25%
Rate of increase in compensation levels........................ 3.00% 4.00% 3.50%
Expected long-term rate of return on Plan assets............... 8.00% 8.00% 8.00%
</TABLE>
The Plan's assets consist of money market accounts and investments in
common stocks, mutual funds, and corporate bonds.
In addition, the Company has 401(k) plans for substantially all employees
and one subsidiary has a union sponsored pension plan for union employees to
which the Company makes contractual contributions.
F-16
<PAGE> 83
SIMULA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. RELATED PARTY TRANSACTIONS
The Company has entered into various transactions with the Chairman. These
transactions are further described as follows:
a. The Company acquired SOUTHtech from the Chairman in 1994 as
described in Note 3.
b. The Chairman loaned the Company $2,000,000 in 1994 which was repaid
by the Company in 1995.
13. COMMITMENTS AND CONTINGENCIES
The Company leases certain equipment under capital lease agreements and
certain facilities under noncancellable operating leases with various renewal
options. Leased assets totaling $1,042,604 and $510,810 (net of accumulated
depreciation of $248,683 and $162,830) are included in furniture and equipment
as of December 31, 1995 and 1994, respectively.
The following is a schedule, by year, of minimum rental payments due under
the leases described above and for other operating leases for the years ending
December 31:
<TABLE>
<CAPTION>
CAPITAL LEASES OPERATING LEASES
-------------- ----------------
<S> <C> <C>
1996...................................................... $ 365,319 $1,284,645
1997...................................................... 317,274 1,219,306
1998...................................................... 230,234 667,451
1999...................................................... 143,163 571,994
2000...................................................... 23,604 360,847
Thereafter................................................ 774 1,582,000
---------- ----------
Total minimum lease payments.............................. 1,080,368 $5,686,243
==========
Less amounts representing interest........................ 162,848
----------
Present value of net minimum lease payments............... $ 917,520
==========
</TABLE>
Rent expense was $1,109,402, $578,079 and $399,167 for the years ended
December 31, 1995, 1994 and 1993, respectively.
GOVERNMENT CONTRACT SETTLEMENT -- Pursuant to a Settlement Agreement and
Release effective September 17, 1993, the Company agreed with the United States
of America (the "Government") to a compromise and settlement relating to a claim
by the Government for alleged violations of the Truth in Negotiations Act
("TINA"). The Agreement resolved the dispute between the parties without any
admission of liability or wrongdoing on the part of the Company. Under the terms
of the Agreement, the Company paid the Government $445,000 in three
installments. Such amount and related legal fees of $474,000 have been recorded
in the income statement as an unusual item.
14. STOCK OPTIONS
In 1992, the Company adopted the 1992 Stock Option Plan which provided for
the issuance of up to 360,000 shares of common stock. All options available
under the 1992 Plan have been granted. In 1992, the Company adopted the 1992
Restricted Stock Plan authorizing the Company to grant to key employees of the
Company the right to purchase up to an aggregate of 19,500 shares of common
stock at $.01 per share. The Company has reserved 19,500 shares of common stock
for issuance pursuant to the Restricted Stock Plan, of which 4,500 shares have
been awarded. In August 1994, the Company adopted the 1994 Stock Option Plan
which reserves up to 945,000 shares of common stock for issuance under the Plan.
In accordance with the terms of the 1994 Plan, the Board of Directors has
awarded 492,750 options under the 1994 Plan. Options are
F-17
<PAGE> 84
SIMULA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
exercisable for up to 10 years at a price equal to 100% of the fair market value
at the date of grant or 85% of fair market value in the case of non-statutory
options.
Information with respect to the Plans is as follows:
<TABLE>
<CAPTION>
OPTION OPTION PRICE
SHARES RANGE FOR SHARES
------- ----------------
<S> <C> <C>
Outstanding at January 1, 1993........................... 0 0 -- 0
Granted................................................ 245,250 $ 3.25
-------
Outstanding at December 31, 1993......................... 245,250 $ 3.25
Granted................................................ 161,250 $ 6.92 -- $12.50
Exercised.............................................. 24,075 $ 3.25
Cancelled.............................................. (1,500)
-------
Outstanding at December 31, 1994......................... 380,925 $ 3.25 -- $12.50
Granted................................................ 478,125 $13.17 -- $13.67
Exercised.............................................. 135,500 $ 3.25 -- $ 6.92
Cancelled.............................................. (6,300)
-------
Outstanding at December 31, 1995......................... 717,250
=======
Exercisable at December 31, 1995......................... 239,125
=======
</TABLE>
15. MAJOR CUSTOMERS
Sales to four major customers accounted for approximately 29%, 66% and 77%
of total sales for the years ended December 31, 1995, 1994 and 1993. Contract
receivables from these customers accounted for approximately 29%, 39% and 59% of
the total contract receivables at December 31, 1995, 1994 and 1993. These major
customers include all branches of the United States armed forces which accounted
for 18%, 24% and 46% of total sales for the years ended December 31, 1995, 1994
and 1993. The Company has performed work for these customers since 1975 and has
no reason to believe that there will be any change in these customer
relationships.
For the year ended December 31, 1995 export sales were $6,760,819. For the
years ended December 31, 1994 and 1993, export sales were less than 10% of
consolidated revenue.
16. OTHER
The Company's research and development efforts arise from funded
development contracts and proprietary research and development.
Amounts arising from such efforts for the years ended December 31 were as
follows:
<TABLE>
<CAPTION>
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Research and development expenses, classifed as
general and administrative expenses.......... $ 375,592 $ 687,686 $1,419,340
========== ========== ==========
Funded contracts:
Revenues..................................... $1,685,745 $3,290,146 $3,901,662
Cost of revenue earned....................... 1,813,120 3,165,130 4,721,858
---------- ---------- ----------
Funded contract -- net............... $ (127,375) $ 125,016 $ (820,196)
========== ========== ==========
</TABLE>
F-18
<PAGE> 85
SIMULA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. SEGMENT REPORTING
During 1995, 1994 and 1993, the Company operated in three industry
segments. The Simula Government Products, Inc. segment includes the design and
manufacture of crash resistant components, energy absorbing devices, ballistics
and composites principally in connection with branches of the United States
armed forces procurement. The Intaero segment includes operations which
manufacture products for the interiors of domestic and foreign passenger
airlines and seating systems for rail and other mass transit. The remaining
segment, entitled Other, includes general corporate operations and other
subsidiaries engaged in technology development and sales (Note 3). Segment
disclosures are as follows:
<TABLE>
<CAPTION>
1995
-------------------------------------------------------------
SIMULA
GOVERNMENT
PRODUCTS, INC. INTAERO OTHER TOTAL
-------------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Revenue:
Contract revenue..................... $ 24,753,600 $23,936,070 $48,689,670
Product sales........................ 5,673,264 $1,968,879 7,642,143
Technology sales and royalties....... 779,347 0 1,977,453 2,756,800
----------- ----------- ---------- -----------
Total revenue................ $ 25,532,947 $29,609,334 $3,946,332 $59,088,613
=========== =========== ========== ===========
Operating income....................... $ 3,294,791 $ 3,066,695 $ 496,651 $ 6,858,137
Identifiable assets.................... 26,629,708 38,688,362 9,421,066 74,739,136
Depreciation and amortization.......... 564,842 1,899,849 600,142 3,064,833
Capital expenditures................... 1,829,664 1,459,651 1,478,142 4,767,457
</TABLE>
<TABLE>
<CAPTION>
1994
-------------------------------------------------------------
SIMULA
GOVERNMENT
PRODUCTS, INC. INTAERO OTHER TOTAL
-------------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Revenue:
Contract revenue..................... $ 21,587,963 $12,126,010 $33,713,973
Product sales........................ 5,966,839 $1,031,379 6,998,218
Technology sales and royalties....... 445,603 0 0 445,603
----------- ----------- ---------- -----------
Total revenue................ $ 22,033,566 $18,092,849 $1,031,379 $41,157,794
=========== =========== ========== ===========
Operating income....................... $ 3,037,566 $ 2,168,567 $ (21,813) $ 5,184,320
Identifiable assets.................... 19,761,764 24,654,688 3,274,511 47,690,963
Depreciation and amortization.......... 516,510 763,418 371,190 1,651,118
Capital expenditures................... 586,178 0 670,674 1,256,852
</TABLE>
F-19
<PAGE> 86
SIMULA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1993
-------------------------------------------------
SIMULA
GOVERNMENT
PRODUCTS, INC. INTAERO TOTAL
-------------- ---------- -----------
<S> <C> <C> <C>
Revenue:
Contract revenue............................... $ 21,252,203 $21,252,203
Product sales.................................. $3,436,797 3,436,797
Technology sales and royalties................. 91,591 0 91,591
----------- ---------- -----------
Total revenue.......................... $ 21,343,794 $3,436,797 $24,780,591
=========== ========== ===========
Operating income................................. $ 2,447,656 $ 216,899 $ 2,664,555
Identifiable assets.............................. 20,784,764 6,002,468 26,787,232
Depreciation and amortization.................... 638,764 159,990 798,754
Capital expenditures............................. 550,752 14,000 564,752
</TABLE>
For the year ended December 31, 1995, inter-segment sales were
insignificant and total intercompany sales of $4,065,201 have been eliminated.
All revenue in 1994 and 1993 was generated from sales to unaffiliated customers.
Operating income for Simula Government Products for 1993 included an unusual
item of $919,389 relating to a government contract settlement as discussed in
Note 13.
18. NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
effective for fiscal years beginning after December 15, 1995. This statement
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles and goodwill related to those assets to be held
and used and long-lived assets and certain identifiable intangibles to be
disposed of. The statement requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In addition, the statement
requires that certain long-lived assets and intangibles to be disposed of be
reported at the lower of carrying amount or fair value less cost to sell. The
Company adopted this accounting standard effective January 1, 1995. The adoption
of this accounting standard had no impact on the Company's results of operations
or financial position.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," effective for transactions entered into in fiscal years that
begin after December 15, 1995. This statement establishes financial accounting
and reporting for stock-based employee compensation plans, including stock
purchase plans, stock option plans, restricted stock and stock appreciation
rights. The Statement requires a fair value based method of accounting for
employee stock options or similar instruments and encourages a similar method
for all employee stock compensation plans. This method measures compensation
cost at the grant date based on the value of an award and recognizes it over the
service period, usually the vesting period. However, the Statement also allows
an entity to continue measuring compensation cost for such plans using the
intrinsic value method of accounting prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," provided pro forma
disclosures are made. The Company expects to continue to account for its
stock-based employee compensation plans using the method of accounting
proscribed by APB No. 25 and does not expect this accounting standard will
materially impact its results of operations or financial position.
F-20
<PAGE> 87
SIMULA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. UNAUDITED QUARTERLY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
1995
-----------------------------------------------------------------
FIRST SECOND THIRD FOURTH
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue......................... $13,580,842 $15,030,715 $14,694,204 $15,782,852
Cost of revenue................. 8,954,807 9,632,276 9,396,431 8,637,957
Gross margin.................... 4,626,035 5,398,439 5,297,773 7,144,895
Net earnings.................... 616,077 936,995 1,139,182 1,410,105
Net earnings per common and
equivalent share.............. $ .09 $ .11 $ .13 $ .15
</TABLE>
<TABLE>
<CAPTION>
1994
-----------------------------------------------------------------
FIRST SECOND THIRD FOURTH
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue......................... $ 6,900,072 $ 7,558,741 $12,875,330 $13,823,651
Cost of revenue................. 4,370,264 4,667,947 9,157,490 9,512,909
Gross margin.................... 2,529,808 2,890,794 3,717,840 4,310,742
Net earnings.................... 334,798 513,707 603,372 662,546
Net earnings per common and
equivalent share.............. $ .07 $ .10 $ .10 $ .10
</TABLE>
20. UNAUDITED NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
NOTE 1 -- BASIS OF PRESENTATION
The accompanying interim financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information. Accordingly, they do not include all of the information and
disclosures required by generally accepted accounting principles for complete
financial statements. In the opinion of Management, all adjustments and
reclassifications considered necessary for a fair and comparable presentation
have been included and are of a normal recurring nature. Operating results for
the six months ended June 30, 1996 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1996.
NOTE 2 -- ACCOUNTING CHANGE
During the second quarter of 1996, the Company adopted a new method of
accounting for pre-contract costs. Pre-contract costs represent amounts
applicable to products and technologies which represent adaptations of existing
capabilities to the particular requirements of the Company's customers. These
costs were previously deferred and recovered over the revenue streams from these
customers. The Company will now expense these costs as they are incurred. Due to
current industry trends and anticipated accounting changes, the new policy is
considered preferable to the previous policy. Both policies are currently in
accordance with generally accepted accounting principles.
The $3.2 million cumulative effect of the change on prior years (after
reduction for income taxes of $2.2 million) is included in operations of the six
months ended June 30, 1996. The effect of the change on the six months ended
June 30, 1996 was to decrease earnings before cumulative effect of a change in
accounting principle $1.8 million ($.21 per share) and net earnings by $5.0
million ($.57 per share). The pro forma amounts reflect the effect of
retroactive application on pre-contract costs, net of amortization, and the
related income tax benefits.
F-21
<PAGE> 88
SIMULA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The effect of the change on the first quarter of 1996 was as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, 1996
--------------
<S> <C>
Net income as originally reported...................................... $ 685,179
Effect of change in accounting for pre-contract costs.................. (563,247)
-----------
Income before cumulative effect of a change in accounting principle.... 121,932
Cumulative effect on prior years (to December 31, 1995) of changing
accounting for pre-contract costs.................................... (3,239,948)
-----------
Net loss as restated................................................... $ (3,118,016)
===========
Per share amounts:
Net income as originally reported.................................... $ .08
Effect of change in accounting for pre-contract costs................ (.07)
-----------
Income before cumulative effect of a change in accounting
principle......................................................... .01
Cumulative effect on prior years (to December 31, 1995) of changing
accounting for pre-contract costs................................. (.36)
-----------
Net loss as restated................................................. $ (.35)
-----------
</TABLE>
Pro forma amounts assuming the change in accounting had been applied
retroactively are as follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, 1995 DECEMBER 31, 1995
------------- -----------------
<S> <C> <C>
Net earnings............................. $ 1,116,402 $ 1,658,299
Net earnings per share................... $ .14 $ .19
</TABLE>
NOTE 3 -- INCOME TAXES
The tax provision for the three and six month periods ended June 30, 1996
and 1995 is proportionate to the Federal and State combined rate of
approximately 40%.
NOTE 4 -- SHAREHOLDERS' EQUITY
During the second quarter of 1996, the Company retired 82,500 shares of
treasury stock which had been acquired for a cost of $279,838.
Weighted average shares used to compute per share amounts for the three and
six month periods ended June 30, 1996 do not include common stock equivalents
because their effect would be anti-dilutive.
F-22
<PAGE> 89
======================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY THE SHARES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM IT IS UNLAWFUL. UNDER NO
CIRCUMSTANCES SHALL THE DELIVERY OF THIS PROSPECTUS OR ANY SALE MADE PURSUANT TO
THIS PROSPECTUS CREATE ANY IMPLICATION THAT INFORMATION CONTAINED IN THIS
PROSPECTUS IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
The Company........................... 3
Risk Factors.......................... 8
Use of Proceeds....................... 16
Capitalization........................ 17
Price Range of Common Stock........... 18
Dividend Policy....................... 18
Selected Consolidated Financial
Data................................ 19
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 22
Business.............................. 29
Properties............................
Management............................ 43
Certain Transactions.................. 50
Principal Shareholders................ 52
Description of Convertible Preferred
Stock............................... 54
Certain Federal Tax Consequences...... 58
Description of Other Capital Stock and
Securities.......................... 61
Underwriting.......................... 63
Legal Opinions........................ 64
Experts............................... 64
Incorporation of Certain Documents by
Reference........................... 64
Additional Information................ 64
Index to Financial Statements......... F-1
</TABLE>
======================================================
======================================================
1,200,000 SHARES
LOGO
SIMULA, INC.
$ SERIES A CONVERTIBLE
PREFERRED STOCK
--------------------
PROSPECTUS
--------------------
HD BROUS & CO., INC.
BREAN MURRAY
SECURITIES INC.
L.H. FRIEND, INC.
======================================================
<PAGE> 90
SIMULA, INC.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is an itemized statement of all expenses in connection with
the issuance and distribution of the securities to be registered. These expenses
will be deducted from the gross proceeds of the offering. The information
contained below is subject to future contingencies. An asterisk to the right of
a dollar figure denotes that the figure is an estimate and the exact amount to
be expended for that category is not yet known.
<TABLE>
<S> <C>
Registration Fee.................................................. $ 12,000
Transfer Agent's Fee.............................................. 10,000
Legal Fees........................................................ 150,000
New York Stock Exchange Listing Fee............................... 30,000
Accounting Fees................................................... 75,000
Printing and Engraving Costs...................................... 90,000
Other............................................................. 33,000
--------
Total................................................... $400,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
ARTICLE 10 of the Company's Amended and Restated Articles of Incorporation
provides that the personal liability of the directors to the Company and its
shareholders for monetary damages by reason of their conduct as directors shall
be limited or eliminated to the fullest extent permitted by Arizona law. In
A.R.S. Sec. 10-202(B) (1), Arizona corporate law limits or eliminates the
liability of a director of a corporation for money damages for any action taken
or not taken as a director in all instances except: (i) where a director
receives financial benefits to which he is not entitled; (ii) any intentional
infliction of harm on the corporation or its shareholders; (iii) the making of
unlawful distributions; and (iv) intentional violations of criminal law.
Section 12.01 of the Company's Bylaws further provides that the Company
shall indemnify and pay the expenses of directors, officers, employees, trustees
or agents of or for the Company to the fullest extent permitted by Arizona law.
In A.R.S. Sec. 10-850 et seq., Arizona corporate law provides that a corporation
may provide indemnification if: (i) the director's conduct was in good faith;
(ii) the director reasonably believed: (x) in the case of conduct in an official
capacity with the corporation, that the conduct was in its best interests, or
(y) in all other cases, that the conduct was at least not opposed to its best
interests; and (iii) in the case of criminal proceedings, the director had no
reasonable cause to believe the conduct was unlawful.
Directors may not be indemnified in connection with proceedings brought by
or in the right of the Company in which the director was adjudged liable to the
Company or in connection with any other proceeding charging improper personal
benefit to the director, whether or not involving action in the director's
official capacity, in which the director was adjudged liable on the basis that
personal benefit was improperly received by the director. Under Arizona law,
indemnification in connection with a proceeding by or in the right of the
Company is limited to reasonable expenses incurred in connection with the
proceeding.
Arizona law also provides for mandatory and court-ordered indemnification
in certain instances, including on behalf of officers, employees and agents of
the Company who are not also directors.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In June 1994, the Company sold $6.5 million in aggregate principal amount
of its Series B 9% Senior Subordinated Convertible Notes ("Convertible Notes").
The Convertible Notes were sold pursuant to exemptions from registration under
the Securities Act of 1933 (" '33 Act"), Section 4(2), and Regulation D
thereunder, and comparable provisions of states' securities laws. The
Convertible Notes were convertible to
II-1
<PAGE> 91
Common Stock, and 947,562 shares of the Company's Common Stock were registered
and offered pursuant to a Prospectus dated July 26, 1994 for shares of Common
Stock issuable upon the conversion of the Convertible Notes. In addition, 19,674
shares of the Company's Common Stock were registered and offered pursuant to a
Prospectus dated December 28, 1994 for remaining shares of Common Stock issuable
for accrued interest. As of the date of this Registration Statement, all
Convertible Notes have been converted into Common Stock.
In September 1996, the Company sold $14.3 million in aggregate principal
amount of its Series C 10% Senior Subordinated Convertible Notes ("10% Notes").
The 10% Notes were issued pursuant to the Company's Indenture dated December 17,
1993 and Supplemental Indenture dated September 12, 1996. The private placement
was made through HD Brous & Co., Inc., a NASD member firm, and other selected
dealers. The 10% Notes were sold pursuant to exemptions from registration under
the '33 Act, Section 4(2), and Regulation D in reliance on Rule 506 thereunder,
and comparable provisions of states' securities laws. The 10% Notes are
convertible to Common Stock of the Company at a conversion price which may be
fixed by each Noteholder at the equivalent of 103% of the average closing price
of the Company's Common Stock on the NYSE for the 10 day period immediately
preceding notice to the Company of such an election to fix the conversion price.
If not earlier converted, the Notes are redeemable by the Company in whole or in
part on a pro rata basis, at par value plus all accrued interest payable through
the date of redemption, at any time upon 30 days written notice to the
Noteholders in accordance with the following: (i) from September 12, 1996 until
June 15, 1997, the Notes may be redeemed by the Company after the closing price
of the Company's Common Stock as quoted on the NYSE has equaled or exceeded
$25.00 for any 10 consecutive trading days and (ii) after June 15, 1997, the
Company may redeem the Notes at any time at par value plus all accrued interest
payable through the date of redemption. Of the 1,931,140 shares of the Company's
Common Stock being registered pursuant to this Registration Statement, 1,430,000
shares are being registered to account for the prospective issuance of Common
Stock in the full amount of principal and interest on the Notes outstanding at
any given time upon notice of the Noteholders of such holders' election to
convert their 10% Notes into Common Stock at 103% of the prices which they may
have fixed for conversion. As of the date of this Registration Statement, no 10%
Notes have been converted into Common Stock.
Other than the foregoing transactions, the Registrant has not offered or
sold any unregistered securities within the last three years.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
a. Exhibits. The following Exhibits are included pursuant to Regulation
S-K.
<TABLE>
<CAPTION>
NO. DESCRIPTION REFERENCE
- ------ ----------------------------------------------------------------------------- ---------
<C> <S> <C>
3.1 Articles of Incorporation of Simula, Inc., as amended and restated........... (14)
3.2 Bylaws of Simula, Inc., as amended and restated.............................. (1)
4.1 Specimen of Common Stock Certificate......................................... (14)
4.2 Indenture dated December 17, 1993 (including cross-reference sheet to Trust
Indenture Act), as amended................................................... (4)
4.5 Amended and Restated Supplemental Indenture No. 2 dated September 12, 1996,
entered into in connection with the Registrant's issuance of Series C 10%
Senior Subordinated Convertible Notes........................................ (14)
5.1 Opinion of Counsel...........................................................
10.8 Employment Agreement between Registrant and Stanley P. Desjardins............ (1)
10.9 Employment Agreement between Registrant and Donald W. Townsend............... (1)
10.11 1992 Stock Option Plan....................................................... (1)
10.12 1992 Restricted Stock Plan................................................... (1)
10.15 Asset Purchase Agreement dated August 2, 1993 between Simula, Inc. and
Airline Interiors, Inc. ..................................................... (3)
</TABLE>
II-2
<PAGE> 92
<TABLE>
<CAPTION>
NO. DESCRIPTION REFERENCE
- ------ ----------------------------------------------------------------------------- ---------
<C> <S> <C>
10.16 Asset Purchase Agreement dated June 14, 1994, among Simula, Inc., CCEC
Acquisition Corp. and Coach and Car Equipment Corporation.................... (5)
10.17 Stock Purchase Agreement between Simula, Inc. and Southtech, Inc. and
shareholders dated July 1, 1994.............................................. (7)
10.18 Asset Purchase Agreement dated September 30, 1994, among Simula, Inc.,
Artcraft Acquisition Corp., and Artcraft Industries Corp. ................... (6)
10.21 1994 Stock Option Plan....................................................... (7)
10.22 Agreements dated January 27, 1995 with Autoliv AB, including license
agreement, frame supply agreement and joint development agreement............ (8)
10.23 Agreement with Jetstream Aircraft Limited.................................... (8)
10.25 Asset Purchase Agreement dated November 1, 1995, between Comfab, Inc. and
Stanley P. Desjardins, d/b/a Desjardins Engineering; Services Agreement dated
November 1, 1995, between Simula, Inc. and Comfab, Inc.; Promissory Note of
Stanley P. Desjardins, d/b/a Desjardins Engineering, dated November 1, 1995,
for the purchase price of Comfab, Inc. ...................................... (10)
10.26 Simula, Inc. Employee Stock Purchase Plan.................................... (11)
10.27 Promissory Note representing $650,000 loan from Stanley P. Desjardins dated
August 12, 1996.............................................................. (14)
10.28 Promissory Note representing $1,000,000 loan from Stanley P. Desjardins dated
August 14, 1996.............................................................. (14)
18. Preference Letter re change in accounting principles......................... (13)
21. Subsidiaries of Registrant................................................... (14)
23. Consents of Independent Auditors.............................................
24. Powers of Attorney -- Directors.............................................. (10)
25. Statement of Eligibility of Trustee on Form T-1 (without Indenture)
(bound separately)........................................................... (4)
</TABLE>
- ---------------
* Filed herewith.
(1) Filed with Registration Statement on Form S-18, No. 33-46152-LA, under the
Securities Act of 1933, effective April 13, 1992.
(2) Filed with Form 10-KSB for the year ended December 31, 1992.
(3) Filed with current Report on Form 8-K, dated August 2, 1993.
(4) Filed with Registration Statement on Form SB-2, No. 33-61028 under the
Securities Act of 1933, effective December 10, 1993.
(5) Filed with current Report on Form 8-K, dated June 14, 1994.
(6) Filed with current Report on Form 8-K, dated September 30, 1994.
(7) Filed with Registration Statement on Form SB-2, No. 33-87582, under the
Securities Act of 1933, effective December 28, 1994.
(8) Filed with Registration Statement on Form S-1, No. 33-89186, under the
Securities Act of 1933, effective March 28, 1995, as amended by
Post-Effective Amendment No. 1, effective March 31, 1995.
(9) Filed with Report on Form 10-Q for the quarter ended September 30, 1995.
(10) Filed with Report on Form 10-K for the year ended December 31, 1995.
(11) Filed with Report on Form 10-Q for the quarter ended March 31, 1996.
(12) Filed with Definitive Proxy on May 14, 1996, for the Company's Annual
Meeting of Shareholders held on June 20, 1996.
II-3
<PAGE> 93
(13) Filed with Report on Form 10-Q for the quarter ended June 30, 1996.
(14) Filed with Report on Form 10-Q/A dated October 3, 1996, amending Report on
Form 10-Q for the quarter ended June 30, 1996.
(15) Filed with Registration Statement on Form S-3, File No. 333-13499, under
the Securities Act of 1933, filed on October 4, 1996.
(16) Filed with Report on Form 10-Q for the quarter ended September 30, 1996.
(17) Filed with Report on Form 10-Q/A for the quarter ended September 30, 1996.
(18) Filed with Report on Form 10-K/A for the year ended December 31, 1995.
(19) Filed with Registration Statement on Form S-3, File No. 333-17043, under
the Securities Act of 1933, filed on November 27, 1996.
b.1. Financial Statements. The financial statements of the Company are
included in the Prospectus beginning at page F-1.
b.2. Financial Statement Schedules. All schedules are included in the
financial statements of the Company or are included in Part II of the
Registration Statement.
ITEM 17. UNDERTAKINGS
RULE 415
a. The undersigned registrant hereby undertakes:
a.1. To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of Securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change
in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration
Statement;
a.2. That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new Registration Statement relating to the Securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
a.3. To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
e. Incorporated Annual and Quarterly Reports.
The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is
sent or given, the latest annual report to security holders that is
incorporated by reference in the prospectus and furnished pursuant to and
meeting the requirements of Rule 14a-3 or Rule 14c-3 under the Securities
Exchange Act of 1934; and, where interim financial
II-4
<PAGE> 94
information required to be presented by Article 3 of Regulation S-X are not
set forth in the prospectus, to deliver, or cause to be delivered to each
person to whom the prospectus is sent or given, the latest quarterly report
that is specifically incorporated by reference in the prospectus to provide
such interim financial information.
h. Request for acceleration of effective date.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-5
<PAGE> 95
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Phoenix, State of Arizona
on March , 1997.
SIMULA, INC.
By /s/ DONALD W. TOWNSEND
------------------------------------
Donald W. Townsend, President
Pursuant to the requirements of the Securities Act of 1933, the
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE AND TITLE DATE
- -------------------------------------------- --------------------------------------------
<S> <C>
/s/ DONALD W. TOWNSEND March , 1997
- --------------------------------------------
Donald W. Townsend, President, Chief
Operating
Officer, and Director
/s/ BRADLEY P. FORST March , 1997
- --------------------------------------------
Bradley P. Forst, Vice President, General
Counsel,
Secretary and Director
/s/ SEAN K. NOLEN March , 1997
- --------------------------------------------
Sean K. Nolen, Vice President, Treasurer,
Chief
Financial Officer, and Director
- --------------------------------------------
Stanley P. Desjardins, Chairman
- --------------------------------------------
James C. Withers, Director
- --------------------------------------------
Robert D. Olliver, Director
- --------------------------------------------
Scott E. Miller, Director
*By: /s/ BRADLEY P. FORST March , 1997
---------------------------------------
Bradley P. Forst,
Attorney-in-Fact
</TABLE>
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