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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 COMMISSION FILE NO. 1-12410
SIMULA, INC.
(Exact name of Registrant as specified in its charter)
ARIZONA 86-0320129
(State of Incorporation) (I.R.S. Employer Identification No.)
2700 NORTH CENTRAL AVENUE, SUITE 1000
PHOENIX, ARIZONA 85004
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (602) 631-4005
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- ------------------------------------------------- -----------------------
Common Stock, par value $.01 per share New York Stock Exchange
8% Senior Subordinated Convertible Notes Due 2004 New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in the definitive Proxy incorporated by
reference in Part III of this Form 10-K. X
As of March 29, 1999, the number of shares of Common Stock outstanding was
9,918,364 and the aggregate market value of the Common Stock (based on the
closing price as quoted on the New York Stock Exchange on that date) held by
non-affiliates of Registrant was $50,211,718.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Proxy Statement to be filed with the
Commission in connection with its Annual Meeting of Shareholders to be held June
17, 1999 are incorporated by reference in Part III of this report.
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PART I
ITEM 1. BUSINESS
With the exception of historical information, the matters discussed in this
report on Form 10-K may be estimates or constitute forward-looking statements
that describe matters that involve risks and uncertainties which could cause the
Company's actual results to differ materially from those discussed herein. See,
"Management's Discussion and Analysis and Financial Condition and Results of
Operations - Forward Looking Information and Trends and Uncertainties in the
Business."
THE COMPANY
Simula, Inc. is an acknowledged world leader in providing crash resistant
and energy absorption technologies that safeguard human lives. Simula invents,
manufactures, and markets advanced occupant seating and restraint systems
installed in air, ground, and sea transport vehicles for the military,
commercial airline, and automotive industries. The Company was established in
1975. In its last six fiscal years, the Company has experienced substantial
revenue growth resulting from strategic acquisitions, wider application of
technologies, and new product introductions. Simula, Inc. conducts its business
operations through nine wholly-owned subsidiaries and divisions. As used herein,
the terms "Company" or "Simula" refer collectively to Simula, Inc. and its
consolidated subsidiaries.
SEGMENTS AND MARKETS
Simula is a holding company for operating subsidiaries in two business
segments. The Commercial Transportation Products segment includes technology
development and manufacturing operations for seating systems for airliners and
products and safety systems for automobiles and trucks. The Company's Government
and Defense segment includes technology development and manufacturing operations
for military aircraft seating, armor, and crew safety systems sold principally
to U.S. and foreign armed forces.
The Company's historic core business was as a supplier of safety systems to
military and other government customers. Since 1992 the Company has successfully
entered commercial markets with products developed from technologies that
originated from its historic core business and newly developed technologies.
Today, the Company's numerous product lines are focused in three primary
markets: (i) Automotive safety systems and devices, (ii) Advanced commercial
airline seating systems, and (iii) Crash resistant aircraft systems and safety
equipment procured by defense and other government agencies.
Revenues, operating results, and other financial data are set forth in
Items 6, 7, and 8 of this Report.
COMMERCIAL TRANSPORTATION PRODUCTS
AUTOMOBILE SAFETY SYSTEMS
Overview
The Company designs and manufactures advanced occupant restraint systems
for automobiles and trucks. In 1994, the Company made a strategic decision to
enter the inflatable restraint market for automobiles utilizing its proprietary
technology, the Inflatable Tubular Structure ("ITS(R)"). The Company completed
its development of this technology and substantially completed the start-up of
its manufacturing facilities in 1996. The ITS(R) began in product delivery
production in April 1997. The Company's automotive safety product line has been
one of its most profitable businesses. In 1998, this business benefited
significantly from technology development, manufacturing efficiencies, cost
downs, quality standards and certifications, and increased production volumes.
Over the past several years the demand for vehicle safety systems has
increased dramatically due to consumer demand for increased safety and changes
in government regulations mandating more effective safety components in
vehicles. After frontal collisions, side-impact collisions are the second
leading cause of injuries in vehicle crashes and account for approximately 25
percent of all injuries and 34 percent of all fatalities. A significant portion
of side-impact injuries are to the head and neck. Rollover crashes are the third
leading cause of injuries, and the
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second leading cause of fatalities in crashes. The ITS(R) was the first product
designed specifically to protect vehicle occupants' heads and necks in
side-impact collisions, and provides significant protection for vehicle
occupants in the event of secondary collisions or rollovers.
Since its introduction in BMW automobiles in 1997, the ITS(R) has proven to
be an effective countermeasure against the grave effects of numerous categories
of crashes. In several cases reported to the National Highway Traffic and Safety
Administration (NHTSA), the ITS(R) has demonstrated its lifesaving qualities in
protecting vehicle occupants from severe injury or death.
In 1998, NHTSA amended a federal motor vehicle safety standard that governs
the level of side-impact protection that vehicles are required to have. As a
part of the new mandate, U.S. auto manufacturers may now replace some interior
padding with a side-impact head protection system mounted on a vehicle's roof
rail, such as the ITS(R). The new regulation underscores the increasing trend
towards making side-impact safety a necessary component of every vehicle's
safety system, and should create the impetus for automobile manufacturers to
install these systems on an accelerated basis.
The worldwide market in 1999 for frontal and side-impact airbags in all
vehicle positions (front and rear) is growing rapidly. In anticipation of such
increased demand, the Company has developed several strategic partnerships with
first-tier automotive suppliers.
Current Products and Technologies
Inflatable Tubular Structure - The ITS(R) provides protection beyond that
provided by conventional airbags currently utilized in automobiles. Unlike a
conventional airbag, which must be backed by a structure such as a steering
wheel, dashboard, or door, the ITS(R) 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, while the ITS(R) provides protection despite the
window being open or breaking upon impact, a conventional airbag would not have
adequate support in these situations. Therefore, the ITS(R) is able to
substantially reduce head rotation to the side and prevent contact with vehicle
components. Additionally, the diagonal arrangement of the activated ITS(R)
offers protection for occupants of different sizes and seating positions, and in
different types of side-impact collisions, as well as in rollover, secondary
impact, and ejection situations. The ITS(R) is not an "aggressive" airbag and
thus does not pose some of the threats to smaller, or out of position vehicle
occupants, as do conventional airbags. It also has an extended inflation time,
enabling the unit to offer protection in the event of secondary impacts or
rollovers.
The Company is currently manufacturing the ITS(R) for sale to BMW, a major
European automobile manufacturer and recognized safety leader in the automotive
industry. The Company has achieved adoptions for the ITS(R) for eight platforms
for various automakers, that will be delivered for series production during
upcoming model years. The Company is consistently engaged in ongoing sales and
marketing efforts for ITS(R) adoption by automakers in their routine planning
and production cycles.
In 1998, the Company entered into license and manufacturing agreements with
TRW Inc. and Delphi Automotive Systems, Inc., major first tier automotive
component suppliers, for the marketing, development and production of ITS(R) for
automotive platforms. The Company entered into a similar agreement with Indiana
Mills & Manufacturing Inc. for the marketing, development and production of
ITS(R) for truck platforms. The Company enters into such strategic alliances
with first tier component suppliers to leverage off the size and industry
strength of such large manufacturers, and to benefit from their market access to
OEMs. The Company believes it will continue to achieve product adoptions and
increased volumes in the coming years. Customary industry price reductions for
products are expected as volumes grow.
The Company has been involved in a dispute regarding its 1995 distributor
agreement with Autoliv, Inc. The Company has alleged that Autoliv violated fair
competition laws and misappropriated some of its proprietary technology. The
Company is also disputing Autoliv's position regarding second sourcing and the
supply and
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manufacturing rights of the Company. See, "Litigation." See also, "Forward
Looking Information and Trends and Uncertainties in the Business."
Inflatable Tubular Torso Restraint ("ITTR") - The Company has developed
various additional applications for its ITS(R)-related technology. To date, the
most notable among them is the Inflatable Tubular Torso Restraint. The ITTR is a
patented seat belt device that incorporates an inflatable tube into the torso
portion of the belt. The ITTR has generated significant interest in the
automotive market both for its innovative design and its potential to offer
greatly enhanced occupant protection.
In addition to the ITS(R) agreement described above, in 1998 the Company
entered into a license and supply agreement with TRW for the marketing of the
ITTR. TRW is one of the largest suppliers of restraint systems in the world and
the ITTR is the only such system in its product portfolio. Numerous automakers
are in discussions with TRW and this product is in an accelerated market
position as compared to the ITS at a similar time in its development cycle.
Rollover Sensors, Inflators, and Integrated Systems - The Company is
completing development and testing of an innovative rollover sensor and airbag
inflator device, both of which are subject to patents pending. Both of these
technologies have been introduced to automakers and have the potential to become
a major component of the Company's automobile safety product offerings.
Additional products such as these that are complementary to currently
manufactured inflatable restraint systems, may position the Company for more
direct access as a supplier to automakers, and could increase market share for
the Company as an integrated systems supplier.
AIRLINE SEATING SYSTEMS
Overview
In 1993, the Company made a strategic decision to enter the commercial
airliner seating market to bring its proprietary energy-absorbing technologies,
established in connection with the Company's government and defense contracting
business, to a new industry and take advantage of industry growth. To implement
its decision, the Company acquired Airline Interiors, Inc. ("Airline
Interiors"), which then was primarily involved with the refurbishment,
re-upholstery, reconditioning, and reconfiguring of existing passenger seats.
This acquisition provided certain FAA certifications, enhanced the Company's
management team and customer base, and provided assembly capacity.
The Company, through Airline Interiors, entered the commercial airliner
seating business in 1996. In 1997 and 1998 the Company made a substantial
investment in ramping up the sales and marketing infrastructure of this
business. The Company's efforts resulted in Airline Interiors becoming the first
successful entry into the airline seating market in 25 years, achieving an
estimated 6% worldwide market share by December 31, 1998. In 1998, the Company
allocated significant additional resources to Airline Interiors to expand its
production capabilities to meet the production volume of seat orders placed by
customers.
The dramatic growth of the airline industry in 1997 and 1998, which is
anticipated to continue over the next few years, created significant demand on
aerospace suppliers including Airline Interiors. The growing demand and customer
base caused industry-wide backlog growth and delivery delays. In addition,
changing FAA certification rules and procedures for seat designs caused
additional engineering, manufacturing, and certification delays in the industry.
The Company's ability to profitably deliver airline seats on schedule is
dependent upon a variety of factors, including the performance of parts and
materials suppliers, regulatory certification issues and schedules, and the
Company's own production and engineering processes, including the burden of
designing seats to varying customer specifications. Airline Interiors
experienced problems associated with all of these factors at various times
during 1998 as it attempted to perform under the contracts that it had
successfully sold in 1996 and 1997, leading to late deliveries on several
programs. Production was further disrupted as a result of Airline Interiors'
relocation to a larger manufacturing facility in the San Diego, California area
in the summer of 1998. As a consequence of all of these issues, the Company is
in the process of implementing a comprehensive engineering and manufacturing
efficiencies plan to increase production throughput, minimize late deliveries,
and reduce costs. Airline Interiors'
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certification, engineering, and manufacturing issues had a significant adverse
financial impact on the Company in 1998.
The Company believes that the numerous management and operational changes
that it began implementing in the latter part of 1998 will improve the financial
condition and operating results of Airline Interiors. To be successful, the
Company will need to improve delivery times and address customer demands and
dissatisfaction with its past performance. The Company will also need to sell
additional new business to its existing and new customer base to assure level
production into the latter half of 1999, to grow its installed base, and to
expand its access to larger customers and larger airframes. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Forward Looking Information and Trends and Uncertainties in the Business."
Current Products and Technologies
16g Airliner Seats - Airline Interiors' 16g Seats are designed to absorb 16
times the force of gravity upon impact. The prices and features of the Company's
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 are designed, certified, and sold for
use in numerous classes of commercial airliners.
The three distribution channels for airliner seats include airframe
manufacturers such as The Boeing Company and Airbus Industries; leasing
companies (that purchase new or used aircraft and lease them to airlines); and
airline companies including, domestic and foreign, regional, national and
worldwide carriers. The Company has customers in each of these distribution
channels and continues to target all three categories of customers.
The worldwide commercial airline seat market (including spare parts) is
presently between $400-$500 million dollars annually. Approximately 10 companies
worldwide supply airline seats, and three major competitors represent a
collective market share of approximately 90%.
According to industry reports, the prospects for growth in this segment of
the Company's business are significant due to three factors:
Expanding Worldwide Fleet. With the exception of 1990, worldwide air
traffic has grown every year since 1946, and is projected to grow at a
compounded average rate of approximately 5% through 2015. According to a report
issued by Boeing, the worldwide fleet of commercial aircraft is expected to
expand from more than 10,000 at the end of 1996 to approximately 15,000 by the
end of 2005, and approximately 21,000 by the end of 2015. Both Boeing and Airbus
have projected significant growth in new airframe manufacturing through 2005. An
expanding worldwide fleet should generate additional revenue from both new seat
programs and an increase in the size of the installed base, which in turn should
generate additional and continual demand for retrofit and refurbishment
services.
Installed Base. At the end of 1996, the existing installed seat base
included more than 10,000 aircraft in service, most with in excess of 120
passenger placements. This base provides the potential for on-going revenues
from replacements, upgrades and repairs. The total worldwide installed base is
estimated to represent up to approximately $3 billion dollars at replacement
prices. This installed base, which is the largest source of business for seat
makers, should generate continued retrofit, refurbishment and spare parts
revenue in connection with the routine upgrading of existing commercial aircraft
interiors. Access to installed base supply is largely dependent on being the
supplier of the newly sold original seat.
Wide Body Aircraft Orders. The trend in the industry is for
disproportionate growth in the wide body aircraft category. Wide body aircraft
carry up to three times the number of seats as narrow body, and have multiple
classes of services and configurations that increase the average revenue per
seat.
Due to the estimated growth in demand of airline seat systems as a result
of the above factors and the limited number of airline seat manufactures,
several industry experts believe there is currently insufficient seat
manufacturing capacity in the world for the airline deliveries scheduled over
the next five years.
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In addition to market demand, the Company focuses on two other competitive
advantages. First, the consolidation in the seat industry due to the merger of
the two largest United States based suppliers has left domestic customers
interested in an alternative source of supply. The Company's entry has been
timely in providing such an alternative source. Second, new public and
regulatory attention to airline safety could allow the Company to benefit from
the safety features offered in the Company's patented "load limiting-16G seat."
Currently, there are no competitors offering comparable technology. Further, the
FAA is examining retrofit rules that would apply certain safety criteria not
solely to newly certificated aircraft, but also to the entire existing fleet. If
a retrofit rule were to be phased in, the market for airliner seating systems
could expand significantly.
Although no longer the principal activity of the company's airline seating
operation, the Company also repairs, refurbishes, and retrofits existing
commercial aircraft seats through its San Diego and Atlanta facilities. Services
include (i) the supply of seat components, including upholstery, cushioning, and
fire blocking; and (ii) the overhaul and modification of seat assemblies,
including arm rests and tray tables.
GOVERNMENT AND DEFENSE CONTRACTING
Overview
The Company manufactures a number of safety systems for military and other
government customers. Simula is the world's leading supplier of energy-absorbing
seating systems for military helicopters, and a manufacturer of advanced armor
systems, inflatable restraints for aircraft, state of the art vacuum-packed
parachutes, and related safety systems and products.
Despite dynamic market and governmental policy changes in recent years, the
market for government and defense contracts is healthy. There are two
significant trends in the business. First, although there have been recent
indications of increased military and defense funding, military procurement
budgets have been shrinking in recent years. This has generally been the trend
regardless of the number of trouble spots in the world or regardless of the
political party in power. Accordingly, businesses have been competing for fewer
defense dollars. The second significant change is the consolidation in defense
industry. As a result of mergers and acquisitions in the last several years,
there remain only six U.S. Government mega-contractors. This consolidation also
has caused a consolidation and shake-up at the subcontractor and component
supplier levels. Defense contractors are bringing increasingly significant
pressure on margins and profitability of subcontractors while reducing the
number of suppliers.
The size of the military procurement market is difficult to predict beyond
an analysis of currently funded programs, and is based on specific programs that
are subject to needs assessments and funding issues by the Government.
Current Products and Technologies
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, and foreign customers for over 20 years. This market is
estimated to be $20 million annually. The military aircraft seating systems
focus on reducing injury and increasing survivability in aircraft crashes. These
crashworthy seating systems contain proprietary energy-absorbing devices that
activate upon crash impact to absorb shock that otherwise would be absorbed by
the seat occupant.
Based on internal market surveys and data, the Company believes that it is
the leading provider of energy-absorbing helicopter seats purchased by the
United States and foreign armed forces. 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-rotar aircraft; India's Hindustan Aeronautics, Ltd. ALH utility
helicopter; and C-17 fixed wing utility aircraft. Aircraft manufacturers in the
Company's military aircraft customer base include Boeing, Sikorsky Aircraft
Corporation, Bell Helicopters Textron, Inc., and GKN Westland Helicopters Ltd.
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Armor Systems - As an outgrowth of its military aircraft seating systems
the Company has developed an expertise in armor, which makes up a significant
portion of both materials in, and costs of, such seating systems. In addition,
the Company has developed a variety of other armor and composite materials for
integration in its existing and proposed products and for sale as base materials
to customers. Advanced composites materials with which the Company has expertise
include fiber reinforcements of Kevlar, carbon, Spectra, S-glass, E-glass, and
hybrid weaves matched with boron carbide, aluminum oxide, and other ceramics.
The Company also has the capability to process thermoset resins including
epoxies, polyesters, and vinyl esters.
The Company's high-strength, lightweight armor systems have been
incorporated into a variety of United States armed forces vehicles. The size of
this total market is approximately $30 million annually, and 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 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"). The Company's armor business,
including new products for personnel, has grown significantly and the Company
anticipates it will devote continuing and additional efforts to increase its
market share.
Aircraft Inflatable Restraint Systems - The Company has completed
development of various inflatable restraint systems for military and commercial
aircraft. These systems include the Cockpit Airbag System ("CABS") for the
protection of the flight crew in military aircraft. The Company developed 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. Development and qualification was
completed in 1998. The Company has been awarded contracts and will commence
production of CABS in 1999.
Parachutes - Under contract with the United States Navy, the Company has
applied its technologies and overall knowledge of materials and structures to
develop a parachute that solves numerous functional problems attendant to
traditional military parachutes. The Company's parachute, unlike many parachutes
traditionally used by the military is small, lightweight, unisex, capable of
being worn during flight, and vacuum-packed so that it maintains a long-term
shelf life without repacking. The Company commenced production of parachutes
under a sole source contract with the Navy in 1998. The Company also has a
development program with the U.S. Army that is investigating the use of Simula
technologies for an entirely different design of tactical paratrooper
parachutes.
DISCONTINUED OPERATIONS
During 1994, the Company acquired Coach and Car Equipment Corporation
("Coach and Car") and Artcraft Industries Corp. ("Artcraft"). These companies'
existing operations included providing a majority of all manufacturing and
refurbishment of rail and mass transit seating systems in North America. These
operations provided the Company with the substantial large-scale manufacturing
capacity and business volume that were needed to establish the Company as a
viable supplier of commercial airliner seating system.
As of 1998, the Company no longer required the support of the rail seating
businesses to support its developed airline seat segment and the Company adopted
a plan to sell its rail and mass transit seating operations at Coach and Car and
Artcraft. The Company's rail and transit seating business are reported as
discontinued operations.
DEVELOPMENTAL STAGE TECHNOLOGIES
Advanced Polymer Materials - The Company has developed and tested a number
of advanced polymers and polyurethanes possessing a wide variety of potential
product applications, and has introduced these materials to a variety of
customers in numerous markets. These patented and proprietary transparent
plastic materials are high-strength, impact resistant, lightweight, dye
compatible, and withstand extreme temperatures and chemical abrasion. Potential
uses for such materials include transparent armor, laser protective devices,
aircraft canopies, high performance windows for aircraft and automobiles,
industrial and protective lenses and visors, and sun, sport, and ophthalmic
lenses. The Company has obtained numerous research and product development
contracts for these
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materials and is negotiating supply contracts with commercial customers in
various markets. In late 1998, the Company formed its newest subsidiary, Simula
Polymer Systems, Inc., to actively pursue commercialization of the technology
and product manufacturing.
Bulkhead Airbag System ("BABS") - The Company developed BABS 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. Prior to BABS, no other company had introduced a
product that satisfied the FAA regulations, and newly certificated 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 whether the FAA will withdraw its waivers as a result of the availability
of BABS and extend its regulations to apply to presently exempt commercial
aircraft. The Company has an agreement with British Aerospace Regional Aircraft,
formerly Jetstream Aircraft Ltd. ("Jetstream"), to manufacture and sell BABS for
implementation of the system in their aircraft. However, the Company has a
dispute with this customer regarding certification issues and manufacturing and
delivery schedules. Anticipated production of the system has been delayed. The
FAA has also recently reopened consideration of its bulkhead criteria rules. The
Company cannot predict the outcome of future rulemaking or amendments, nor the
probable date of production of BABS.
TECHNOLOGY BUSINESS AND INTELLECTUAL PROPERTY
The Company supports a large design, development, research, testing, and
engineering capability for the modification and improvement of existing products
and invention and development of new technologies and products. The Company
regards it research and development capabilities as a superior competitive
strength and intends to continue to devote substantial resources to support this
part of its business. The Company employs an interdisciplinary team of
biomedical experts, crash safety analysts, chemists, and physicists. The Company
has a state of the art testing facility for a variety of functions including
ballistics and crash dynamics. The Company's research and testing facilities
support intracompany projects and also generate revenue from external services
contracting.
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 all of its
technology to product applications. The Company's costs for research and
development in 1998, 1997, and 1996 were approximately $13.5 million, $11.8
million and $10.5 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.
The Company holds 26 patents, including for the ITS(R) and 16g Seat
technologies. In addition, the Company has 18 patent applications pending for
various technologies. United States patents protect inventions for a period of
20 years after the application is first filed. The Company does not presently
own or maintain any trademarks that are material to its business.
PRODUCTION AND MANUFACTURING
The Company's production and manufacturing consists principally of the
machining, bending and welding of metals, molding of composite materials,
processing, sewing, upholstery, component fabrication, and final 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. All products manufactured must meet rigorous standards and
specifications for workmanship, process, raw materials, procedures, and testing,
and in some cases regulatory requirements. 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
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quality assurance.
From 1996 to the present, the Company has been actively consolidating
certain operations, and expanding and upgrading certain of its existing
manufacturing capabilities. In July 1998, Airline Interiors moved into a new,
larger manufacturing facility in the San Diego, California. In March 1999, the
Company closed its Artcraft facility in Milwaukee, Wisconsin and consolidated
Artcraft-Milwaukee's operations with Coach and Car in the Chicago, Illinois area
which are currently held for sale. Simula Automotive Safety Devices, Inc.
operates two new state of the art manufacturing facilities including a high
volume, just in time provider, in the United Kingdom to support customers
located in Europe. See, "Item 2. Properties."
DISTRIBUTION, MARKETING, AND SALES
Most of the Company's products are distributed as a component supplier to
OEMs or subcontractor to prime contractors. The Company does not directly serve
mass consumer markets and supplies directly from manufacturing facilities which
does not involve significant inventory, warehousing, or shipping methodologies.
Depending upon the product, the Company typically employs one of four
methods for marketing: (i) direct sales, which, for example, it utilizes in the
marketing of its 16g Seats, (ii) technical teams, typically comprised of a
combination of sales personnel and engineers, which it utilizes in the marketing
of automotive safety devices, (iii) strategic alliances with first tier
component suppliers, which it utilizes in the marketing to OEMs, and (iv)
responses to formal request for proposals in bidding for government contracts.
Approximately 31% of the Company's total revenue in 1998 resulted from
products sold internationally. The Company anticipates that its international
sales will continue to grow. The initial customer of the ITS(R) has been
Autoliv, a European first tier automobile supplier that is supplying to BMW. The
Company believes that there are opportunities for additional sales of the
ITS(R), and commercial aircraft seating systems in Europe and Asia. Military
procurement has traditionally had a large international base. Countries in which
the Company is actively marketing include Germany, Canada, Italy, the United
Kingdom, Ireland, Japan, India, Korea, Australia, and Canada.
CUSTOMERS
Sales of the Company's products to all branches of the United States armed
forces represented approximately 12%, 15% and 27% of the Company's revenue in
1998, 1997, and 1996, respectively. Sales to Continental Airlines accounted for
approximately 12% of the Company's revenue in 1997.
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 and their prime
contractors, to which the Company has supplied products for over 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. 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.
COMPETITION
The worldwide automobile airbag market is currently dominated by five large
suppliers, all of which are producing airbag systems in commercial quantities.
The market served by the Company's inflatable restraint systems is intensely
competitive. The Company has entered into strategic alliances with a number of
the largest suppliers of conventional automotive airbags, including TRW, Delphi,
and others, to market and produce the Company's products.
Based on internal estimates, the Company believes that in three years of
production it has attained a 6% share of the worldwide commercial airline
seating market. Approximately 10 companies worldwide supply airline seats, and
three major competitors represent a collective market share of approximately
90%, with the largest being BE Aerospace Inc.
8
<PAGE> 10
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's principal competitors in the crashworthy military
seating market are Martin Baker (England) and Israel Aircraft Industries, Ltd.
The Company does not have financial or market share data concerning these two
competitors.
Most of the Company's competitors have greater marketing capabilities and
financial resources than the Company. The Company's competitive strategy is to
be a technology innovator and strategic partner with larger industry leaders.
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.
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 plastics, urethanes, ceramics, Kevlar, aluminum, steel, airbag
materials, hoses, woven materials, upholstery and fabric products and foam.
Components include aluminum subassemblies, restraints and related hardware,
harnesses, and gas generators for inflatable restraint products. The Company
generally purchases supplies and components 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. Most of the raw materials used by the Company are widely available.
Certain components utilized in the 16g Seat have been subject to vendor delays
or vendor quality problems. The Company has addressed these issues and believes
that it has established an adequate multiple source supplier base that is
industry standard. However, certain components of the Company's products are
proprietary or highly regulated, including certain types of foam, hydrolocks and
woven materials, and shortages of these components could cause disruptions of
production from time to time.
BACKLOG
The Company's backlog at December 31, 1998 and 1997 was approximately $121
million and $86 million, respectively. The backlog at December 31, 1998 and 1997
consisted of approximately $62 million and $51 million, respectively, under
defense contracts and approximately $59 million and $35 million, respectively,
with commercial customers.
The backlog includes contracts for major current products as well as for
supplies and replacement components. 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 next 5 years.
EMPLOYEES
The Company has approximately 1,300 full-time employees at its locations in
Arizona, California, Illinois, New York, North Carolina, Georgia, and Ashington,
England. The Company believes that its continued success depends on its ability
to attract and retain highly qualified personnel. The Company's employees are
not unionized except at its Coach and Car facility which is reported as a
discontinued operation.
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 qualified waste disposal
companies 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.
ITEM 2. PROPERTIES
9
<PAGE> 11
The Company's corporate headquarters are located in Phoenix, Arizona. The
Company conducts operations in six U.S. states and in the United Kingdom.
Manufacturing facilities are located in Tempe, Arizona; Poway, California (San
Diego metropolitan area); Elk Grove Village, Illinois (discontinued operation);
Atlanta, Georgia; Asheville, North Carolina; and Ashington, England. In
addition, the Company maintains extensive research and development labs and
testing facilities in Phoenix. The Company leases most of its facilities.
Management believes that its facilities are adequate for their various
purposes. In July 1998, Airline Interiors moved into a new, larger manufacturing
facility in Poway, California, and in March 1999, the Company closed its
Artcraft facility in Milwaukee, Wisconsin. The Company will relocate its
Phoenix-based government and defense business to a new facility in the Phoenix
metropolitan area in 2000.
ITEM 3. LEGAL PROCEEDINGS
In February 1998, the Company filed a complaint in United States District
Court for the District of Arizona against Autoliv, Inc., seeking injunctive
relief from alleged anti-competitive acts and practices by Autoliv. The
complaint alleges numerous unlawful actions taken by Autoliv in connection with
a license from the Company to market and distribute the Company's ITS(R). The
legal action asserts that Autoliv has suppressed technology and is unlawfully
interfering with the Company's rights to market the ITS(R) and related products
to other first tier automotive safety equipment suppliers and to automobile
manufacturers. In 1998, the District Court stayed the proceedings and ruled that
the dispute between the parties was a contractual one and was subject to
arbitration pursuant to a contract provision. The Company disagrees and has
appealed the order to the United States Court of Appeals for the Ninth Circuit.
The litigation is pending. The District Court did not rule on the merits of the
Company's claims.
On November 3, 1998, the Company filed a separate complaint against Autoliv
in the United States District Court for the District of Delaware seeking
injunctive relief and damages for patent infringement. The Company's complaint
alleges that Autoliv developed, offered, and sold a side impact head protection
device in the United States that infringes the patent that Simula owns for the
ITS(R). The Company became aware of the potential infringement in early October
1998 as Autoliv introduced this device into production automobiles being offered
for the first time in the United States. This litigation is pending.
In addition, the Company is involved in other litigation in the ordinary
course of business from time to time. The Company presently is not a party to
any threatened or pending litigation, the negative outcome of which would be
material to the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of fiscal 1998 to a
vote of security holders, through the solicitation of proxies, or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is listed on the New York Stock Exchange under
the symbol "SMU." The following table sets forth the high and low closing prices
of the Company's Common Stock for each calendar quarter of the year indicated.
10
<PAGE> 12
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
1997:
First Quarter.......................... $18.38 $13.63
Second Quarter......................... 20.00 14.00
Third Quarter.......................... 24.56 18.94
Fourth Quarter......................... 19.88 14.31
1998:
First Quarter.......................... $17.13 $13.50
Second Quarter......................... 18.19 13.50
Third Quarter.......................... 17.00 8.25
Fourth Quarter......................... 8.75 5.25
1999:
First Quarter.......................... 8.75 4.94
</TABLE>
The number of holders of the Common Stock of the Company, including
beneficial holders of shares held in street name, as of the close of business on
March 29, 1999, is estimated to be greater than 2,000. On March 29, 1999, the
closing price of the Common Stock was $5.06 per share.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL 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, 1998. 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.
11
<PAGE> 13
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenue $ 100,645 $ 67,362 $ 42,125 $ 35,153 $ 29,032
Cost of revenue 85,724 51,781 36,769 20,029 18,822
--------- --------- --------- --------- ---------
Gross margin 14,921 15,581 5,356 15,124 10,210
Administrative expenses 20,421 18,698 15,861 11,847 6,918
--------- --------- --------- --------- ---------
Operating (loss) income (5,500) (3,117) (10,505) 3,277 3,292
Interest expense (5,277) (4,486) (1,752) (1,423) (1,774)
Interest income 178 313 52 440 22
Other 1,298
--------- --------- --------- --------- ---------
(Loss) income before taxes (10,599) (5,992) (12,205) 2,294 1,540
Income tax benefit (expense) 3,786 2,390 5,010 (158) (575)
--------- --------- --------- --------- ---------
(Loss) earnings before discontinued
operations and cummulative effect of
change in accounting principle (1) (2) (6,813) (3,602) (7,195) 2,136 965
(Loss) earnings from discontinued operations (1) (2,320) 62 277 521 1,149
Estimated loss on disposal (1) (18,576)
Cumulative effect of change in
accounting principle (2) (3,132)
--------- --------- --------- --------- ---------
Net (loss) earnings (2) $ (27,709) $ (3,540) $ (10,050) $ 2,657 $ 2,114
========= ========= ========= ========= =========
PER SHARE AMOUNTS (3):
Earnings per common share - basic:
(Loss) earnings before discontinued
operations and accounting change $ (0.69) $ (0.39) $ (0.79) $ 0.26 $ 0.18
(Loss) earnings from discontinued operations $ (0.23) $ 0.01 $ 0.03 $ 0.07 $ 0.21
Estimated loss on disposal $ (1.88)
Cumulative effect of accounting change -- -- (0.36)
--------- --------- --------- --------- ---------
Net (loss) earnings $ (2.80) $ (0.38) $ (1.12) $ 0.33 $ 0.39
========= ========= ========= ========= =========
Earnings per common share - assuming dilution:
(Loss) earnings before discontinued
operations and accounting change $ (0.69) $ (0.39) $ (0.79) $ 0.25 $ 0.17
(Loss) earnings from discontinued operations $ (0.23) $ 0.01 $ 0.03 $ 0.06 $ 0.20
Estimated loss on disposal $ (1.88)
Cumulative effect of accounting change -- -- (0.36)
--------- --------- --------- --------- ---------
Net (loss) earnings $ (2.80) $ (0.38) $ (1.12) $ 0.31 $ 0.37
========= ========= ========= ========= =========
PRO FORMA AMOUNTS (2) (3):
Net earnings $ 194 $ 1,675
========= =========
Earnings per share - basic $ 0.02 $ 0.31
========= =========
Earnings per share - assuming dilution $ 0.02 $ 0.29
========= =========
OTHER DATA:
Research and development
Funded by the Company $ 3,383 $ 4,394 $ 1,916 $ 1,419 $ 688
Costs incurred on funded contracts $ 10,066 $ 7,383 $ 8,588 $ 4,722 $ 3,165
</TABLE>
12
<PAGE> 14
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Assets:
Current assets $ 62,424 $ 73,409 $ 44,280 $ 29,211 $ 15,340
Property and equipment - net 21,495 18,666 17,462 10,476 8,370
Deferred income taxes 20,550 4,477 1,782 812 --
Deferred costs 2,628 3,137 929 6,206 1,460
Intangibles - net 3,452 3,701 3,832 3,758 3,930
Other 430 498 731 1,800 157
Net assets of discontinued operations 13,471 13,926 13,166 12,017
-------- -------- -------- -------- --------
Total assets $110,979 $117,359 $ 82,942 $ 65,429 $ 41,274
======== ======== ======== ======== ========
Liabilities:
Current liabilities $ 45,176 $ 24,754 $ 21,075 $ 8,142 $ 10,104
Long-term debt 47,233 46,963 24,680 11,200 14,176
Other 345
-------- -------- -------- -------- --------
Total liabilities 92,409 71,717 45,755 19,342 24,625
Shareholders' equity (4) 18,570 45,642 37,187 46,087 16,649
-------- -------- -------- -------- --------
Total liabilities and shareholders' equity $110,979 $117,359 $ 82,942 $ 65,429 $ 41,274
======== ======== ======== ======== ========
</TABLE>
(1) In 1998, the Company's board of directors adopted a plan to dispose of its
rail and mass transit operations. Accordingly, the operating results of
these operations including a provision for estimated loss upon disposition,
have been segregated from continuing operations and are reported as
discontinued operations.
(2) During 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. Pro forma amounts for 1995 and 1994
assume the new accounting method is applied retroactively.
(3) In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings Per share, ("SFAS No.
128"). Per share amounts previously reported have been restated to conform
with the requirements of SFAS No. 128. SFAS No. 128 requires the dual
presentation of basic and diluted earnings per share and requires a
reconciliation of the numerators and denominators of basic and diluted
earnings per share calculations. Earnings per share amounts for the years
ended December 31, 1998, 1997 and 1996 are calculated using only weighted
average outstanding shares of 9,880,283, 9,288,416 and 8,947,060,
respectively. Options to purchase Common Stock and shares to be issued upon
conversion of the 8% Senior Subordinated Convertible Notes and the Series C
10% Senior Subordinated Convertible Notes totaling 4,546,065, 3,896,966 and
1,881,562 for the years ended December 31, 1998, 1997 and 1996,
respectively, were not used for computing diluted earnings per share
because the result would be anti-dilutive. Basic earnings per share for the
year ended December 31, 1994 is calculated using weighted average shares
outstanding of 5,461,095 and earnings per share assuming dilution is
calculated including 243,831 additional shares for stock options and
warrants.
(4) The Company has not paid any cash dividends since its April 1992 initial
public offering.
13
<PAGE> 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
GENERAL
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, 1998 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 Form 10-K.
OVERVIEW
The Company designs and manufactures occupant safety systems and devices
engineered to safeguard human life in a wide range of air, ground, and sea
transportation vehicles. Utilizing its substantial proprietary technology in
energy-absorbing seating, inflatable restraints, and composite materials, the
Company focuses on reducing injury and increasing survivability in vehicle and
aircraft crashes.
Since its founding in 1975, the Company's historic core business has been
as a government and defense contractor. Additionally, commencing with
acquisitions and commercial products development since 1993, the Company become
the largest North American-based supplier of seating systems for rail and other
mass transit vehicles and a successful new entrant in the manufacture of new
commercial airliner seating. Utilizing its proprietary safety technology, the
Company has introduced crashworthy systems for a variety of vehicles and
aircraft and various inflatable restraint systems for automobiles including the
Inflatable Tubular Structure ("ITS").
Management made a strategic decision to enter the commercial aircraft
seating market to bring its proprietary energy-absorbing technologies to a new
industry and take advantage of positive industry trends in 1993. 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 & 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 provided the Company with substantial large-scale
manufacturing capacity and synergies utilized in the production of its 16g Seat
for airliners.
In 1994, the Company made a strategic decision to enter the inflatable
restraint market for automobiles utilizing its proprietary ITS technology.
Through 1996, the Company completed its development of this technology and
start-up of its manufacturing facilities. In 1997, the Company began
manufacturing the ITS for sale to BMW, a major European automobile manufacturer.
To continue it's strategic plan, in 1998 the Company adopted a plan to sell
its rail and mass transit seating operations at Coach and Car and Artcraft.
Because the company's commercial airliner seating operation moved into a
significantly larger facility in July 1998 and has established substantial
production, the rail operations are no longer required to demonstrate the
company's production capabilities to current and potential airliner seating
customers. In addition, the larger airliner seating manufacturing facility
reduced the synergies achieved previously with the mass rail and transit seating
operation. The sale of these businesses will provide cash that will be used to
repay outstanding indebtedness. In addition, the sale will allow senior company
management to focus on its other businesses. The company has initiated an active
marketing plan and anticipates it will sell these operations as ongoing
businesses. These companies will continue their marketing, sales and
manufacturing activities as the company prepares them for sale. The company's
rail and mass transit seating operations are reported as discontinued
operations.
14
<PAGE> 16
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 from the government and defense segment 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. Note 17 of the
Notes to Consolidated Financial Statements provides a break down of revenues for
each significant segment of the Company. Note 16 of the Notes to Consolidated
Financial Statements provides the revenues and related costs associated with
contract research and development for third parties.
The Company is a holding company for wholly owned subsidiaries which
operate in two primary business segments. The Commercial Transportation Products
segment includes operations which primarily manufacture seating systems for
domestic and foreign passenger airlines and operations producing inflatable
restraints and related safety technologies for automobiles. The Government and
Defense segment includes operations that design and manufacture crash resistant
seats and components, energy absorbing devices, and ballistic armor, principally
in connection with United States armed forces procurement. The remaining
segment, entitled Other, represents general corporate operations.
<TABLE>
<CAPTION>
RESULTS OF CONTINUING OPERATIONS YEAR ENDED DECEMBER 31,
-----------------------------------
1998 1997 1996
--------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C>
REVENUE:
Commercial Transportation Products $ 64,749 $ 36,997 $ 9,436
Government and Defense 35,877 30,348 32,689
Other 19 17
--------- --------- ---------
Total $ 100,645 $ 67,362 $ 42,125
========= ========= =========
GROSS MARGIN:
Commercial Transportation Products $ 4,141 $ 4,781 $ (4,129)
Government and Defense 10,760 10,792 9,485
Other 20 8
--------- --------- ---------
Total $ 14,921 $ 15,581 $ 5,356
========= ========= =========
ADMINISTRATIVE EXPENSES:
Commercial Transportation Products $ 9,842 $ 7,207 $ 5,929
Government and Defense 9,225 10,096 8,502
Other 1,355 1,395 1,430
--------- --------- ---------
Total $ 20,422 $ 18,698 $ 15,861
========= ========= =========
OPERATING (LOSS)/INCOME:
Commercial Transportation Products $ (5,701) $ (2,427) $ (10,058)
Government and Defense 1,536 696 983
Other (1,335) (1,386) (1,430)
--------- --------- ---------
Total $ (5,500) $ (3,117) $ (10,505)
========= ========= =========
</TABLE>
15
<PAGE> 17
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>
YEAR ENDED
DECEMBER 31,
--------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
INCOME STATEMENT DATA
Revenue 100% 100% 100%
Cost of revenue 85 77 87
Gross margin 15 23 13
Administrative expenses 20 28 38
--- --- ---
Operating loss (5)% (5)% (25)%
=== === ===
</TABLE>
1998 Compared to 1997
Revenue for the year ended December 31, 1998 increased 49% to $100.6
million from $67.4 million for the comparable period in 1997. Commercial
Transportation Products revenue increased 75% or $27.8 million principally as a
result of increased deliveries of ITS and 16g Seats. Government and Defense
revenue increased 18% or $5.5 million due to a general increase in ongoing
government contracts.
For the year ended December 31, 1998, gross margin decreased 4% to $14.9
million from $15.6 million for the comparable period in 1997. As a percent of
sales, gross margins decreased to 15% from 23%. Gross margins for Commercial
Transportation Products decreased 13% or $0.6 million and the gross margin
percentage decreased to 6% from 13% in 1997. The decrease in gross margins
resulted primarily from increased pre-contract and start-up costs and production
cost inefficiencies from the penetration of additional sales channels in the
airline seating market, a $2.0 million write down of certain inventory used in
the refurbishment of airline seating which is no longer a significant component
of operations, and costs incurred related to the move of the airline seating
operations to a new facility which provided for additional capacity. The effect
of the above results in the airline seat business was partially offset by
increased gross margins on the ITS as a result of increased volume and a
complete year of operations. Gross margin percentages of Government and Defense
decreased to 30% from 36%. The decrease in gross margin percentages at
Government and Defense was primarily due to higher funding on research and
development contracts.
Administrative expenses for the year ended December 31, 1998 increased 9%
to $20.4 million from $18.7 million for the comparable period in 1997. As a
percent of sales, administrative expenses decreased to 20% from 28% due to the
increase in revenue noted above. Commercial Transportation Products
administrative expenses increased $2.6 million or 37% and as a percentage of
sales decreased to 15% from 19% primarily due to increased sales volume.
Government and Defense administrative expenses decreased $0.9 million or 9% and
is related to the 23% decrease to $3.4 million from $4.4 million of internally
funded research and development expenses. The decreased research and development
expenses were partially attributable to an increase in certain Government and
Defense production contracts which resulted in greater production resources
being assigned to contract programs. As a percent of sales, Government and
Defense administrative expenses decreased to 26% from 33% attributable to
increased sales and lower expense levels as noted above.
Interest expense for the year ended December 31, 1998 increased 18% to $5.3
million from $4.5 million for the comparable period in 1997. These increases
were due to increased borrowings on the Company's bank credit facilities. These
borrowings were made to fund operations and acquire fixed assets necessary to
support the growth in revenues for 1998 and subsequent years.
Interest income for the year ended December 31, 1998, was approximately
$178,000. This income results from the investment by the Company of the excess
liquid assets in short term instruments which are invested in high quality
government and short-term investment grade, interest bearing securities.
16
<PAGE> 18
The effective income tax rate for the year ended December 31, 1998
approximated 35% as compared to 39% for the comparable period in 1997. The
decrease in the Company's 1998 effective tax rate is attributable to the
expiration of certain foreign tax credits and the recognition of a valuation
allowance for certain state net operation loss and foreign tax credit carry
forwards.
1997 Compared to 1996
Revenue for the year ended December 31, 1997 increased 60% to $67.4 million
from $42.1 million for the comparable period in 1996. Commercial Transportation
Products revenue increased 292% or $27.6 million principally as a result of
increased deliveries of 16g Seats and the beginning of ITS deliveries for the
first time. Government and Defense revenue decreased 7% or $2.3 million due to
approximately $4.6 million in incremental revenue in 1996 from a government
armor contract which represented non-recurring business. Excluding this contract
from the year ended December 31, 1996, revenues increased 9% for the 1997 period
versus the 1996 period due to a general increase in ongoing government
contracts.
For the year ended December 31, 1997, gross margin increased 191% to $15.6
million from $5.4 million for the comparable period in 1996. As a percent of
sales, gross margins increased to 23% from 13%. Gross margins for Commercial
Transportation Products increased 216% or $8.9 million and the gross margin
percentage increased to 13% from a negative (44%) in 1996. The increase in gross
margins is primarily attributable to beginning product deliveries of ITS in
1997, whereas the comparable period in 1996 did not generate significant
revenues, and a significant increase in deliveries of the Company's airline 16g
Seat. In addition, gross margins were positively impacted by lower pre-contract
and start-up costs for both the ITS and the 16g Seat. The improvements in gross
margin percentage were partially offset by cost inefficiencies resulting from
the significant increase in 16g Seat deliveries. Production bottlenecks caused
by parts shortages, overtime costs, learning costs related to adding a second
production shift and other production related expenses for the Company's tourist
class 16g Seats resulted in reduced gross margins. In addition, the initial
production costs of the larger than expected volume for Company's new first
class 16g Seat were higher than anticipated. Gross margin percentages of
Government and Defense increased to 36% from 29%. The increase in gross margin
percentages at Government and Defense was primarily due to lower funding
deficiencies incurred on research and development contracts.
Administrative expenses for the year ended December 31, 1997 increased 18%
to $18.7 million from $15.9 million for the comparable period in 1996. As a
percent of sales, administrative expenses decreased to 28% from 38% due to the
increase in revenue noted above. Commercial Transportation Products
administrative expenses increased $1.3 million or 22% due primarily to the
expansion of the corporate and sales infrastructure related to the commercial
introduction of the ITS, including resources being utilized for sales and
administration versus pre-contract activities, and research and development
related to expansion of ITS related technologies. Government and Defense
administrative expenses increased $1.6 million or 19% primarily due to the
increase in internally funded research and development expenses which increased
129% to $4.4 million from $1.9 million. The increased research and development
expenses were partially attributable to a delay in certain Government and
Defense production contracts which resulted in production resources being
assigned to available work.
Interest expense for the year ended December 31, 1997 increased 156% to
$4.5 million from $1.8 million for the comparable period in 1996. These
increases were due to increased borrowings on the Company's bank credit
facilities, the issuance of $34.5 million of the 8% Senior Subordinated
Convertible Notes (the "8% Notes") in April 1997 and the issuance of $14.3
million of the Series C 10% Senior Subordinated Convertible Notes (the "10%
Notes) in September 1996. These borrowings were made to fund its growth in
working capital and fixed assets necessary to support the growth in revenues for
1997 and subsequent years. During the third quarter of 1997, $9,550,000 of the
10% Notes and $475,548 of accrued interest were converted into 679,633 shares of
the Company's Common Stock. Annual interest expense on the 10% Notes converted
would be approximately $1.1 million.
Interest income for the year ended December 31, 1997, was approximately
$313,000. This income results from the investment by the Company of the excess
proceeds received upon the issuance of the 8% Notes. These excess proceeds have
been invested in high quality government and short-term investment grade,
interest bearing securities.
17
<PAGE> 19
Other income for the year ended December 31, 1997 was $1.3 million and
represented the net gain on various real estate transactions. During 1997, the
Company determined it would be necessary to move the majority of its operations
to accommodate current and anticipated growth. As a result, the Company sold
certain facilities and entered into leases for new facilities for its 16g Seat
and ITS manufacturing operations.
The effective income tax rate for the years ended December 31, 1997 and
1996 approximated the Company's combined statutory rate of 40%.
DISCONTINUED OPERATIONS
The net loss from discontinued operations was ($20.9) million for the year
ended December 31, 1998. Included in this amount is a net loss from operations
of the discontinued segment of ($2.3) million primarily resulting from
unabsorbed overhead costs principally due to production delays. The remainder of
the loss from discontinued operations of ($18.6) million represents the
write-down of the remaining net assets of these business to their net realizable
value. This write-down was principally comprised of fixed assets, contract
receivables and inventory and the write-off of intangible assets and represented
a non-cash charge. Estimated costs of disposal and projected operating results
have been included in determining the net realizable value of these businesses
through the projected date of disposition. Due to the subjective nature of
estimated future operations and incremental costs of disposal, it is reasonably
possible that these estimates may change in the future. Future changes, if any,
in estimates will be included in the consolidated statement of operations in the
reporting period determined.
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 12% Senior Subordinated Notes (the "12% Notes") in connection
with the acquisition of Airline Interiors in August 1993. The 12% Notes were
retired during 1998. In 1994, the Company issued approximately $6.5 million of
9% Senior Subordinated Convertible Notes (the "9% Notes") in connection with the
acquisition of Coach and Car. The 9% Notes were converted into Common Stock
during 1994. The Company issued 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 needs to fund the large vendor payable balances,
contract advances of Coach and Car existing at the date of acquisition, and the
increase in receivables and inventories of all the acquired companies after the
respective dates of acquisition.
The Company completed a secondary public offering of Common Stock, which
closed and funded in April 1995. As a result of this 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.
In September 1996, the Company issued $14.3 million of the 10% Notes in a
private placement to accredited investors. During 1997, $9,550,000 of the 10%
Notes and $475,548 of accrued interest were converted into 679,633 shares of the
Company's Common Stock. The 10% Notes outstanding at December 31, 1997 bear
interest at 10% payable semi-annually and are due in September 1999. These
remaining 10% Notes are convertible into approximately 280,000 shares of the
Company's Common Stock. The Company has the right to call the remaining 10%
Notes at par plus accrued interest on and after June 15, 1997. The Indenture
relating to the 10% Notes contains certain covenants including limitations on
sale of assets and transactions with affiliates. The Company was in compliance
with all of the covenants of this indenture at December 31, 1998.
During the second quarter of 1997, the Company completed the public
offering of $34.5 million of 8% Convertible Subordinated Notes (the "8% Notes").
The 8% Notes are due May 1, 2004 and bear interest at 8% per annum, payable
semi-annually. The 8% Notes are convertible into shares of the Company's Common
Stock at a price of $17.55 per share of Common Stock. The 8% Notes may be
redeemed at the Company's option in whole or in part on a pro rata basis, on and
after May 1, 1999, at certain specified redemption prices plus accrued interest
payable to the redemption date. However, on or after May 1, 1999 and prior to
April 30, 2000, the 8% Notes will not be redeemable unless the
18
<PAGE> 20
closing price of the Company's Common Stock has equaled or exceeded $23.625 for
20 trading days within a period of 30 consecutive trading days.
In November 1998, the Company undertook to refinance the maturing 12% Notes
and completed a private placement to accredited investors of $3,238,000 of
9-1/2% Senior Subordinated Notes (the "9-1/2% Notes"), and received proceeds of
approximately $1.0 million and the exchange of approximately $2.2 million of the
company's 12% Notes. The 9-1/2% Notes may be redeemed at the Company's option,
upon at least 30 days' notice, in whole or in part on a pro rata basis, on and
after April 30, 1999, at 102% of par value plus all accrued interest payable to
the date of redemption. Proceeds received from the 9-1/2% Notes were used in the
retirement of the 12% Notes upon maturity. The 9-1/2 % Notes become due on
September 30, 2003 and bear interest payable semi-annually.
The indenture relating to the 8% Notes and 9-1/2% Notes contains certain
covenants including limitations on the incurrence of additional indebtedness,
the sale of assets, liens securing indebtedness other than senior indebtedness,
payment restrictions affecting subsidiaries, transactions with affiliates,
future senior subordinated indebtedness and mergers and consolidations. In
accordance with the indenture, the Company may incur indebtedness under senior
credit facilities up to $50 million and may incur other indebtedness based upon
a specified ratio of cash flow, as defined, to interest expense. The Company was
in compliance with all these covenants as of December 31, 1998.
In November 1998, the Company executed a new Senior Credit Agreement
replacing the Company's previous senior credit agreement and provides for an
increase in capacity to a total of $30 million and can be expanded to encompass
additional facilities. This agreement initially provides for a $20 million
revolving line of credit and two $5 million term facilities for the refinancing
of equipment and subordinated debt. The Company used proceeds received under the
equipment facility to fund working capital requirements and repay the
outstanding principal balance of approximately $3.4 million on a previous $5.0
million term equipment note payable. The Company used proceeds of $2.5 million
received under the subordinated debt refinancing facility in the retirement of
it's 12% Notes upon maturity.
In February 1999, the Senior Credit Agreement was amended by a Modification
Agreement. The Modification Agreement increased the revolving credit facility to
$26 million, limited the outstanding balance to the lesser of the revolving
credit facility or the Revolving Line of Credit Borrowing Base (as defined),
reduced the subordinated debt refinance facility to $2.5 million and adjusted
the interest rate to LIBOR plus 3.5% from LIBOR plus 2.25%. In addition, the
Modification Agreement set benchmarks concerning timing and proceeds from the
sale of the discontinued operations and the sale of certain real property owned
by the company. The agreement requires that sale proceeds, up to certain limits,
must be used to reduce outstanding borrowing under the agreement and if the
Company's discontinued operations are not disposed of by April 30, 1999
additional lender fees will be assessed.
During the first quarter of 1999, the Company commenced a private
placement to an accredited investor of up to $7.5 million of the Company's
Series A Convertible Preferred Stock (the "Series A"). Under the terms of this
offering the Series A will bear a coupon rate of 6% per annum payable quarterly
in cash, or in stock that will be valued at 90% of fair market value at the time
of payment. The Series A is subject to mandatory redemption at May 1, 2004. The
Series A may be converted into shares of the Company's Common Stock at any time
at 101% of the average closing price of any 15 out of the 30 consecutive trading
days preceding conversion, up to a specified maximum conversion price (the
"Conversion Cap"). The Conversion Cap for the first twelve months will be $8.60
per share and is subject to an annual adjustment to the lesser of the then
existing Conversion Cap or 130% of the then current market price of the
Company's Common Stock. Conversion of the Series A is limited to 10% of the
initial amount per month, accumulating monthly up to a maximum of 30% of the
accumulated convertible amount in any month. The Company may require the
conversion of the Series A if the market price of the Company's Common Stock
exceeds the Conversion Cap by at least 50% for at least 20 consecutive trading
days, subject to the same conversion limitations imposed upon the Series A
holders. The proceeds from this offering will be utilized to pay down the
existing revolving line of credit. The Company expects to complete this
transaction on or around March 31, 1999. The Company will execute with the
Series A holder a registration rights agreement pursuant to which the Company
must file a registration statement, registering the Common Stock issuable upon
the conversion of the Series A with the Securities Exchange Commission, within
45 days of the Series A closing date.
The Company has engaged a broker and listed real property owned by the
Company for sale and leaseback and expects to generate net cash proceeds in the
range of $2.0 million to $2.8 million in this transaction. The Company expects
to complete this transaction during the second quarter of 1999.
19
<PAGE> 21
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 contract advances, increased $2.0 million for the
year ended December 31, 1998 principally due to the timing of work performed and
the billing provisions of the related contracts. In addition, trade receivables
increased $1.1 million for the year ended December 31, 1998 due to the increased
volume in Commercial Transportation Products segment.
Operating activities required the use of $19.2 million of cash during the
year ended December 31, 1998, compared to the use of $16.6 million of cash
during the same period in 1997. Cash used by operating activities in 1998 was
primarily used to fund the Company's operating activities that experienced
inefficiencies in the design and production of the 16g Seats, and higher than
expected cost overruns on contracts held in the discontinued operation segment.
In addition, cash was utilized to fund the increase in inventories of $2.2
million and the increase in contract and trade receivables noted above,
partially offset by combined increases in accounts payable and accrued
liabilities of $2.6 million. The increase in inventory is primarily related to
the 16g Seat and represents the buildup necessary to support current and
anticipated future deliveries. The combined increase in accounts payable and
accrued liabilities is attributable to overall increase in business volume.
Investing activities required the use of $6.4 million of cash during the
year ended December 31, 1998. Approximately $6.2 million was used for capacity
investment in the Commercial Transportation Products segment of the Company's
business. This investment included approximately $1.0 million in leasehold
improvements at new larger manufacturing facilities for the 16g Seat and $4.1
million in the purchase of manufacturing equipment to support the current and
future production demands.
Financing activities provided $17.2 million of cash during the year ended
December 31, 1998 principally due to net borrowings received from the revolving
line of credit of $16.9 million.
The Company believes it has sufficient manufacturing capacity, at December
31, 1998, to meet its anticipated future delivery requirements. The Company's
ability to fund working capital requirements during the next year will be
dependent upon the proceeds received from the sale of its' discontinued
operations and the Series A financing described above to repay indebtedness and
increase availability of funds under its bank credit agreement. The Company may,
however, seek to obtain additional capital should demand for its products exceed
current capacity. The raising of capital in public markets will be primarily
dependent upon prevailing market conditions and the demand for the Company's
products and technologies.
INFLATION
The Company does not believe that it is significantly impacted by
inflation.
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. The Company anticipates that future
fluctuations may also occur and that absent government funded research, the
Company will directly fund research and development efforts to expand its
inflatable restraint, commercial airliner seating, and other technologies. As
noted in Note 16 to the Consolidated Financial Statements, the Company's costs
for research and development to advance its technologies were $13.5 million in
1998, of which $3.4 million was internally funded.
SEASONALITY
The Company does not believe that it is currently significantly impacted by
seasonal factors.
20
<PAGE> 22
YEAR 2000 MATTERS
Background
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define an applicable year. Any computer programs
or equipment that have time-sensitive software or embedded chips may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
a system failure or miscalculations causing disruptions in commerce, including
among other things, a temporary inability to process transactions, send
invoices, or engage in similar normal business activities.
The Company employs a number of information technology ("IT") systems in
its operations, including computer networking systems, hardware and software,
financial systems, and other similar systems. The Company also employs a number
of non-IT devices such as building security and safety devices, and other
devices containing embedded electronic circuits. Both IT systems and non-IT
devices are subject to potential failure due to the Year 2000 issue.
The Company's Year 2000 Plan
In 1996, the Company initiated a plan for the conversion from existing
accounting software to new state-of-the-art, Year 2000-compliant, manufacturing
and accounting systems at each of its operating companies. That conversion is
part of an overall plan (the "Year 2000 Plan") the Company has developed to
achieve Year 2000 readiness. The Year 2000 Plan is intended to remediate the
Year 2000 issue in all categories of systems and electronic devices in use by
the Company, including IT and non-IT devices, so that the Company may continue
its operations without interruption or with minimal disruption. The Year 2000
Plan also includes communication with critical third parties such as customers,
vendors and other business partners to determine the expected degree of Year
2000 compliance of those parties and to monitor their progress toward Year 2000
readiness. The Year 2000 Plan includes the following phases: 1) assessment, 2)
remediation, 3) testing, and 4) implementation.
The Company is in the assessment phase with regard to its state of
readiness relative to non-IT devices containing embedded circuitry. The Company
is in the process of communicating with the manufacturers of non-IT devices
containing embedded circuitry and to date has fully assessed (confirmed that
such devices are Year 2000 compliant or upgraded the devices as needed)
approximately 20% of such devices.
The Company is also in the assessment phase with regard to third parties
with which the Company has a material relationship. In connection with this
assessment, the Company has been appointing a Year 2000 Program Manager at each
of its subsidiaries, and has made or is making written inquiries of its
customers and suppliers. This process is not yet complete. While the Company has
not been made aware of any problems that would materially impact the Company's
operations, there can be no assurance that one or more material third parties
will not have Year 2000 problems that materially impact the Company's business
in some fashion. Various agencies of the U.S. government and military branches
of the U.S. armed forces are significant customers of the Company. As of the
date of this report, the Company has received conflicting data as to the state
of any of such customers' Year 2000 readiness. Therefore, the Company is unsure
at this time the extent, if any, that any entity of the U.S. government with
whom the Company has a material relationship will have internal Year 2000 issues
which may materially impact the Company's business.
The Company continues to be in the remediation phase with regard to its IT
systems. As of the date of this report, the Company has one subsidiary using
accounting and manufacturing systems significantly affected by the Year 2000
issue. The remediation of these systems is more than 50% complete and the
Company estimates it will complete the conversion to new, Year 2000-compliant,
manufacturing and accounting software by April 15, 1999.
Selection of a remediation tool set for desktop personal computers and
servers was completed in February 1999, and the implementation of such tool is
continuing and is expected to be completed by June 30, 1999.
21
<PAGE> 23
In addition to the internal assessment and remediation efforts being
conducted by the Company pursuant to the Year 2000 Plan as described above, the
Company has engaged the services of a third party consultant to review Year 2000
matters on a subsidiary-by-subsidiary basis. The consultant commenced work in
January 1999.
Costs
The Company has incurred significant costs in connection with its
conversion, beginning in 1996, to the state-of-the-art manufacturing and
accounting systems discussed above. An incidental benefit of this conversion is
that such systems are Year 2000-compliant.
In addition to the foregoing, the costs associated with the Company's Year
2000 Plan, including the on-going systems conversions described above, are
expensed as incurred and to date have not been, and are not anticipated to be,
material to the Company's financial position or results of operations.
Risks of Year 2000 Failure
The failure on any party's part to correct a material Year 2000 problem
could result in an interruption in, or a failure of, certain normal business
activities or operations. Such failures could materially and adversely affect
the Company's results of operations, liquidity and financial condition. The
Company has not developed a formal written contingency plan for dealing with
potential Year 2000 issues in general. The risks associated with each particular
system not being Year 2000 compliant are analyzed in connection with the
Company's assessment of Year 2000 issues as described above, and contingency
plans will be effected by the Company on a case-by-case basis as the need
arises.
Due to the general uncertainty inherent in the Year 2000 issue, resulting
in large part from the uncertainty of the Year 2000 readiness of material third
party suppliers and customers, the Company is unsure at this time the extent, if
any, that it might be materially adversely impacted by Year 2000 issues.
Readers are cautioned that forward-looking statements contained in this
Year 2000 discussion should be read in conjunction with the Company's
disclosures under the heading "Forward Looking Information and Risks of the
Business" below.
FORWARD LOOKING INFORMATION AND TRENDS AND UNCERTAINTIES IN THE BUSINESS
Commencing in fiscal 1997, the Company entered large scale production of
the ITS and 16g Seat. Significant investments to transition to high volume
manufacturing for the 16g Seat continued in 1998 which resulted in loses for the
Company. The Company began to realize significant revenues from the introduction
of these products in 1997 and 1998 and anticipates continued growth in 1999.
Growth in the automotive safety business should result from increased production
volumes. However, auto industry customary price reductions will reduce operating
margins. If disputes with first tier suppliers reduce production levels this
business could be impacted. Improved financial performance in the airline
seating business is expected but will be dependent on improvements in
manufacturing efficiencies, materials cost reductions, better delivery records
and customer satisfaction, and continued sales. It is estimated that the airline
seating business should achieve break even results in 1999. During 1999, the
government and defense business of the Company is expected to show growth in
revenues and operating income. See, "Segments and Markets - Automotive Safety
Systems; Airline Seating Systems and Components; Government and Defense
Contracting."
The Company believes its revenues should exceed $125 million in 1999. The
Company's current focus is on controlling costs and eliminating inefficiencies
resulting from the faster than anticipated rate of growth in its new product
lines, principally the 16g Seat, and this focus should result in net operating
income with a positive impact on earnings.
Projected operating results and capital needs will be affected by a wide
variety of factors which could adversely impact revenues, profitability and cash
flows. The Company's liquidity and available working capital will be dependent
upon the availability of sales proceeds from discontinued operations and other
financings to repay indebtedness and increase availability of funds under its
bank credit agreement. Other pertinent factors include
22
<PAGE> 24
manufacturing capacity and yield; costs of labor, raw materials, supplies, and
equipment; reliability of vendor base; contract mix and shifting production and
delivery schedules among the Company's two business segments; amount of
resources committed to independent research and development from time to time;
success in building strategic alliances with large prime contractors and first
tier suppliers to OEMs; the costs of legal proceedings; the level of orders
which are received and can be shipped and invoiced in a quarter; customer order
patterns and seasonally; the cyclical nature of the airline and automobile
industries and other markets addressed by the Company's products; the level and
makeup of military expenditures; technological changes; competition and
competitive pressures on pricing; and economic conditions in the United States
and worldwide markets served by the Company.
As used throughout this report, the words "estimate," "anticipate,"
"expect," "should," "intend," or other expressions that indicate future events
identify forward looking statements. Actual results and trends may differ
materially.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data are set forth in this
report on Form 10-K commencing on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
In accordance with Instruction G(3) to Form 10-K, Items 10, 11, 12 and 13
of Form 10-K are incorporated herein by reference from the Company's definitive
proxy statement to be filed pursuant to Regulation 14A under the Securities
Exchange Act of 1934.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
a. Financial Statements. Financial Statements appear beginning at page F-1.
b. Reports on Form 8-K. None.
C. EXHIBITS. THE FOLLOWING EXHIBITS ARE INCLUDED PURSUANT TO ITEM 601 OF
REGULATION S-K.
<TABLE>
<CAPTION>
NO. DESCRIPTION REFERENCE
--- ----------- ---------
<S> <C> <C>
3.1 Articles of Incorporation of Simula, Inc., as amended and restated ....................... (4)
3.2 Bylaws of Simula, Inc., as amended and restated .......................................... (1)
4.2 Indenture dated December 17, 1993, as amended ............................................ (2)
4.5 Supplemental Indenture No. 2 dated September 12, 1996, entered into in connection with the
the Company's issuance of Series C 10% Senior Subordinated Convertible Notes ............. (6)
4.6 Supplemental Indenture No.3, effective March 14, 1997, amending the Indenture of
Simula, Inc. dated December 17, 1993 ..................................................... (7)
4.7 Indenture dated April 1, 1997, in connection with the Company's issuance of the 8% Senior
Subordinated Convertible Notes due May 1, 2004 ........................................... (7)
10.11 1992 Stock Option Plan, as amended effective September 15, 1998 .......................... (10)
10.12 1992 Restricted Stock Plan ............................................................... (1)
10.21 1994 Stock Option Plan, as amended effective September 15, 1998 .......................... (10)
10.24 Senior Credit Agreement with Bank One, Arizona, N.A. and Imperial Bank, Arizona dated
November 6, 1998 ......................................................................... (10)
</TABLE>
23
<PAGE> 25
<TABLE>
<S> <C> <C>
*10.25 Modification Agreement with Bank One, Arizona, N.A. and Imperial Bank, Arizona dated
February 12, 1999
10.26 Simula, Inc. Employee Stock Purchase Plan ................................................ (4)
10.29 Form of Change of Control Agreements, as amended and restated, between the Company and
Donald W. Townsend, Bradley P. Forst, James A. Saunders, Donald Rutter, and Randall L.
Taylor ................................................................................... (9)
10.30 Form of Employment Agreements between the Company and Donald W. Townsend, Bradley P
Forst, James A. Saunders, and Randall L. Taylor .......................................... (8)
18. Preference Letter re: change in accounting principles .................................... (5)
21. Subsidiaries of the Company .............................................................. (8)
+24. Powers of Attorney - Directors ........................................................... (8)
*27. Financial Data Schedule
</TABLE>
- ----------
* Filed herewith.
+ Powers of Attorney of James A. Saunders and Lon A. Offenbacher filed herewith.
All other Powers of Attorney filed as noted.
(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 Registration Statement on Form SB-2, No. 33-61028 under the
Securities Act of 1933, effective December 10, 1993.
(3) Filed with Registration Statement on Form SB-2, No. 33-87582, under the
Securities Act of 1933, effective December 28, 1994.
(4) Filed with Definitive Proxy on May 14, 1996, for the Company's Annual
Meeting of Shareholders held on June 20, 1996.
(5) Filed with report on Form 10-Q/A for the quarter ended June 30, 1996. (6)
Filed with report on Form 10-K for the year ended December 31, 1996.
(7) Filed with registration Statement on Form S-3, No. 333-13499, under the
Securities Act of 1993, effective April 24, 1997.
(8) Filed with report on Form 10-K for the year ended December 31, 1997.
(9) Filed with report on Form 10-Q for the quarter ended March 31, 1998.
(10) Filed with report on Form 10-Q for the quarter ended September 30, 1998.
24
<PAGE> 26
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) THE SECURITIES EXCHANGE
ACT OF 1934, AS AMENDED, THE REGISTRANT HAS DULY CAUSED THIS REPORT ON FORM 10-K
TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED IN THE
CITY OF PHOENIX, STATE OF ARIZONA, ON MARCH 31, 1999.
SIMULA, INC.
By /s/ Donald W. Townsend
-----------------------------------
Donald W. Townsend, President
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
FORM 10-K HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE
DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Donald W. Townsend President and Director March 31, 1999
- ------------------------------------ (Principal Executive Officer
Donald W. Townsend and acting Chief Accounting
Officer)
/s/ Bradley P. Forst Executive Vice President, General March 31, 1999
- ------------------------------------ Counsel, Secretary and Director
Bradley P. Forst
/s/ James A. Saunders Executive Vice President, Chief March 31, 1999
- ------------------------------------ Operating Officer
James A. Saunders
* Chairman of the Board of Directors March 31, 1999
- ------------------------------------
Stanley P. Desjardins
* Director March 31, 1999
- ------------------------------------
James C. Withers
* Director March 31, 1999
- ------------------------------------
Robert D. Olliver
* Director March 31, 1999
- ------------------------------------
John M. Leinonen
* Director March 31, 1999
- ------------------------------------
Lon A. Offenbacher
*By: /s/ Bradley P. Forst
--------------------------------
Bradley P. Forst
Attorney-in-Fact
</TABLE>
25
<PAGE> 27
SIMULA, INC.
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report.................................................F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997.................F-3
Consolidated Statements of Operations for the three years
ended December 31, 1998....................................................F-4
Consolidated Statements of Shareholders' Equity and Comprehensive Income
for the three years ended December 31, 1998................................F-5
Consolidated Statements of Cash Flows for the
three years ended December 31, 1998.................................F-6 to F-7
Notes to Consolidated Financial Statements...........................F-8 to F-24
F-1
<PAGE> 28
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, 1998 and 1997, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles.
As discussed in Note 2, during 1996, the Company changed its method of
accounting for pre-contract costs.
Deloitte & Touche LLP
March 26, 1999
Phoenix, Arizona
F-2
<PAGE> 29
SIMULA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 933,462 $ 9,367,031
Contract and trade receivables - Net 27,113,757 22,897,091
Inventories 26,021,433 23,772,430
Income taxes receivable 53,142 146,899
Deferred income taxes 3,173,000 3,763,000
Prepaid expenses and other 548,472 1,188,467
Net current assets of discontinued operations 4,580,773 12,274,200
------------- -------------
Total current assets 62,424,039 73,409,118
PROPERTY, EQUIPMENT and LEASEHOLD IMPROVEMENTS - Net 21,494,535 18,666,140
DEFERRED INCOME TAXES 20,550,000 4,477,000
DEFERRED FINANCING COSTS 2,627,765 3,136,898
INTANGIBLES - Net 3,452,402 3,701,494
OTHER ASSETS 430,340 497,823
NET LONG-TERM ASSETS OF DISCONTINUED OPERATIONS 13,470,801
------------- -------------
TOTAL $ 110,979,081 $ 117,359,274
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving line of credit $ 16,900,000
Trade accounts payable 11,028,062 $ 9,832,206
Other accrued liabilities 7,496,841 5,662,816
Advances on contracts 2,220,737 1,163,109
Current portion of long-term debt 7,530,222 8,096,207
------------- -------------
Total current liabilities 45,175,862 24,754,338
LONG-TERM DEBT - Less current portion 47,233,558 46,962,530
------------- -------------
Total liabilities 92,409,420 71,716,868
COMMITMENTS AND CONTINGENCIES (Note 12)
SHAREHOLDERS' EQUITY:
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 and outstanding, 9,915,391 and 9,850,832 shares 99,154 98,508
Additional paid-in capital 51,742,593 51,109,830
Accumulated deficit (33,452,571) (5,505,822)
Accumulated other comprehensive income 180,485 (60,110)
------------- -------------
Total shareholders' equity 18,569,661 45,642,406
------------- -------------
TOTAL $ 110,979,081 $ 117,359,274
============= =============
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE> 30
SIMULA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE YEARS ENDED DECEMBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Revenue $ 100,644,678 $ 67,362,456 $ 42,125,104
Cost of revenue 85,723,846 51,781,020 36,769,569
------------- ------------- -------------
Gross margin 14,920,832 15,581,436 5,355,535
Administrative expenses 20,420,763 18,697,971 15,860,670
------------- ------------- -------------
Operating loss (5,499,931) (3,116,535) (10,505,135)
Interest expense (5,276,942) (4,486,391) (1,751,961)
Interest income 177,748 313,118 51,711
Other income 1,298,026
------------- ------------- -------------
Loss before discontinued operations and cumulative effect (10,599,125) (5,991,782) (12,205,385)
of change in accounting principle
Income tax benefit 3,786,000 2,390,049 5,009,601
------------- ------------- -------------
Loss before discontinued operations and cumulative effect of a
change in accounting principle (6,813,125) (3,601,733) (7,195,784)
Discontinued Operations:
(Loss) earnings from discontinued operations, net of the related
income tax benefit (expense) of $1,276,000, ($125,951), ($268,601) (2,319,388) 62,207 277,592
Estimated loss on disposal, net of the
related income tax benefit of $10,224,000 (18,576,000)
Cumulative effect on prior years (to December 31, 1995)
of changing accounting for pre-contract costs - Net
of the related income tax benefit of $2,160,000 (3,131,722)
------------- ------------- -------------
Net loss $ (27,708,513) $ (3,539,526) $ (10,049,914)
============= ============= =============
(Loss) earnings per common share - basic and diluted:
(Loss) earnings before discontinued operations and accounting change $ (0.69) $ (0.39) $ (0.79)
(Loss) earnings from discontinued operations (0.23) 0.01 0.03
Estimated loss on disposal (1.88)
Cumulative effect of a change in accounting principle (0.36)
------------- ------------- -------------
Net loss $ (2.80) $ (0.38) $ (1.12)
============= ============= =============
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE> 31
SIMULA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
THREE YEARS ENDED DECEMBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Additional Currency
Common Stock Paid-In Accumulated Translation Treasury
Shares Amount Capital Deficit Adjustment Stock
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1996 8,970,627 $ 89,706 $37,981,759 $ 8,295,434 $ -- $ (279,838)
Net loss (10,049,914)
Issuance of Common shares 104,471 1,045 953,891
Retirement of treasury stock (82,500) (825) (67,197) (211,816) 279,838
Tax benefit from option exercises 163,000
Currency translation adjustment 32,414
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1997 8,992,598 89,926 39,031,453 (1,966,296) 32,414 --
Net loss (3,539,526)
Issuance of common shares 178,601 1,786 2,059,132
Conversion of Series C 10% Senior
Subordinated Convertible Notes 679,633 6,796 9,586,245
Tax benefit from option exercises 433,000
Currency translation adjustment (92,524)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1998 9,850,832 98,508 51,109,830 (5,505,822) (60,110) --
Net loss (27,708,513)
Issuance of common shares 64,559 646 622,763
Recognition of Minimum (238,236)
Pension Liability
Tax benefit from options exercised 10,000
Currency translation adjustment 240,595
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1998 9,915,391 $ 99,154 $51,742,593 $(33,452,571) $ 180,485 $ --
=========== =========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Total
Shareholders' Comprehensive
Equity Income
----------- -----------
<S> <C> <C>
BALANCE, January 1, 1996 $ 46,087,061
Net loss (10,049,914) $(10,049,914)
Issuance of Common shares 954,936
Retirement of treasury stock --
Tax benefit from option exercises 163,000
Currency translation adjustment 32,414 32,414
----------- -----------
BALANCE, December 31, 1997 37,187,497 $(10,017,500)
===========
Net loss (3,539,526) $ (3,539,526)
Issuance of common shares 2,060,918
Conversion of Series C 10% Senior
Subordinated Convertible Notes 9,593,041
Tax benefit from option exercises 433,000
Currency translation adjustment (92,524) (92,524)
----------- -----------
BALANCE, December 31, 1998 45,642,406 $ (3,632,050)
===========
Net loss (27,708,513) $(26,540,513)
Issuance of common shares 623,409
Recognition of Minimum (238,236) (238,236)
Pension Liability
Tax benefit from options exercised 10,000
Currency translation adjustment 240,595 240,595
----------- -----------
Balance, December 31, 1998 $ 18,569,661 $(26,538,154)
=========== ===========
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE> 32
SIMULA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE YEARS ENDED DECEMBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows used for operating activities:
Net loss $(27,708,513) $ (3,539,526) $(10,049,914)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 4,646,531 3,505,328 2,016,815
Deferred income taxes (15,314,000) (2,262,000) (4,578,000)
Currency translation adjustment 240,595 (92,524) 32,414
Provision for loss on disposal of discontinued
operations 28,800,000
Gain on sale of property (1,298,026)
Cumulative effect of change in accounting 5,220,724
Changes in net assets and liabilities:
Contract and trade receivables, net of advances (3,159,038) (8,628,705) 1,886,038
Inventories (2,249,003) (10,868,627) (5,646,268)
Income taxes receivable 942,665 (1,089,564)
Prepaid expenses and other 733,752 374,448 (167,717)
Deferred costs (229,758)
Other assets 67,485 233,462 1,037,362
Net assets of discontinued operations (7,635,772) (628,900) (8,521,512)
Trade accounts payable 1,195,854 3,389,723 1,394,433
Other accrued liabilities 1,436,789 2,317,844 1,521,782
------------ ------------ ------------
Net cash used by operating activities (19,175,078) (16,554,838) (16,943,407)
------------ ------------ ------------
Cash flows used for investing activities:
Purchase of property and equipment (6,188,725) (7,980,581) (7,518,489)
Proceeds from sale of property and equipment 6,100,000
Costs incurred to obtain intangibles (235,273) (326,796) (487,909)
------------ ------------ ------------
Net cash used by investing activities (6,423,998) (2,207,377) (8,006,398)
------------ ------------ ------------
Cash flows from financing activities:
Net (repayments) borrowings under line of credit 16,900,000 (6,900,000) 6,900,000
Issuance of 9 1/2% notes - net of expenses 962,054
Issuance of 8% notes - net of expenses 31,186,226
Issuance of 10% notes - net of expenses 13,656,500
Borrowings under other debt arrangements 7,569,081 4,895,636 3,153,296
Principle payments under other debt arrangements (8,889,037) (4,412,275) (1,591,358)
Issuance of common shares - net of expenses 623,409 2,060,918 954,936
------------ ------------ ------------
Net cash provided by financing activities 17,165,507 26,830,505 23,073,374
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (8,433,569) 8,068,290 (1,876,431)
Cash and cash equivalents at beginning of year 9,367,031 1,298,741 3,175,172
------------ ------------ ------------
Cash and cash equivalents at end of year $ 933,462 $ 9,367,031 $ 1,298,741
============ ============ ============
</TABLE>
F-6
<PAGE> 33
SIMULA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Interest paid $5,534,092 $3,284,192 $1,650,479
========== ========== ==========
Taxes paid $ 41,200 $ 125,900 $ 352,575
========== ========== ==========
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Conversion of notes:
Conversion of $9,550,000 Series C 10% Senior
Subordinated Convertible Notes and accrued interest of $475,548 less
deferred note issuance
costs of $432,507 for 679,633 shares of common stock $9,593,041
==========
Property and equipment acquired under capital leases $ 396,411 $ 836,634
========== ==========
Tax benefits from exercise of stock options $ 10,000 $ 433,000 $ 163,000
========== ========== ==========
</TABLE>
See notes to consolidated financial statements
F-7
<PAGE> 34
SIMULA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
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.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Described below are those
generally accepted 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 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. Adjustments
to this measurement are made however, 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.
Revenue derived from sales of airline and automotive commercial
products is recognized at contractual amounts when the product is
shipped.
c. Inventories include raw materials not yet applied to contracts and raw
materials, work-in-process and finished goods 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 first-in first-out method.
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 is
calculated on a straight-line basis over estimated useful lives of
three to twelve years and buildings are depreciated on a straight-line
basis over estimated useful lives of thirty years.
e. Deferred financing costs are amortized over the life of the related
debt using the effective interest method.
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
F-8
<PAGE> 35
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. Impairment losses, if any, will be
recorded as a component of operating earnings. Intangibles are
amortized on a straight-line basis over the following periods:
Goodwill................................................ 10-25 years
Covenants not to compete................................ 10 years
Other .................................................. 7-20 years
g. Foreign currency assets and liabilities are translated into United
States dollars using the exchange rates in effect at the balance sheet
date. The effects of exchange rate fluctuations on translation of
assets and liabilities are reported as a separate component of
shareholders' equity.
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 an original maturity of three months or less.
i. (Loss) earnings per common share - In 1997, the Financial Accounting
Standards Board (the "FASB") issued Statement of Financial Accounting
Standards No. 128, Earnings Per Share. SFAS No. 128 requires the dual
presentation of basic and diluted earnings per share on the face of
the income statement and the disclosure of the reconciliation between
the numerators and denominators of basic and diluted earnings per
share calculations. Earnings per share amounts for the years ended
December 31, 1998, 1997 and 1996 are calculated using only weighted
average outstanding shares of 9,880,283, 9,288,416 and 8,947,060,
respectively. Options to purchase common stock and shares to be issued
upon conversion of the 8% Notes and 10% Notes (Note 8) totaling
4,546,065, 3,896,966 and 1,881,562 for the years ended December 31,
1998, 1997 and 1996, respectively were not used for computing diluted
earnings per share because the result would be anti-dilutive. Per
share amounts previously reported have been restated to conform with
the requirements of SFAS No. 128.
j. New accounting pronouncements -In June 1997, the FASB issued SFAS No.
130, Reporting Comprehensive Income, and SFAS No. 131, Disclosures
About Segments of an Enterprise and Related Information. In February
1998, the FASB issued SFAS No. 132, Employers Disclosure about
Pensions and other Postretirement Benefits. SFAS No. 130 requires that
an enterprise (a) classify items of other comprehensive income by
their nature in a financial statement and (b) display the accumulated
earnings and additional capital in the equity section of a statement
of financial position. SFAS No. 131 establishes standards for the way
that public enterprises report information about operating segments in
annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for
disclosures about products and services, geographic area and major
customers. SFAS No. 132 expands the disclosure requirement related to
pension and postretirement benefits. These statements are effective
for fiscal year 1998.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133, requires that
entities record all derivatives as assets or liabilities, measured at
fair value, with the change in fair value recognized in earning or in
other comprehensive income, depending on the use of the derivative and
whether it qualifies for hedge accounting. SFAS No. 133 is effective
for the fiscal year ending 2000. The Company has not completed
evaluating the effects this statement will have on its financial
position or results of operations.
F-9
<PAGE> 36
2. ACCOUNTING CHANGE
During 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
year ended December 31, 1996. The effect of the change on the year ended
December 31, 1996 was to decrease earnings before cumulative effect of a change
in accounting principle $3.2 million ($.36 per share) and net earnings by $6.4
million ($.72 per share).
3. RECEIVABLES
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.
At December 31, receivables include the following:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
United States Government:
Billed receivables $ 1,702,085 $ 2,242,773
Costs and estimated earnings in excess of billings 6,366,253 4,330,403
------------ ------------
Total United States Government 8,068,338 6,573,176
------------ ------------
Other contracts:
Billed receivables 3,171,740 1,980,447
Costs and estimated earnings in excess of billings 4,624,648 3,567,468
------------ ------------
Total other contracts 7,796,388 5,547,915
------------ ------------
Other trade receivables 11,449,031 10,976,000
Less allowance for doubtful accounts (200,000) (200,000)
------------ ------------
Contract and trade receivables - net $ 27,113,757 $ 22,897,091
============ ============
</TABLE>
F-10
<PAGE> 37
4. INVENTORIES
At December 31, inventories consisted of the following:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Raw materials $15,581,952 $12,205,813
Work-in-process 9,077,849 10,652,149
Finished goods 1,361,632 914,468
----------- -----------
Total inventories $26,021,433 $23,772,430
=========== ===========
</TABLE>
5. PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
At December 31, property, equipment and leasehold improvements consisted of the
following:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Land $ 1,603,870 $ 1,603,870
Buildings and leasehold improvements 4,120,501 3,063,459
Equipment 26,295,766 21,177,091
------------ ------------
Total 32,020,137 25,831,602
Less accumulated depreciation and amortization (10,525,602) (7,178,280)
------------ ------------
Property, equipment and leasehold improvements - net $ 21,494,535 $ 18,666,140
============ ============
</TABLE>
6. INTANGIBLES
At December 31, intangibles consisted of the following:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Covenants not to compete $ 2,489,356 $ 2,489,356
Goodwill 1,059,553 1,059,553
Patents and licenses 1,245,270 1,009,998
Other 783,968 783,963
----------- -----------
Total 5,578,147 5,342,870
Less accumulated amortization (2,125,745) (1,641,376)
----------- -----------
Intangibles - net $ 3,452,402 $ 3,701,494
=========== ===========
</TABLE>
7. REVOLVING LINE OF CREDIT
In November 1998, the Company executed The Senior Credit Agreement with a
bank which provided for a $20,000,000 revolving line of credit and two
$5,000,000 term facilities for the refinancing of equipment and subordinated
debt (Note 8). The revolving line of credit accrues interest at LIBOR plus 2.25%
and matures in August 2000. The outstanding balance under this line of credit
was $16,900,000 and the average interest rate was 7.8% at December 31, 1998.
The Senior Credit Agreement encompassing this line of credit and the
equipment and subordinated debt refinancing facilities described in Note 8
contain certain covenants that require the maintenance of a minimum tangible net
worth, income and certain defined financial ratios and is secured by the assets
of the Company. The Company was in compliance with all of the covenants of this
loan agreement at December 31, 1998.
The Senior Credit Agreement was amended by a Modification Agreement
executed in February 1999. The Modification Agreement increased the revolving
credit facility to $26,000,000, limited the outstanding balances to the lesser
of the credit facility or the Revolving Line of Credit Borrowing Base (as
defined), and adjusted the interest rate to LIBOR plus 3.5%. As additional
security under The Senior Credit Agreement, the Company pledged a security
interest in the stock owned by the Company. In addition, the Modification
Agreement set benchmarks concerning timing and proceeds from the sale of the
discontinued
F-11
<PAGE> 38
operation and the sale of certain property owned by the company. The agreement
requires that sale proceeds, up to certain limits, must be used to reduce
outstanding borrowing under the agreement and if the Company's discontinued
operations are not disposed of by April 30, 1999 additional fees will be
assessed.
8. LONG-TERM DEBT
Long-term debt at December 31 consisted of the following:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
8% Senior Subordinated Convertible Notes $ 34,500,000 $ 34,500,000
10% Senior Subordinated Convertible Notes 4,750,000 4,750,000
9 1/2 % Senior Subordinated Notes 3,238,000 --
12% Senior Subordinated Notes -- 5,700,000
Various loans payable, secured by property and equipment 10,287,560 7,552,623
Various mortgage notes payable, secured by land and buildings 1,330,944 1,381,357
Obligations under capital leases, interest at 10% (Note 13) 657,276 1,174,757
------------ ------------
Total 54,763,780 55,058,737
Less current portion (7,530,222) (8,096,207)
------------ ------------
Long-term debt $ 47,233,558 $ 46,962,530
============ ============
</TABLE>
In November 1998 the Company executed The Senior Credit Agreement with a
bank which provided for a $20,000,000 revolving line of credit (Note 7) and two
$5,000,000 term facilities for the refinancing of U.S. based equipment and the
refinancing of existing subordinated debt. The Company used proceeds received
under the equipment facility to repay $3,430,306 outstanding principal balance
on a previous $5,000,000 term equipment note payable. The Company used proceeds
of $2,500,000 received under the subordinated debt refinancing facility in the
retirement of it's 12% Notes upon maturity. Interest on both facilities is
payable at the LIBOR rate in effect at the time of the drawdown plus 2.25% with
the remaining outstanding principal balance due in August 2003. Outstanding
balances under the equipment and subordinated debt refinancing facilities at
December 31, 1998 were $4,916,667 and $2,500,000, respectively. The average
interest rate on the outstanding balances at December 31, 1998 is approximately
7.8%. In a Modification Agreement executed in February 1999, the subordinated
debt facility loan commitment was reduced to $2,500,000 and the interest rate
under both facilities was adjusted to LIBOR plus 3.5%.
In November 1998, the Company completed a private placement to accredited
investors of $3,238,000 of it 9 1/2% Senior Subordinated Notes (the "9 1/2%
Notes") and received proceeds of $1,025,000 and exchanged $2,213,000 of its 12%
Notes. The 9 1/2% Notes are due on September 30, 2003 and bear interest at
9 1/2% per annum, payable semi-annually. The 9 1/2% Notes may be redeemed at the
Company's option, upon at least 30 days' notice, in whole or in part on a pro
rata basis, on and after April 30, 1999, at 102% of par value plus accrued
interest payable to the redemption date. The net proceeds received under the
9 1/2% Notes were utilized in the retirement of the 12% Notes upon maturity.
During 1997, the Company completed the public offering of $34.5 million of
its 8% Senior Subordinated Convertible Notes (the "8% Notes"). The 8% Notes are
due May 1, 2004 and bear interest at 8% per annum, payable semi-annually. The 8%
Notes are convertible into shares of the Company's common stock at a price of
$17.55 per share of common stock. The 8% Notes may be redeemed at the Company's
option in whole or in part on a pro rata basis, on and after May 1, 1999, at
certain specified redemption prices plus accrued interest payable to the
redemption date. However, on or after May 1, 1999 and prior to April 30, 2000,
the 8%
F-12
<PAGE> 39
Notes will not be redeemable unless the closing price of the Company's common
stock has equaled or exceeded $23.625 for 20 trading days within a period of 30
consecutive trading days.
The indenture relating to the 9 1/2% Notes and the 8% Notes contains
certain covenants including limitations on the incurrence of additional
indebtedness, the sale of assets, liens securing indebtedness other than senior
indebtedness, payment restrictions affecting subsidiaries, transactions with
affiliates, future senior subordinated indebtedness and mergers and
consolidations. In accordance with the indenture, the Company may incur
indebtedness under senior credit facilities up to $50 million and may incur
other indebtedness based upon a specified ratio of cash flow, as defined, to
interest expense. The Company was in compliance with all of the covenants of
this indenture at December 31, 1998.
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. During 1997, $9,550,000 of the 10% Notes and $475,548 of
accrued interest were converted into 679,633 shares of the Company's common
stock. The 10% Notes outstanding at December 31, 1998 bear interest at 10%
payable semi-annually and are due in September 1999. These remaining 10% Notes
are convertible into approximately 280,000 shares of the Company's common stock.
The Company has the right to call the remaining 10% Notes at par plus accrued
interest. The Indenture relating to the 10% Notes contains certain covenants
including limitations on sale of assets and transactions with affiliates. The
Company was in compliance with all of the covenants of this indenture at
December 31, 1998.
In December 1993, the Company issued $5.7 million of 12% Senior
Subordinated Notes ("12% Notes"), due in November of 1998. At their maturity,
$3,487,000 was repaid and $2,213,000 was exchanged for the Company's 9 1/2%
Notes.
The aggregate principle payments required for the five years subsequent to
December 31, 1998 are:
<TABLE>
<S> <C>
1999 $ 7,530,222
2000 2,400,885
2001 2,310,335
2002 2,168,531
2003 4,860,568
Thereafter 35,493,239
------------------
Total $ 54,763,780
==================
</TABLE>
Interest expense for the years ended December 31 is comprised of the following:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Interest $4,501,105 $4,655,833 $2,134,447
Amortization of deferred financing costs 801,836 725,147 234,644
---------- ---------- ----------
Interest expense $5,302,941 $5,380,980 $2,369,091
========== ========== ==========
</TABLE>
Based on borrowing rates currently available to the Company and the quoted
market prices for the 8% Notes, the fair value of long-term debt at December 31,
1998 is approximately $49,600,000.
F-13
<PAGE> 40
9. INCOME TAXES
The income tax (benefit) provision for the years ended December 31 are as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Current $ 36,000 $ 431,000 $ (2,160,000)
Deferred (15,483,000) (2,695,000) (4,741,000)
------------ ------------ ------------
(Benefit) provision for income taxes $(15,286,000) $ (2,264,000) $ (6,901,000)
============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Federal statutory income tax rate 34.0% 34.0% 34.0%
State income taxes 2.1 5.3 5.3
Tax credits and other (.7) (.3) 1.4
---- ---- ----
Effective rate 35.4% 39.0% 40.7%
==== ==== ====
</TABLE>
The provision for deferred income taxes consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Accruals and reserves $(11,257,000) $ (448,000) $ (1,157,000)
Depreciation and amortization expense 371,000 554,000 560,000
Net operating loss carryforward (4,656,000) (2,425,000) (3,867,000)
Minimum tax credit carryforwards (226,000) (376,000) (277,000)
Change in valuation allowance 285,000
------------ ------------ ------------
Total $(15,483,000) $ (2,695,000) $ (4,741,000)
============ ============ ============
</TABLE>
F-14
<PAGE> 41
The significant tax effected temporary differences comprising deferred taxes at
December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Current:
Net operating loss carryforwards $ 1,380,000 $ 2,900,000
Accrued vacation and self insurance 489,000 294,000
Inventory and warranty reserves 1,004,000 371,000
Other 300,000 198,000
------------ ------------
Total current deferred tax asset 3,173,000 3,763,000
------------ ------------
Long-term:
Excess of tax over book depreciation and amortization (861,000) (490,000)
Net operating loss carryforwards 9,848,000 3,840,000
Minimum tax credit carryforward 764,000 663,000
Deferred start-up costs 313,000 348,000
Discontinued Operations 10,385,000 --
Other 101,000 116,000
------------ ------------
Total long-term deferred tax asset 20,550,000 4,477,000
------------ ------------
Net deferred tax asset $ 23,723,000 $ 8,240,000
============ ============
</TABLE>
The Company increased its deferred tax valuation allowance $285,000 in 1998
because certain tax credits and operating loss carry forwards are unlikely to be
utilized. At December 31, 1998, the Company had approximately $31,100,000 of net
operating loss carry forwards which expire through 2018.
10. 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 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.
F-15
<PAGE> 42
The Plan's funded status and amounts recognized in the Company's balance sheet
at December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested $ 2,574,688 $ 1,949,265
Nonvested benefits 470,672 382,815
----------- -----------
Accumulated benefit obligation 3,045,360 2,332,080
Effect of projected future compensation increases 659,652 582,128
----------- -----------
Projected benefit obligation 3,705,012 2,914,208
Plan assets at fair value 2,212,953 2,034,500
----------- -----------
Funded status 1,492,059 879,708
Unrecognized prior service costs 216,977 15,239
Unrecognized loss (1,353,003) (524,607)
Unrecognized transition liability 79,138 84,790
----------- -----------
Accrued benefit cost 435,171 455,130
Additional minimum liability 397,236
----------- -----------
Accrued benefit liability 832,407 455,130
Accumulated other comprehensive income adjustments 397,236
----------- -----------
Net amount recognized $ 435,171 $ 455,130
=========== ===========
</TABLE>
Reconciliation of the Plan benefit obligation is as follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Beginning benefit obligation $2,914,208 $2,199,959
Service cost 366,594 307,249
Interest Cost 211,324 175,039
Actuarial (gain)/loss 547,798 271,103
Plan amendments (230,547)
Benefits paid (104,365) (39,142)
---------- ----------
Ending benefit obligation $3,705,012 $2,914,208
========== ==========
</TABLE>
Reconciliation of the fair value of plan assets is as follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Beginning fair value of plan assets $2,034,500 $1,729,919
Employer contributions 444,081 280,849
Actual gain/(loss) (161,263) 62,874
Benefits paid (104,365) (39,142)
---------- ----------
Ending fair value of plan assets $2,212,953 $2,034,500
========== ==========
</TABLE>
F-16
<PAGE> 43
Net periodic pension cost includes the following:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Service Cost $ 366,594 $ 307,249 $ 235,167
Interest Cost 211,324 175,039 147,852
Expected return on assets (172,330) (144,306) (115,489)
Transition asset recognition (5,652) (5,652) (5,652)
Prior service cost (28,809) (4,572) (4,572)
Net loss recognition 52,995 13,021 22,365
-------- -------- --------
Net periodic benefit cost $ 424,122 $ 340,779 $279,671
======== ======== ========
</TABLE>
Assumptions at December 31 used in the accounting for the Plan were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Discount or settlement rate 6.75% 7.25% 7.50%
Rate of increase in compensation levels 3.00% 3.25% 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, bonds and mutual funds.
In addition, the Company has a 401(k) plan for substantially all employees
and one subsidiary has a union sponsored pension plan for union employees to
which the Company makes contractual contributions. Company contributions to the
401(k) plan were $48,597, $38,355 and $29,065 for the years ended December 31,
1998, 1997 and 1996, respectively. Company contributions to the union sponsored
pension plan were $57,809, $57,742 and $56,931 for the years ended December 31,
1998, 1997 and 1996, respectively.
11. OTHER INCOME
Other income for the year ended December 31, 1997 represents the net gain
on real estate transactions.
F-17
<PAGE> 44
12. 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 of $2,030,635 and $2,015,324 (net of accumulated
depreciation of $1,144,166 and $782,644) are included in property and equipment
as of December 31, 1998 and 1997, respectively.
The following is a schedule 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>
1999 $ 505,590 $ 2,382,182
2000 166,244 2,141,406
2001 24,496 1,819,953
2002 19,539 1,521,369
2003 1,529,719
Thereafter 4,908,624
----------- -----------
Total minimum lease payments 715,869 $14,303,253
===========
Less amounts representing interest (58,593)
-----------
Present value of net minimum lease payments $ 657,276
===========
</TABLE>
Rent expense was $2,530,932, $1,889,660 and $1,132,263 for the years ended
December 31, 1998, 1997 and 1996, respectively.
In connection with its decision to establish a facility in the United
Kingdom for the production of inflatable restraints for automobiles, the Company
negotiated certain grants with local and national authorities in the United
Kingdom. The total grant of approximately $3 million is anticipated to be
received through January 1999 as certain levels of capital expenditures and the
creation of jobs are met. These grants will be recognized as a reduction of cost
of revenue in accordance with the purpose of the grants in the periods in which
such grants are received.
13. DISCONTINUED OPERATIONS
In 1998, the Company's board of directors adopted a plan to dispose of its
rail and mass transit seating operations. Accordingly, the operating results of
these rail and mass transit operations, including a provision for estimated loss
upon disposition, have been segregated from continuing operations and are
reported as discontinued operations. The estimated loss on disposal at December
31, 1998 included the write down of the remaining net assets to their net
realizable value. Estimated costs of disposal and projected operating results
have been included in determining the net realizable value of business assets.
Revenues for the rail and mass transit operations were $15,781,983,
$23,059,525 and $23,636,853 for the years ended December 31, 1998, 1997 and
1996, respectively. Interest expense has been allocated to discontinued
operations based on the ratio of the discontinued operations' net assets to
consolidated net assets. General corporate administrative expenses are not
allocated to discontinued operations.
F-18
<PAGE> 45
The components of net assets of discontinued operations included in the
consolidated Balance Sheets at December 31 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Accounts and notes receivable--trade, net $ 2,641,379 $ 11,128,395
Inventories 6,198,387 3,733,664
Prepaid expenses and other current assets 138,378 305,715
Property, Plant and equipment, net 4,057,226 6,188,087
Other noncurrent assets, net 155,115 7,308,043
Accounts payable (2,642,569) (2,175,081)
Accrued liabilities (5,956,355) (717,458)
Other liabilities (10,787) (26,364)
------------ ------------
$ 4,580,773 $ 25,745,001
============ ============
</TABLE>
The sale of the Company's discontinued operations is expected to be completed in
1999.
14. STOCK OPTIONS AND STOCK PLANS
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 August 1994, the Company adopted the
1994 Stock Option Plan which reserves up to 2,500,000 shares of common stock for
issuance under the Plan. In accordance with the terms of the 1994 Plan,
2,348,592 options have been granted. Information with respect to the Plans is as
follows:
<TABLE>
<CAPTION>
OPTION SHARES WEIGHTED AVERAGE
OPTION PRICE
---------- ----------
<S> <C> <C>
Outstanding at December 31, 1995 717,250 $ 10.85
Granted 360,550 $ 12.99
Exercised (104,471) $ 9.14
Canceled (51,400) $ 12.77
----------
Outstanding at December 31, 1996 921,929 $ 11.78
Granted 858,900 $ 13.84
Exercised (126,575) $ 10.51
Canceled (3,100) $ 13.91
----------
Outstanding at December 31, 1997 1,651,154 $ 12.94
Granted 676,517 $ 14.07
Exercised (9,700) $ 12.01
Canceled (29,600) $ 13.04
----------
Outstanding at December 31, 1998 2,288,371
==========
</TABLE>
Options are generally exercisable one year from the date of grant for up to
ten 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
F-19
<PAGE> 46
options. As of December 31, 1998, 1997, and 1996, exercisable options were
1,976,854, 1,127,304, and 612,179, respectively.
On December 1, 1998 584,392 options that had been previously to the granted
to the Company's non-executive management employees were repriced at $7.00 per
share which represents the fair market value at the date of repricing. These
options retain the same characteristics as their original grant.
The following information, aggregated by option price ranges, is applicable to
options outstanding at December 31, 1998:
<TABLE>
<S> <C> <C>
Range of exercise prices .......................................... $3.25 - $7.00 $8.63- $20.50
Shares outstanding in range........................................ 714,296 1,574,075
Weighted-average exercise price ................................... 6.71 13.69
Weighted-average remaining contractual life ....................... 8 8
Shares currently exercisable ...................................... 471,754 1,534,700
Weighted-average exercise price of shares currently exercisable.... 6.52 13.71
</TABLE>
The estimated fair value of options granted during 1998 was $3.85 per
share. The Company applies Accounting Principles Board Opinion No. 25 and
related Interpretations in accounting for its stock option plans. Accordingly,
no compensation cost has been recognized for its fixed stock option plans. Had
compensation cost for the Company's stock option plans been recognized based on
the fair value at the grant dates for awards under those plans consistent with
the method of Statement of Financial Accounting Standards No. 123, the Company's
net (loss) earnings and net (loss) earnings per share for the three years ended
December 31, 1998 would have been reduced to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Net loss - as reported $ (27,708,513) $ (3,539,526) $ (10,049,914)
============== ============== ==============
Net loss - pro forma $ (29,683,277) $ (6,222,900) $ (12,074,645)
============== ============== ==============
Loss per share - basic - as reported $ (2.80) $ (0.38) $ (1.12)
============== ============== ==============
Loss per share - basic - pro forma $ (3.00) $ (0.67) $ (1.35)
============== ============== ==============
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes options pricing model. For the year ended December 31, 1998
the assumptions used for grants were no dividend yield, and expected volatility
of 53%, a risk free interest rate of 4.5% and expected lives of 3 years. For the
year ended December 31, 1997, the assumptions used for grants were no dividend
yield, an expected volatility of 46%, a risk-free interest rate of 5.5% and
expected lives of three years. For the years ended December 31, 1996, the
assumptions used for grants were no dividend yield, an expected volatility of
36%, a risk-free interest rate of 7% and expected lives of five years.
RESTRICTED STOCK PLAN - 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 4,623 shares have been awarded.
EMPLOYEE STOCK PURCHASE PLAN - On June 20, 1996, the Company adopted the
Employee Stock Purchase Plan (the "ESPP") to allow eligible employees of the
Company to acquire shares of the Company's common stock at periodic intervals,
paid for with accumulated payroll deductions over a six month offering period. A
total of 400,000 shares of the Company's common stock have been reserved for
issuance under the ESPP. The first offering period under the ESPP began October
1, 1996.
F-20
<PAGE> 47
15. EXPORT SALES
Export sales for the years ended December 31 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
United Kingdom $14,355,817 $ 2,571,566 $ 2,278,212
Germany 9,949,416 8,879,713
Canada 1,958,905 3,414,059 2,154,620
Ireland 1,045,417 2,279,659
Japan 925,578 1,167,752 1,191,468
Other 2,554,393 2,864,530 3,231,782
----------- ----------- -----------
Total export sales $30,789,526 $21,177,279 $ 8,856,082
=========== =========== ===========
</TABLE>
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>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Research and development expenses classified
as general and administrative expenses $ 3,383,082 $ 4,394,359 $ 1,915,649
============ ============ ============
Funded contracts:
Revenues funded by customers $ 8,916,222 $ 6,933,661 $ 6,518,818
Research and development expenses classified
as cost of such revenue (10,066,340) (7,382,734) (8,587,658)
------------ ------------ ------------
Funded contract deficiency $ (1,150,118) $ (449,073) $ (2,068,840)
============ ============ ============
</TABLE>
The above amounts do not include pre-contract costs which the Company began
expensing in 1996 (See Note 2). Pre-contract costs expended for the years ended
December 31, 1998, 1997 and 1996 were approximately $60,000, $2,200,000 and
$6,420,000, respectively.
17. SEGMENT REPORTING
The Company is a holding company for wholly owned subsidiaries which
operate in two primary business segments. The Commercial Transportation Products
segment includes operations which primarily manufacture seating systems for
domestic and foreign passenger airlines and includes operations encompassing
inflatable restraints and related technology for automobiles. The Government and
Defense segment includes operations that design and manufacture crash resistant
components, energy absorbing devices, ballistic armor and composites principally
in connection with branches of the United States armed forces procurement. The
remaining segment, entitled Other, represents general corporate operations.
For the years ended December 31, 1998, 1997 and 1996, inter-segment sales
were insignificant and total intercompany sales of $10,643,702, $10,085,025 and
$7,547,039, respectively, have been eliminated.
F-21
<PAGE> 48
<TABLE>
<CAPTION>
1998
---------------------------------------------------------------
Commercial
Government Transportation
and Defense Products Other Total
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue:
Contract revenue $ 32,430,873 $ 4,778,566 $ 37,209,439
Product sales:
Airline seat systems 30,932,898 30,932,898
Automotive safety systems 27,992,525 27,992,525
Other 3,445,639 $ 19,598 3,465,237
Technology sales and royalties 1,044,579 1,044,579
------------- ------------- ------------- -------------
Total revenue $ 35,876,512 $ 64,748,568 $ 19,598 $ 100,644,678
============= ============= ============= =============
Operating (loss) income $ 1,535,526 $ (5,701,323) $ (1,334,134) $ (5,499,931)
Identifiable assets 30,544,223 47,811,797 32,623,061 110,979,081
Depreciation and amortization 1,251,642 2,486,144 908,745 4,646,531
Capital expenditures 889,119 5,171,569 128,037 6,188,725
</TABLE>
Revenue from three major customers accounted for approximately 27% of total
revenue for the year ended December 31, 1998. Contract and trade receivables
from these customers accounted for approximately 44% of the total contract and
trade receivables at December 31, 1998. The Government and Defense segment
recognized revenue from all branches of the United States armed forces which
accounted for approximately 12% of total revenue for the year ended December 31,
1998.
The Company has performed work for the United States armed forces since
1975 and has no reason to believe that there will be any change in these
customer relationships.
The Company's external sales based upon the customers country of origin
and investment in long lived assets by geographic area is as follows:
<TABLE>
<CAPTION>
1998
-------------------------------
<S> <C> <C>
Revenues Long-Lived
Assets
------------ ------------
United States 69,855,152 40,824,266
United Kingdom 14,355,817 7,730,776
Germany 9,949,416
Canada 1,958,905
Other foreign counties 4,525,388
------------ ------------
Total 100,644,678 48,555,042
============ ============
</TABLE>
<TABLE>
<CAPTION>
1997
---------------------------------------------------------------
Commercial
Government and Transportation
Defense Products Other Total
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue:
Contract revenue $ 29,104,203 $ 431,563 $ 29,535,766
Product sales:
Airline seat systems 27,405,305 27,405,305
Automotive safety systems 8,879,713 8,879,713
Other 1,243,302 $ 18,321 1,261,623
Technology sales and royalties 280,049 280,049
------------- ------------- ------------- -------------
Total revenue $ 30,347,505 $ 36,996,630 $ 18,321 $ 67,362,456
============= ============= ============= =============
Operating (loss) income $ 696,485 $ (2,426,666) $ (1,386,354) $ (3,116,535)
Identifiable assets 28,357,665 42,986,193 46,015,416 117,359,274
Depreciation and amortization 1,185,753 1,473,145 846,430 3,505,328
Capital expenditures 2,742,281 5,564,297 (325,997) 7,980,581
</TABLE>
F-22
<PAGE> 49
Revenue from three major customers accounted for approximately 55% of total
revenue for the year ended December 31, 1997. Contract and trade receivables
from these customers accounted for approximately 33% of the total contract and
trade receivables at December 31, 1997. The Government and Defense segment
recognized revenue from all branches of the United States armed forces which
accounted for approximately 13% of total revenue for the year ended December 31,
1997. The Commercial Transportation Products segment recognized revenue from
Continental Airlines that accounted for approximately 12% of total revenue for
the year ended December 31, 1997.
The Company anticipates that it will fulfill current delivery requirements
to Continental Airlines in early 1999 and it will not represent as significant
of a customer in 1998 and following years. The Company believes that in the
ordinary course of its airline seating business, the programs with Continental
Airlines will be replaced by programs with other customers.
The Company's external sales based upon the customers country of origin and
investment in long lived assets by geographic area is as follows:
<TABLE>
<CAPTION>
1997
---------------------------
Long-Lived
Revenues Assets
------------ ------------
<S> <C> <C>
United States 46,185,177 37,532,376
Germany 8,879,713
Canada 3,414,059
United Kingdom 2,571,566 6,417,780
Other foreign countries 6,311,941
---------- ----------
Total 67,362,456 43,950,156
========== ==========
</TABLE>
<TABLE>
<CAPTION>
1996
-----------------------------------------------------------
Government Commercial
and Transportation
Defense Products Other Total
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue:
Contract revenue $ 31,626,701 $ 31,626,701
Product sales:
Airline seat systems $ 8,965,719 8,965,719
Automotive safety systems 470,785 470,785
Other 807,250 807,250
Technology sales and royalties 254,649 254,649
------------ ------------ ------------ ------------
Total revenue $ 32,688,600 $ 9,436,504 $ -- $ 42,125,104
============ ============ ============ ============
Operating (loss) income $ 982,684 $(10,058,730) $ (1,429,089) $(10,505,135)
Identifiable assets 28,609,140 20,162,159 34,170,913 82,942,212
Depreciation and amortization 920,699 823,483 272,633 2,016,815
Capital expenditures 2,631,512 4,985,520 49,312 7,666,344
</TABLE>
Revenue from two major customers accounted for approximately 37% of total
revenue for the year ended December 31, 1996. Contract and trade receivables
from these customers accounted for approximately 11% of the total contract and
trade receivables at December 31, 1996. The Government and Defense segment
recognized revenue from all branches of the United States armed forces which
accounted for approximately 27% of total revenue for the year ended December 31,
1996.
The Company's external sales based upon the customers country of origin
and investment in long lived assets by geographic area is as follows:
<TABLE>
<CAPTION>
1996
---------------------------
Long-Lived
Revenues Assets
------------ ------------
<S> <C> <C>
United States 33,269,022 35,313,447
Germany 2,278,212 3,348,660
Canada 2,154,620
Japan 1,191,468
Other foreign countries 3,231,782
---------- ----------
Total 42,125,104 38,662,107
========== ==========
</TABLE>
F-23
<PAGE> 50
18. UNAUDITED QUARTERLY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
1998
------------------------------------------------------------
First Second Third Fourth
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue $ 22,542,178 $ 25,739,419 $ 23,680,404 $ 28,682,677
Cost of Revenue 16,615,993 19,067,593 18,197,029 31,843,231
------------ ------------ ------------ ------------
Gross margin $ 5,926,185 $ 6,671,826 $ 5,483,375 $ (3,160,554)
============ ============ ============ ============
Net (loss) earnings from continuing operations $ 228,679 $ 502,976 $ (559,150) $ (6,985,630)
Discontinued Operations:
(Loss) earnings from discontinued
operations, net of tax $ (223,978) $ (1,932,410) (163,000)
Estimated loss on disposal, net of tax $ (4,680,000) $(13,896,000)
------------ ------------ ------------ ------------
Net (loss) earnings $ 4,701 $ (6,109,434) $ (559,150) $(21,044,630)
============ ============ ============ ============
Net earnings per common share - basic
and assuming dilution $ -- $ (0.62) $ (0.06) $ (2.12)
</TABLE>
The fourth quarter included inventory write downs of unabsorbed overhead as a
result of lower shipping volumes and net realizable value for inventory used in
the refurbishment of airline seats. Also, an additional loss on disposal of
discontinued operations was recorded to reflect the adjusted expected sale
price from that which was determined through an independent valuation earlier
in the year.
<TABLE>
<CAPTION>
1997
------------------------------------------------------------
First Second Third Fourth
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue $ 11,311,476 $ 13,006,130 $ 18,440,487 $ 24,604,363
Cost of Revenue 7,879,957 8,284,746 16,144,823 19,471,494
------------ ------------ ------------ ------------
Gross margin $ 3,431,519 $ 4,721,384 $ 2,295,664 $ 5,132,869
============ ============ ============ ============
Net (loss) earnings from continuing operations $ (870,188) $ (244,031) $ (2,262,900) $ (224,614)
Discontinued Operations:
(Loss) earnings from discontinued
operations, net of tax 304,051 262,332 (122,110) (382,066)
Estimated loss on disposal, net of tax
------------ ------------ ------------ ------------
Net (loss) earnings $ (566,137) $ 18,301 $ (2,385,010) $ (606,680)
============ ============ ============ ============
Net earnings per common share - basic
and assuming dilution $ (0.06) $ -- $ (0.26) $ (0.06)
</TABLE>
F-24
<PAGE> 51
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
NO. DESCRIPTION REFERENCE
--- ----------- ---------
<S> <C> <C>
3.1 Articles of Incorporation of Simula, Inc., as amended and restated.......................... (4)
3.2 Bylaws of Simula, Inc., as amended and restated............................................. (1)
4.2 Indenture dated December 17, 1993, as amended............................................... (2)
4.5 Supplemental Indenture No. 2 dated September 12, 1996, entered into in connection with the
Company's issuance of Series C 10% Senior Subordinated Convertible Notes.................... (6)
4.6 Supplemental Indenture No.3, effective March 14, 1997, amending the Indenture of
Simula, Inc. dated December 17, 1993........................................................ (7)
4.7 Indenture dated April 1, 1997, in connection with the Company's issuance of the 8% Senior
Subordinated Convertible Notes due May 1, 2004.............................................. (7)
10.11 1992 Stock Option Plan, as amended effective September 15, 1998............................. (10)
10.12 1992 Restricted Stock Plan.................................................................. (1)
10.21 1994 Stock Option Plan, as amended effective September 15, 1998............................. (10)
10.24 Senior Credit Agreement with Bank One, Arizona, N.A. and Imperial Bank, Arizona dated
November 6, 1998............................................................................ (10)
*10.25 Modification Agreement with Bank One, Arizona, N.A. and Imperial Bank, Arizona dated
February 12, 1999
10.26 Simula, Inc. Employee Stock Purchase Plan................................................... (4)
10.29 Form of Change of Control Agreements, as amended and restated, between the Company and
Donald W. Townsend, Bradley P. Forst, James A. Saunders, Donald Rutter, and Randall L.
Taylor ..................................................................................... (9)
10.30 Form of Employment Agreements between the Company and Donald W. Townsend, Bradley P.
Forst, James A. Saunders, and Randall L. Taylor............................................ (8)
18. Preference Letter re: change in accounting principles....................................... (5)
21. Subsidiaries of the Company................................................................. (8)
+24. Powers of Attorney - Directors.............................................................. (8)
*27. Financial Data Schedule
</TABLE>
- ----------
* Filed herewith.
+ Powers of Attorney of James A. Saunders and Lon A. Offenbacher filed herewith.
All other Powers of Attorney filed as noted.
(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 Registration Statement on Form SB-2, No. 33-61028 under the
Securities Act of 1933, effective December 10, 1993.
(3) Filed with Registration Statement on Form SB-2, No. 33-87582, under the
Securities Act of 1933, effective December 28, 1994.
(4) Filed with Definitive Proxy on May 14, 1996, for the Company's Annual
Meeting of Shareholders held on June 20, 1996.
(5) Filed with report on Form 10-Q/A for the quarter ended June 30, 1996.
(6) Filed with report on Form 10-K for the year ended December 31, 1996.
(7) Filed with registration Statement on Form S-3, No. 333-13499, under the
Securities Act of 1993, effective April 24, 1997.
(8) Filed with report on Form 10-K for the year ended December 31, 1997.
(9) Filed with report on Form 10-Q for the quarter ended March 31, 1998.
(10) Filed with report on Form 10-Q for the quarter ended September 30, 1998.
<PAGE> 1
Exhibit 10.25
MODIFICATION AGREEMENT
BY THIS MODIFICATION AGREEMENT (the "Agreement"), made and entered into
as of the 12th day of February, 1999, BANK ONE, ARIZONA, NA, a national banking
association, as administrative agent for the Banks (as hereinafter defined) (the
"Administrative Agent"), and SIMULA, INC., an Arizona corporation (the
"Company"), all present and future Subsidiaries of the Company (with the
Company, the "Borrower"), in consideration of the mutual covenants herein
contained and other good and valuable consideration, the receipt and sufficiency
of which is hereby acknowledged, hereby confirm and agree as follows:
RECITALS:
A. Borrower, the Administrative Agent, the Issuing Bank and the "Banks"
named therein entered into that Senior Credit Agreement dated November 6, 1998
to provide financial accommodations to the Borrower as provided therein (as
modified from time to time, the "Senior Credit Agreement").
B. Borrower and the Administrative Agent, with the consent of the Banks
and the Issuing Bank, desire to modify the Senior Credit Agreement as set forth
herein.
C. All undefined capitalized terms used herein shall have the meaning
given them in the Senior Credit Agreement.
AGREEMENT:
SECTION 1. ACCURACY OF RECITALS.
Borrower acknowledges the accuracy of the Recitals.
SECTION 2. MODIFICATIONS OF LOAN DOCUMENTS; OTHER AGREEMENTS.
2.1 The following definitions in Section 1.1 of the Senior Credit
Agreement are hereby amended to read as follows:
"Discontinued Operations" means the railcar seat operations
conducted by the Company's Subsidiaries known as Artcraft Industries
Corp. and Coach and Car Equipment Corp.
"EBITDA" means Net Income, plus the sum of all interest
expense, depreciation and amortization deducted in computing such Net
Income, less any debt service on Subordinated Debt, all calculated as
follows:
<PAGE> 2
(i) for the fiscal quarter ending March 31, 1999, the
EBITDA for said fiscal quarter multiplied by 4;
(ii) for the six month fiscal period ending June 30,
1999, the EBITDA for said period multiplied by 2;
(iii) for the nine month fiscal period ending
September 30, 1999, the EBITDA for said period multiplied by
1.33; and
(iv) thereafter, the EBITDA for the prior four fiscal
quarters, using a rolling four quarter period;
provided, however, that any losses recorded due to the Discontinued
Operations shall be disregarded in the calculation of Net Income.
"Imperial" means IMPERIAL BANK, a California banking
corporation, successor by merger to IMPERIAL BANK ARIZONA, an Arizona
banking corporation.
"Interest Period" means:
(a) For each LIBOR Based Rate RLC Advance, the period
commencing on the date of such LIBOR Based Rate RLC Advance
and ending on the last day of the period selected by Borrower
pursuant to the provisions herein and, thereafter, each
subsequent period commencing on the date after the last day of
the immediately preceding Interest Period and ending on the
last day of the period selected by Borrower pursuant to the
provisions herein. The duration of each Interest Period shall
be one month, two months or three months, as selected by
Borrower (A), for a new RLC Advance, in the request for a
LIBOR Based Rate RLC Advance or (B), for an outstanding RLC
Advance, in the request for a LIBOR Based Rate RLC Advance to
continue bearing interest at the LIBOR Based Rate or (C), for
an outstanding Variable Rate RLC Advance, in the request to
convert to a LIBOR Based Rate RLC Advance; provided, however,
that:
(i) Interest Periods commencing on the same
date shall be of the same duration;
(ii) Whenever the last day of any Interest
Period would otherwise occur on a day other than a
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<PAGE> 3
Business Day, the last day of such Interest Period
shall be extended to occur on the next succeeding
Business Day, provided that if such extension would
cause the last day of such Interest Period to occur
in the next following calendar month, the last day of
such Interest Period shall occur on the next
preceding Business Day; and
(iii) No Interest Period with respect to any
RLC Advance shall extend beyond the RLC Maturity
Date.
(b) For each LIBOR Based Rate Term Portion, one
month, commencing on the first day of each month and ending on
the last day of each month; provided, however, that no
Interest Period shall extend beyond the Term A Maturity Date
or the Term B Maturity date, as applicable.
"LIBOR Based Rate" means the rate per annum equal to the sum
of (i) the LIBOR Based Rate Factor per annum in effect, and (ii) the
rate per annum obtained by dividing (A) the offered rate for United
States dollar deposits of not less than $1,000,000.00 for a period of
time equal to each Interest Period as of 11:00 A.M. City of London,
England time as to the RLC two London Business Days prior to, and as to
the Term Loans, the first date of each Interest Period as shown on the
display designated as "British Bankers Assoc. Interest Settlement
Rates" on the Telerate System ("Telerate"), Page 3750 or Page 3740, or
such other page or pages as may replace such pages on Telerate for the
purpose of displaying such rate; provided, however, that if such rate
is not available on Telerate then such offered rate shall be otherwise
independently determined by the Administrative Agent from an alternate,
substantially similar independent source available to the
Administrative Agent or shall be calculated by the Administrative Agent
by a substantially similar methodology as that theretofore used to
determine such offered rate in Telerate, by (B) a percentage equal to
one hundred percent (100%) minus the Eurodollar Rate Reserve Percentage
for the period equal to such Interest Period. "London Business Day"
means any day other than a Saturday, Sunday or a day on which banking
institutions are generally authorized or obligated by law or executive
order to close in the City of London, England. The LIBOR Based Rate
will change to the extent of any change in the LIBOR Based Rate Factor.
The LIBOR Based Rate Factor shall be recalculated ninety (90) days
after the end of the final fiscal quarter of each fiscal year, and
sixty (60) days after the end of each other fiscal quarter, based on
the EBITDA Ratio for the prior fiscal quarter.
"LIBOR Based Rate Factor" means until the Pricing Adjustment
Date 3.50%, and thereafter:
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<PAGE> 4
(a) 1.50% if the EBITDA Ratio is less than or equal
to 1.0 to 1.0.
(b) 1.75% if the EBITDA Ratio is less than or equal
to 1.5 to 1.0, but greater than 1.0 to 1.0.
(c) 2.0% if the EBITDA Ratio is less than or equal to
2.0 to 1.0, but greater than 1.5 to 1.0.
(d) 2.25% if the EBITDA Ratio is less than or equal
to 2.5 to 1.0, but greater than 2.0 to 1.0.
(e) 2.5% if the EBITDA Ratio is less than or equal to
3.0 to 1.0, but greater than 2.5 to 1.0.
"LIBOR Based Rate Term Portion" means any portion of a Term
Loan that at any time bears interest at a LIBOR Based Rate.
"NIDA" means Net Income plus the sum of all depreciation and
amortization deducted in computing such Net Income, less any income
taxes paid in cash, all calculated as follows:
(i) for the fiscal quarter ending March 31, 1999,
the NIDA for said fiscal quarter multiplied by 4;
(ii) for the six month fiscal period ending June
30, 1999, the NIDA for said period multiplied by 2;
(iii) for the nine month fiscal period ending
September 30, 1999, the NIDA for said period multiplied by
1.33; and
(iv) thereafter, the NIDA for the prior four
fiscal quarters, using a rolling four quarter period;
provided, however, that any losses recorded due to the Discontinued
Operations shall be disregarded in the calculation of Net Income.
"RLC Commitment" means Twenty-Six Million And No/100 Dollars
($26,000,000.00) until the RLC Adjustment Date, after which it means
Twenty Million And No/100 Dollars ($20,000,000.00).
-4-
<PAGE> 5
"Term B Loan Commitment" means Two Million Five Hundred
Thousand And No/100 Dollars ($2,500,000.00).
"Variable Rate Factor" means until the Pricing Adjustment Date
1.0%, and thereafter:
(a) 0% if the EBITDA Ratio is less than or equal to
2.5 to 1.0;
(b) 0.25% if the EBITDA Ratio is less than 3.0 to
1.0, but greater than 2.5 to 1.0.
2.2 Section 1.1 of the Senior Credit Agreement is hereby amended by the
addition of the following definitions:
"Accounts Receivable" means, as of any date, accounts
receivable of Borrower on a consolidated basis.
"Compliance Date" means that date by which no Event of Default
shall be outstanding and Borrower shall be in compliance with all
Original Financial Covenants, calculated using a rolling four quarter
period.
"Discontinued Operations Sale Date" means that date by which
Borrower shall have sold its Discontinued Operations in accordance with
Section 7.19.
"Eligible Account Receivable" means an amount owing to
Borrower, as determined by the Administrative Agent in its sole and
absolute discretion, which has arisen from the delivery and/or shipment
of products previously made and from services rendered for which an
invoice has been issued by Borrower to its customer ("Customer") (a)
which amount is not subject to any offset, counterclaim or defense
asserted by the Customer, (b) which amount is subject to a perfected
security interest in favor of the Administrative Agent on behalf of the
Banks and is not subject to any other security interest, lien, claim or
encumbrances, and (c) which amount is not an uninsured amount owing
from a Customer located in a foreign country.
"Eligible Inventory" means the inventory of Borrower
(consisting of raw materials, work in progress, and finished goods), as
determined by the Administrative Agent in its sole and absolute
discretion, to be (a) in good condition and salable in the ordinary
course of Borrower's business, (b) owned by Borrower free and clear of
any mortgages, liens, security interests, claims, encumbrances or
rights of others, excepting only the security interests in favor of the
Administrative Agent on behalf of the Banks, (c) located in the United
States of America at a location identified in a Security Agreement, (d)
subject to a perfected security interest in favor of the Administrative
Agent on behalf of the Banks, (e) not subject to any consignment to any
customer, and
-5-
<PAGE> 6
(f) not acquired by Borrower in or as part of a bulk transfer of sale
or assets unless Borrower has complied with all applicable bulk sales
or bulk transfer laws.
"Original Financial Covenants" means those "Financial
Covenants" as defined in the Senior Credit Agreement prior to any
modification thereof.
"Pledge Agreement": See Section 4.1(c).
"Pricing Adjustment Date" means that date by which both the
RLC Adjustment Date and the Compliance Date shall have occurred.
"Rail Credit Fee": See Section 3.2(d).
"Reporting Period" means each month and fiscal quarter until
the Compliance Date and thereafter each fiscal quarter.
"RLC Adjustment Date" means the earliest of (i) July 31, 1999,
(ii) the Discontinued Operations Sale Date, or (iii) the date on which
the aggregate outstanding principal balance of the RLC is reduced to a
balance below $20,000,000.00 by Borrower from funds obtained by it from
a junior capital source.
"RLC Borrowing Base" means the amount, from time to time,
equal to the sum of (i) eighty percent (80%) of the aggregate
consolidated book value of the Eligible Accounts Receivable of
Borrower, (ii) thirty percent (30%) of the aggregate consolidated book
value of the Eligible Inventory of Borrower, and (iii) thirty percent
(30%) of the aggregate Costs and Estimated Earnings in excess of
Billings (as described in the Company's financial statements).
"RLC Borrowing Base Certificate" means a certificate of an
Authorized Officer setting forth a detailed reconciliation of the RLC
Balance against the definitional components of the RLC Borrowing Base,
substantially in the form of Exhibit "A-1" attached hereto signed by an
Authorized Officer.
2.3 Section 2.1 of the Senior Credit Agreement is hereby amended by the
deletion of the following definitions:
Variable Rate Term Loan Advance
Variable Rate Term Portion
2.4 Section 2.1 of the Senior Credit Agreement is hereby amended to
read as follows:
2.1 RLC Commitment. Each Bank agrees, severally but not
jointly, to loan to or for the benefit of Borrower, and Borrower shall
be entitled to draw upon and
-6-
<PAGE> 7
borrow, in the manner and upon the terms and conditions contained in
this Senior Credit Agreement, an amount that shall not exceed that
Bank's Pro Rata Share of the lesser of the RLC Borrowing Base or the
RLC Commitment.
2.5 Section 2.2 of the Senior Credit Agreement is hereby amended to
read as follows:
2.2 Revolving Line.
(a) Subject to the terms and conditions set forth in
this Senior Credit Agreement, each Bank shall provide to
Borrower a revolving line of credit (each, a "RLC"), against
which a Bank shall fund its Pro Rata Share of each RLC Advance
to be made to Borrower, repaid by Borrower, and readvanced to
Borrower, as Borrower may request, and the Issuing Bank shall
issue such Letters of Credit as Borrower shall request, which
may be terminated or repaid by Borrower and reissued provided
that (i) there is no Event of Default under any provision of
this Senior Credit Agreement, (ii) no RLC Advance shall be
made or Letter of Credit issued that would cause the RLC
Balance to exceed the lesser of the RLC Borrowing Base or the
RLC Commitment, (iii) no Bank shall be obligated under any
circumstances to fund an RLC Advance in excess of that Bank's
Pro Rata Share of the requested RLC Advance, (iv) the
aggregate amount of a Bank's funding of the RLC Balance at any
one time outstanding shall not exceed its Pro Rata Share of
the lesser of the RLC Borrowing Base or the RLC Commitment,
and (v) no Letter of Credit shall be issued with a Stated
Expiry Date later than the RLC Maturity Date. The Banks shall
not be obligated to fund their Pro Rata Share of any RLC
Advance if, after giving effect thereto, any of the foregoing
limitations would be exceeded.
(b) The failure of any Bank to fund its Pro Rata
Share of an RLC Advance in accordance with its Pro Rata Share
of the lesser of the RLC Borrowing Base or the RLC Commitment
shall not relieve any other Bank of its several obligations
hereunder, but no Bank shall be liable with respect to the
obligation of any other Bank hereunder.
(c) RLC Advances may be made for the purpose of
providing to Borrower working capital financing or in
connection with a Disbursement under a Letter of Credit. No
RLC Advances shall be made for the purpose of purchasing stock
of the Borrower or refinancing any Subordinated Debt.
-7-
<PAGE> 8
(d) Notwithstanding anything herein to the contrary,
an amount of the RLC Commitment equal to $600,000.00 shall not
be disbursed for any purpose other than to pay the fees, costs
and expenses of the Administrative Agent, the Banks and their
agents (including, without limitation, attorneys' fees and
costs) with respect to the documentation of the Loans, and the
drafting of the Credit Documents and any modification thereof
until the Administrative Agent shall have determined in its
sole discretion that all such amounts have been fully paid.
2.6 Section 2.5 of the Senior Credit Agreement is hereby amended to
read as follows:
2.5 Excess Balance Repayment. There shall be due and payable
from Borrower to the Banks, and Borrower shall immediately repay to the
Banks, without notice or demand, from time to time, any amount by which
the RLC Balance exceeds the lesser of the RLC Borrowing Base or the RLC
Commitment.
2.7 Section 2.10(b) of the Senior Credit Agreement is hereby amended to
read as follows:
(b) Each Letter of Credit shall (i) by its terms be issued in
a Stated Amount; (ii) have a Stated Expiry Date no later than the RLC
Maturity Date; (iii) expire or be terminated by the beneficiary
thereunder on or before its Stated Expiry Date; (iv) not cause the RLC
Balance after the issuance of said Letter of Credit to exceed the
lesser of the RLC Borrowing Base or the RLC Commitment; and (v) not
cause the Outstanding LC Balance after the issuance of said Letter of
Credit to exceed the Maximum LC Commitment.
2.8 Section 2A.3 of the Senior Loan Agreement is hereby amended to read
as follows:
2A.3 Term A Loan. The Term A Loan shall bear interest and be
payable to the Banks upon the terms and conditions contained therein,
which include the following provisions:
(a) Interest shall accrue on the unpaid principal of
the Term A Loan at the LIBOR Based Rate.
(b) Principal shall be due and payable on the Payment
Date in consecutive monthly installments equal to the Principal
Payment, together with interest until the Term A Maturity Date.
(c) All interest shall be computed on the basis of a
360-day year and accrue on a daily basis for the actual number of days
elapsed. No Interest Period shall begin on any day other than a Payment
Date.
-8-
<PAGE> 9
(d) The entire unpaid principal balance, all accrued
and unpaid interest, and all other amounts payable under the Term A
Note shall be due and payable in full on the Term A Maturity Date.
(e) The proceeds of the Term A Loan shall be
disbursed in a single Term A Loan Advance.
(f) [Intentionally left blank.]
(g) Each request for a Term A Loan Advance by the
Borrower shall be irrevocable and binding on Borrower once the request
is received by the Agent and the Agent notifies the Banks of the
request. Prior to the Agent's notice of the request to the Banks,
Borrower may revoke the request. Borrower shall indemnify each Bank
against any cost, loss or expense incurred by any Bank as a result of
Borrower's failure to fulfill, on or before the date specified for a
Term A Loan Advance in any request for a Term A Loan Advance, the
conditions to such Term A Loan Advance set forth herein, including any
cost, loss or expense incurred by reason of the liquidation or
reemployment of deposits or other funds acquired by a Bank to fund such
Term A Loan Advance when such Term A Loan Advance, as a result of such
failure, is not made on the date so specified.
(h) [Intentionally left blank.]
(i) Nothing herein shall be deemed to relieve any Bank from
its obligations to fulfill its Pro Rata Share of the Term A Loan
Commitment hereunder or to prejudice any right which the Agent or the
Borrower may have against any Bank as a result of any default by such
Bank hereunder.
(j) Upon default, including failure to pay upon final
maturity, the Banks, at their option, may also, if permitted under
applicable law, do one or both of the following: (a) increase the
applicable interest rate to the Default Rate, and/or (b) add any unpaid
accrued interest to principal and such sum will bear interest therefrom
until paid at the rate provided herein (including any increased rate).
The interest rate will not exceed the maximum rate permitted by
applicable law.
2.9 Section 2B.3 of the Senior Loan Agreement is hereby amended to read
as follows:
2B.3 Term B Loan. The Term B Loan shall be evidenced by the
Term B Note, and shall bear interest and be payable to the Banks upon
the terms and conditions contained therein, which include the following
provisions:
(a) Interest shall accrue on the unpaid principal of
the Term B Loan at the LIBOR Based Rate.
-9-
<PAGE> 10
(b) Principal shall be due and payable on the Payment
Date in consecutive monthly installments equal to the Principal
Payment, together with interest until the Term B Maturity Date.
(c) All interest shall be computed on the basis of a
360-day year and accrue on a daily basis for the actual number of days
elapsed. No Interest Period shall begin on any day other than a Payment
Date.
(d) The entire unpaid principal balance, all accrued
and unpaid interest, and all other amounts payable under the Term B
Note shall be due and payable in full on the Term B Maturity Date.
(e) Each request for a Term B Loan Advance shall, in
addition to complying with the other requirements in this Senior Credit
Agreement, specify the date and amount of the requested Term B Loan
Advance.
(f) After receiving a request for a Term B Loan
Advance in the manner provided herein, the Administrative Agent shall
promptly, before 11:30 a.m. (Phoenix, Arizona local time) on the date a
Term B Loan Advance is requested, notify each Bank by telephone
(confirmed promptly in writing), telefacsimile or cable of the terms of
such request and such Bank's Pro Rata Share of the requested Term B
Loan Advance. Each Bank shall, before 1:00 p.m. (Phoenix, Arizona local
time) on the date a Term B Loan Advance is to be made as specified in a
request for a Term B Loan Advance, deposit with the Administrative
Agent such Bank's Pro Rata Share of the requested Term B Loan Advance
in immediately available funds. Upon fulfillment of all applicable
conditions set forth herein and after receipt by the Administrative
Agent of such funds, the Administrative Agent shall pay or deliver all
funds so received to the order of Borrower at the principal office of
the Administrative Agent. The failure of any Bank to fund its Pro Rata
Share of any Term B Loan Advance required of it hereunder shall not
relieve any other Bank of its obligation to fund its Pro Rata Share of
any Term B Loan Advance hereunder. If any Bank fails to fund its Pro
Rata Share of the requested Term B Loan Advance and if all conditions
to such Term B Loan Advance have apparently been satisfied, the
Administrative Agent will make available to Borrower the funds received
by it from the other Bank. Neither the Administrative Agent nor any
Bank shall be responsible for the performance by any other Bank of its
obligations hereunder.
Unless the Administrative Agent shall have received
notice from a Bank prior to the date of any Term B Loan Advance that
such Bank will not make available to the Administrative Agent such
Bank's Pro Rata Share of the requested Term B Loan Advance, the
Administrative Agent may assume that such Bank has made such amount
available to the Administrative Agent on the date of such Term B Loan
Advance in accordance with this Section and the Administrative Agent
may, in
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<PAGE> 11
reliance upon such assumption, make available a corresponding amount to
or on behalf of Borrower on such date. If and to the extent any Bank
shall not have so made its Pro Rata Share of the requested Term B Loan
Advance available to the Administrative Agent (the "Term Principal
Shortfall Amount"), Borrower agrees to repay the Term Principal
Shortfall Amount to the Administrative Agent forthwith on demand,
together with interest thereon for each day from (and including) the
date such amount is made available to or on behalf of Borrower to (but
excluding) the date such amount is repaid to the Administrative Agent,
at the rate per annum equal to the rate otherwise applicable to the
Term B Loan Advance in question.
(g) [Intentionally left blank.]
(h) [Intentionally left blank.]
(i) Each request for a Term B Loan Advance by the
Borrower shall be irrevocable and binding on Borrower once the request
is received by the Agent and the Agent notifies the Banks of the
request. Prior to the Agent's notice of the request to the Banks,
Borrower may revoke the request. Borrower shall indemnify each Bank
against any cost, loss or expense incurred by any Bank as a result of
Borrower's failure to fulfill, on or before the date specified for a
Term B Loan Advance in any request for a Term B Loan Advance, the
conditions to such Term B Loan Advance set forth herein, including any
cost, loss or expense incurred by reason of the liquidation or
reemployment of deposits or other funds acquired by a Bank to fund such
Term B Loan Advance when such Term B Loan Advance, as a result of such
failure, is not made on the date so specified.
(j) [Intentionally left blank.]
(k) Nothing herein shall be deemed to relieve any
Bank from its obligations to fulfill its Pro Rata Share of the Term
Loan Commitment hereunder or to prejudice any right which the Agent or
the Borrower may have against any Bank as a result of any default by
such Bank hereunder.
(l) Upon default, including failure to pay upon final
maturity, the Banks at their option, may also, if permitted under
applicable law, do one or both of the following: (a) increase the
applicable interest rate to the Default Rate, and/or (b) add any unpaid
accrued interest to principal and such sum will bear interest therefrom
until paid at the rate provided herein (including any increased rate).
The interest rate will not exceed the maximum rate permitted by
applicable law.
2.10 Section 3.2(a) of the Senior Loan Agreement is hereby amended to
read as follows:
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<PAGE> 12
(a) RLC Non-Use Fee. Borrower agrees to pay the Administrative
Agent for distribution to the Banks pursuant to Section 9A.8 hereof a
quarterly fee (the "RLC Non-Use Fee") in an annualized amount equal to
one percent (1.0%) until the Pricing Adjustment Date, and thereafter
one-half percent (0.5%), of the average daily undrawn balance of the
RLC Commitment during the prior calendar quarterly period. For purposes
of calculating the RLC Non-Use Fee, the Outstanding LC Balance on any
date shall be deemed to have been drawn. The RLC Non-Use Fee shall
initially accrue from the Closing Date and shall be due and payable in
arrears within three (3) Business Days after written notice of such
amount due by the Administrative Agent to Borrower and shall be
non-refundable.
2.11 Section 3.2 of the Senior Loan Agreement is hereby amended by the
addition of the following Paragraph (e):
(e) Rail Credit Fee. Company agrees to pay the Administrative
Agent for distribution to the Banks a monthly fee (the "Rail Credit
Fee") equal to $100,000.00 in advance on the first day of each month,
commencing May 1, 1999 if the Discontinued Operations Sale Date has not
yet occurred and continuing until the Discontinued Operations Sale Date
has occurred. The Rail Credit Fee shall be distributed by the
Administrative Agent as follows: $80,000.00 to Bank One and $20,000.00
to Imperial.
2.12 Section 4.1 of the Senior Credit Agreement is hereby amended by
the addition of the following Paragraph (c):
(c) So long as any Loan is outstanding, Company shall cause
such Loan and Borrower's obligations under this Senior Credit Agreement
to be secured at all times by a valid and effective pledge and
irrevocable proxy security agreement (each, a "Pledge Agreement"), each
duly executed and delivered by Company (or if applicable, by a
Subsidiary), together with the stock related thereto and any other
documents reasonably requested by the Administrative Agent, granting
the Administrative Agent on behalf of the Banks and the Issuing Bank a
valid and enforceable security interest in the stock owned by Company
(or if applicable, by a Subsidiary) of any Subsidiary, subject to no
prior Lien other than Permitted Liens.
2.13 Sections 7.1(a) and (c) of the Senior Credit Agreement are hereby
amended to read as follows:
(a) Consolidated Periodic Statements of the Company. As soon
as available, and in any event within thirty (30) days after the end of
each month until the Compliance Date, within seventy-five (75) days
after the end of the final fiscal quarter of each fiscal year, and
within forty-five (45) days after the end of all other fiscal quarters,
copies of the consolidated balance sheet of the Company as of the end
of the
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<PAGE> 13
applicable Reporting Period, and consolidated statements of income of
the Company for that Reporting Period and for the portion of the fiscal
year ending with such Reporting Period, in each case setting forth in
comparative form the figures for the corresponding period of the
preceding fiscal year, all in reasonable detail and fairly stated and
prepared in accordance with GAAP.
(c) Compliance Certificate of the Company. Within seventy-five
(75) days after the end of the final fiscal quarter of each fiscal
year, and within forty-five (45) days after the end of all other fiscal
quarters, a certificate (the "Compliance Certificate") substantially in
the form of Exhibit "A" attached hereto signed by an Authorized
Officer, (i) stating that a review of the activities of Borrower during
such Reporting Period or year has been made under his/her supervision,
that, as of such date, Borrower has observed, performed and fulfilled
each and every obligation and covenant contained herein and no Event of
Default exists under any of the same or, if any Event of Default shall
have occurred, specifying the nature and status thereof, and stating
that all financial statements delivered to the Banks during the
respective period pursuant to Section 7.1(a) and 7.1(b) hereof, to such
officer's knowledge after due inquiry, fairly present in all material
respects the financial position of the Company and the results of its
operations at the dates and for the periods indicated, and have been
prepared in accordance with GAAP, subject to year end audit and
adjustments, (ii) setting forth in such level of detail as the Banks
shall reasonably require a calculation of the Financial Covenants as of
the end of that fiscal quarter, and (iii) reporting on the profit
status of its principal contracts.
2.14 Section 7.1 of the Senior Credit Agreement is hereby amended by
the addition of the following Paragraph:
(h) RLC Borrowing Base Certificate. No later than thirty (30)
days after the end of each month a fully executed RLC Borrowing Base
Certificate.
2.15 Section 7.19 of the Senior Credit Agreement is hereby amended to
read as follows:
7.19 Discontinued Operations.
(a) Upon its sale of the Discontinued Operations, the
Company shall apply the net proceeds from such sale to the
repayment of the Loans, first to the extent applicable the
RLC, second to the extent applicable the Term B Loan and third
to the extent applicable the Term A Loan.
(b) The Discontinued Operations shall be sold by the
Company no later than July 31, 1999. The net sales price
therefrom
-13-
<PAGE> 14
to be applied to the prepayment of the RLC Loans shall not be
less than $10,000,000.00 unless the Banks otherwise agree in
writing.
(c) Unless the Banks otherwise agree in writing, the
Company shall not invest, directly or indirectly, more than an
additional $1,500,000.00 in cash in the Discontinued
Operations during the 1999 fiscal year.
2.16 Article 7 of the Senior Credit Agreement is hereby amended by the
addition of the following Section 7.20:
7.20 Building Sale. The building located at 10016 South 51st
Street, Phoenix, Arizona shall be sold no later than April 30, 1999. As
a result of such sale, at least $2,000,000 of such sale proceeds shall
be available for, and shall be applied to, the repayment of the Loans,
first to the extent applicable the RLC and thereafter to the other
Loans.
2.17 Section 8.9 of the Senior Credit Agreement is hereby amended to
read as follows:
8.9 Financial Covenants. It will not permit:
(a) Its EBITDA Ratio to be more than 3.5 to 1.0 until
the earlier of July 31, 1999 or the Discontinued Operations
Sale Date, and thereafter 3.0 to 1.0 at the end of any fiscal
quarter.
(b) Its Current Ratio to be less than 1.50 to 1.0 at
the end of any fiscal quarter.
(c) Its Debt Coverage Ratio to be less than 1.75 to
1.0 at the end of any fiscal quarter.
(d) Its Tangible Net Worth Percentage to be less than
fifty percent (50.0%) at the end of any fiscal quarter.
(e) Its Net Income for any two consecutive fiscal
quarters, beginning with the two fiscal quarters ending June
30, 1999, or for any fiscal year beginning with the 1999
fiscal year to be less than zero (i.e. net loss), provided
that any decrease in Net Income resulting from the
Discontinued Operations shall be disregarded in the
calculation of Net Income.
(f) Its EBITDA to be less than $3,000,000.00 for the
fiscal quarter ending March 31, 1999 and $4,000,000.00 for any
fiscal
-14-
<PAGE> 15
quarter thereafter, calculated for each such fiscal quarter
without any annualization adjustment.
2.18 Article 8 of the Senior Credit Agreement is hereby amended by the
addition of the following Section 8.10:
8.10 Use of Senior Bank Debt. Until the latest of the
Discontinued Operations Sale Date, the RLC Adjustment Date and the
Compliance Date, it will not repay or reduce the principal of any
Indebtedness, the payment of which is subordinate to that of the Loans,
or repurchase or redeem any stock of the Company or of any Subsidiary.
2.19 Section 9A.8(a) of the Senior Credit Agreement is hereby amended
to read as follows:
(a) Administrative Agent, upon receipt, shall promptly
distribute in like funds as received to each Bank its Pro Rata Share of
all payments of principal, interest and fees (including without
limitation any Letter of Credit Fees) received by Administrative Agent
on or with respect to the Loans, whether collected from Borrower, or
any security for the Loans, or otherwise, after first deducting any
costs, fees or other charges due Administrative Agent hereunder or
under the Credit Documents, with the exception of (i) the RLC "Non-Use
Fee" of which Imperial shall receive until the Pricing Adjustment Date
three-quarters, and thereafter one-half, of its Pro Rata Share, (ii)
the Termination Fee of which Imperial shall receive a share based on
its share of the Total Commitment, and (iii) any charge for the
administrative expenses of the Issuing Bank in connection with the
Letters of Credit paid by Borrower pursuant to Section 2.12, which
amounts shall be paid to the Issuing Bank.
2.20 Each of the RLC Notes is hereby amended as follows:
(a) The amount of the RLC Note held by Bank One shall be equal
to its Pro Rata Share of the RLC Commitment as shown from time to time
on Schedule 1.1 attached to the Senior Credit Agreement.
(b) The amount of the RLC Note held by Imperial shall be equal
to its Pro Rata Share of the RLC Commitment as shown from time to time
on Schedule 1.1 attached to the Senior Credit Agreement.
2.21 Paragraph A of the Term A Note held by Bank One and Paragraph A of
Exhibit D-2 to the Senior Credit Agreement are each hereby amended to read as
follows:
A. Interest shall accrue on the unpaid principal of the Term A
Loan at the LIBOR Based Rate.
-15-
<PAGE> 16
2.22 Paragraph A of the Term B Note held by Bank One and Paragraph A of
Exhibit D-3 to the Senior Credit Agreement are each hereby amended to read as
follows:
A. Interest shall accrue on the unpaid principal of the Term B
Loan at the LIBOR Based Rate.
2.23 All references in the Term B Note held by Bank One to
"$5,000,000.00" are hereby amended to read "$2,500,000.00."
2.24 Schedule 1.1 of the Senior Credit Agreement is hereby amended to
read as attached hereto.
2.25 Schedule 6.18 of the Senior Credit Agreement is hereby amended to
read as attached hereto.
2.26 Exhibit "A" to the Senior Credit Agreement is hereby amended to
read as attached hereto.
2.27 The reference to "$20,000,000.00" in Section 2(a) of each Security
Agreement is hereby amended to read "$26,000,000.00."
2.28 The reference to "$5,000,000.00" in Section 2(c) of each Security
Agreement is hereby amended to read "$2,500,000.00."
2.29 Each of the Loan Documents is modified to provide that it shall be
a default or an event of default thereunder if Borrower shall fail to comply
with any of the covenants of Borrower herein or if any representation or
warranty by Borrower herein or by any guarantor in any related Consent and
Agreement of Guarantors is materially incomplete, incorrect, or misleading as of
the date hereof.
2.30 Each reference in the Credit Documents to any of the Credit
Documents is hereby amended to be a reference to such document as modified
herein.
SECTION 3. RATIFICATION OF CREDIT DOCUMENTS AND COLLATERAL.
The Credit Documents are ratified and affirmed by Borrower and shall
remain in full force and effect as modified herein. Any property or rights to or
interests in property granted as security in the Credit Documents shall remain
as security for the Loans and the obligations of Borrower in the Credit
Documents.
-16-
<PAGE> 17
SECTION 4. BORROWER REPRESENTATIONS AND WARRANTIES.
Company and each Co-Borrower to the extent applicable represents and
warrants to the Banks:
4.1 No default or event of default under any of the Credit Documents as
modified herein, nor any event, that, with the giving of notice or the passage
of time or both, would be a default or an event of default under the Credit
Documents as modified herein has occurred and is continuing.
4.2 There has been no material adverse change in the financial
condition of Borrower or any other person whose financial statement has been
delivered to the Banks in connection with the Loans from the most recent
financial statement received by the Banks.
4.3 Each and all representations and warranties of Borrower in the
Credit Documents are accurate on the date hereof.
4.4 Borrower has no claims, counterclaims, defenses, or set-offs with
respect to the Loans or the Credit Documents as modified herein.
4.5 The Credit Documents as modified herein are the legal, valid, and
binding obligation of Borrower, enforceable against Borrower in accordance with
their terms.
4.6 Borrower is validly existing under the laws of the State of its
formation or organization and has the requisite power and authority to execute
and deliver this Agreement and to perform the Credit Documents as modified
herein. The execution and delivery of this Agreement and the performance of the
Credit Documents as modified herein have been duly authorized by all requisite
action by or on behalf of Borrower. This Agreement has been duly executed and
delivered on behalf of Borrower.
SECTION 5. BORROWER COVENANTS.
Borrower covenants with the Banks:
5.1 Borrower shall execute, deliver, and provide to the Administrative
Agent such additional agreements, documents, and instruments as reasonably
required by the Banks to effectuate the intent of this Agreement.
5.2 Borrower fully, finally, and absolutely and forever releases and
discharges the Administrative Agent and the Banks and their present and former
directors, shareholders, officers, employees, agents, representatives,
successors and assigns, and their separate and respective heirs, personal
representatives, successors and assigns, from any and all actions, causes of
action, claims, debts, damages, demands, liabilities, obligations, and suits, of
whatever kind or nature, in law or equity of Borrower, whether now known or
unknown to Borrower, and whether contingent or matured, (i) in respect of the
Loans, the Credit Documents, or the actions or omissions of the Administrative
-17-
<PAGE> 18
Agent or the Banks in respect of the Loans or the Credit Documents and (ii)
arising from events occurring prior to the date of this Agreement.
5.3 Borrower agrees to deliver to the Administrative Agent the original
of all shares of stock of each direct and indirect Subsidiary of the Company
including that of Simula Automotive Safety Devices Limited, no later than
February 19, 1999. Failure to do so shall be an Event of Default.
SECTION 6. CONDITIONS PRECEDENT.
The agreements of the Banks and the Administrative Agent and the
modifications contained herein shall not be binding(1) upon the Banks until the
Banks have executed and delivered this Agreement and the Administrative Agent
has received, at Borrower's expense, all of the following, all of which shall be
in form and content satisfactory to the Administrative Agent and shall be
subject to approval by the Administrative Agent:
6.1 An original of this Agreement fully executed by the Borrower and
all Guarantors;
6.2 A modification fee in the amount of $300,000.00 of which
$235,000.00 shall be paid to Bank One and $65,000.00 to Imperial, and an
arrangement fee of $25,000.00 to Bank One;
6.3 An original Pledge and Irrevocable Proxy Security Agreement for
each Subsidiary, fully executed by the Company or if applicable a Subsidiary,
together with executed assignments of the Subsidiary's stock;
6.4 Such resolutions or authorizations and such other documents as the
Administrative Agent may require relating to the existence and good standing of
each Borrower and Guarantor the authority of any person executing this Agreement
or other documents on behalf of each Borrower and Guarantor; and
6.5 Payment of all the internal and external costs and expenses
incurred by the Administrative Agent and the Banks in connection with this
Agreement (including, without limitation, inside and outside attorneys,
appraisal, appraisal review, processing, title, filing, and recording costs,
expenses, and fees).
- --------
(1) The Administrative Agent acknowledges that the effective date of this
Agreement is February 16, 1999.
-18-
<PAGE> 19
SECTION 7. INTEGRATION, ENTIRE AGREEMENT, CHANGE, DISCHARGE, TERMINATION, OR
WAIVER.
The Credit Documents as modified herein contain the complete
understanding and agreement of Borrower and the Banks in respect of the Loans
and supersede all prior representations, warranties, agreements, arrangements,
understandings, and negotiations. No provision of the Credit Documents as
modified herein may be changed, discharged, supplemented, terminated, or waived
except in a writing signed by the parties thereto.
SECTION 8. BINDING EFFECT.
The Credit Documents as modified herein shall be binding upon and shall
inure to the benefit of Borrower and the Banks and their successors and assigns
and the executors, legal administrators, personal representatives, heirs,
devisees, and beneficiaries of Borrower, provided, however, Borrower may not
assign any of its right or delegate any of its obligation under the Credit
Documents and any purported assignment or delegation shall be void.
SECTION 9. CHOICE OF LAW.
This Agreement shall be governed by and construed in accordance with
the laws of the State of Arizona, without giving effect to conflicts of law
principles.
SECTION 10. COUNTERPART EXECUTION.
This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original and all of which together shall constitute one
and the same document. Signature pages may be detached from the counterparts and
attached to a single copy of this Agreement to physically form one document.
DATED as of the date first above stated.
SIMULA, INC., an Arizona corporation
By:/s/Donald Townsend
Name: Donald Townsend
Its: Treasurer
-19-
<PAGE> 1
Exhibit 24
POWER OF ATTORNEY
The undersigned officer and/or director of SIMULA, INC. (the "Company")
does hereby constitute and appoint Bradley P. Forst and Sean K. Nolen with full
power of substitution, my true and lawful attorney and agent, to do any and all
acts and things in my name in the capacity indicated below, and to execute any
and all instruments for me and in my name in the capacities indicated below that
he may deem necessary or advisable to enable the Company to register securities
and comply with the Securities Act of 1933, the Securities Exchange Act of 1934,
and any rules, regulations and requirements of the Securities and Exchange
Commission in connection with periodic reports on Form 3, Form 4, Form 5, or
Form 144, covering such shares of preferred stock, common stock, options,
warrants, or other securities of the Company that I may acquire or dispose of,
including specifically, but not limited to, the power and authority to sign for
me in the capacity indicated below any and all amendments thereto; and I do
hereby ratify and confirm all that Bradley P. Forst or Sean K. Nolen shall do or
cause to be done by virtue hereof.
Dated this 7th day of October, 1998.
/s/James A. Saunders
-----------------------------------------
JAMES A. SAUNDERS
Executive Vice President, Chief Operating
Officer and Director
<PAGE> 2
POWER OF ATTORNEY
The undersigned officer and/or director of SIMULA, INC. (the "Company")
does hereby constitute and appoint Bradley P. Forst with full power of
substitution, my true and lawful attorney and agent, to do any and all acts and
things in my name in the capacity indicated below, and to execute any and all
instruments for me and in my name in the capacities indicated below that he may
deem necessary or advisable to enable the Company to register securities and
comply with the Securities Act of 1933, the Securities Exchange Act of 1934, and
any rules, regulations and requirements of the Securities and Exchange
Commission in connection with periodic reports on Form 3, Form 4, Form 5, or
Form 144, covering such shares of preferred stock, common stock, options,
warrants, or other securities of the Company that I may acquire or dispose of,
including specifically, but not limited to, the power and authority to sign for
me in the capacity indicated below any and all amendments thereto; and I do
hereby ratify and confirm all that Bradley P. Forst shall do or cause to be done
by virtue hereof.
Dated this 1st day of September, 1998.
/s/Lon A. Offenbacher
---------------------------
LON A. OFFENBACHER
Director
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 933
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0
0
<COMMON> 99
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<TOTAL-LIABILITY-AND-EQUITY> 18,570
<SALES> 100,645
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<OTHER-EXPENSES> 24,718
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<INTEREST-EXPENSE> 802
<INCOME-PRETAX> (10,599)
<INCOME-TAX> (3,786)
<INCOME-CONTINUING> (6,813)
<DISCONTINUED> (20,895)
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<NET-INCOME> (27,709)
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