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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
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FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 COMMISSION FILE NO. 1-12410
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SIMULA, INC.
(Exact name of Registrant as specified in its charter)
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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)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (602) 631-4005
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, par value $.01 per share New York Stock Exchange
8% Senior Subordinated Convertible Notes Due 2004 New York Stock Exchange
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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 28, 2000, the number of shares of Common Stock outstanding was
11,103,827 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 $32,809,430.
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 22, 2000
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 "Risks
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. In its
role as a safety technology company, Simula invents, manufactures, and markets
advanced occupant seating and restraint systems installed in air, ground, and
sea transport vehicles for the military, aircraft, and automotive industries.
Simula, Inc. conducts its business through eight wholly-owned operating units.
As used herein, the terms "Company" or "Simula" refer collectively to Simula,
Inc. and its consolidated subsidiaries.
SEGMENTS AND MARKETS OVERVIEW
During 1999 Simula was a holding company for operating units in two
business segments. The Commercial Transportation Products segment includes
technology development, manufacturing and assembly 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.
Financial information about the Company and its segments is found in Item 6, 7,
and 8 of this report.
1999 Recapitalization and Business Realignment
During the period 1999 through early 2000, the Company completed major
steps in recapitalizing the Company to provide additional working capital and
focus the Company on its profitable core businesses. In August, 1999, the
Company completed the sale of its rail seating operation which was reported as a
discontinued operation. On December 31, 1999, the Company obtained a new credit
facility with an asset based lender to replace its existing bank line and issued
$20 million in secured senior notes in a transaction with a private investor. In
December, 1999 the Company entered into an agreement for the sale of the assets
of its operating unit engaged in the commercial airline seating business, for
cash and the assumption of liabilities. This transaction was completed in
January 2000. "See Management's Discussion and Analysis of Financial Results."
Following this recapitalization the remaining operations of the Company
are in the automotive safety and government and defense businesses. Although the
recapitalization and operating results of its rail and airline seating units
resulted in substantial charges on disposition and an operating loss in the
fourth quarter, on a stand-alone basis, the automotive safety and government and
defense businesses were profitable in each quarter of 1999. The Company believes
that the recapitalization will allow Simula to continue to achieve these results
through its focus on these profitable core businesses.
Strategic Repositioning
As part of the changes in 1999, the Company began implementing its
strategic repositioning plan. The first element of this three part plan is to
focus the Company on its core competencies, that is those businesses which
historically have proven capable of operating on a profitable basis and
financial performance. The Company has instituted economic value added
performance metrics to better align its operating results with shareholder
value.
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The second element of the plan is the reduction of costs, particularly fixed
expenses, to ensure positive cash flow. The last element of the repositioning
plan is improving its technology and product development process for new
projects and technologies. This process will systematically introduce new
technologies and shorten technology development and product introduction
timelines.
CORE PRODUCTS AND TECHNOLOGIES
Through its operating divisions and subsidiaries, Simula develops,
manufactures, licenses, and sells products and technologies in six major
categories. The products and technologies are typically developed into a number
of different applications which are provided across a range of markets to
different types of customers:
- Inflatable Restraints - Simula has numerous patented inflatable
restraint devices, embodying technologies and designs that are
significantly different than the conventional airbag, which are
used to protect occupants in automobiles and aircraft. The
products and technologies are used in both military and
commercial markets.
- Seating Systems - The Company has expertise in crash resistant,
energy absorbing, technologies used in protective seating systems
for aircraft pilots and crews. The systems are used principally
in military aircraft but also have commercial applications and
customers.
- Sensors - The Company has developed and patented a variety of
sensors including one used to detect rollover incidents for land
vehicles and another used to detect crash incidents in aircraft.
The sensors trigger the deployment of safety devices, including
inflatable restraints and airbags. The sensors have application
in both commercial and military markets.
- Armor - In connection with its military seating systems, Simula
developed extensive technology and an array of armor products.
Armor in numerous designs is used in military aircraft and land
vehicles. Products are also sold and licensed in the civilian
market, including for vehicles and "body armor" for law
enforcement and similar personnel.
- Polymer Products - Simula sells and licenses a family of
proprietary polymer materials. The materials are transparent,
high impact, and have high optical properties. The materials are
suited for a variety of applications in both military and
commercial markets, including ophthalmic lenses, protective
eyewear, and armor systems.
- Protective Equipment and Parachutes - The Company has patented
designs for state-of-the-art parachutes with numerous competitive
advantages. Parachutes are marketed for pilots in military
branches around the world. Simula also has military customers for
a related set of crew and pilot protective equipment including
inflatable life vests utilizing the Company's inflatable
restraint technology.
COMMERCIAL TRANSPORTATION PRODUCTS SEGMENT
In 1999, the Commercial Transportation Segment included five operating
units in automotive safety, airline seating and airline soft goods, and polymer
materials businesses.
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
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profitable businesses. In 1999, this business benefited significantly from
increased production volumes, manufacturing efficiencies, cost downs and quality
standards and certifications.
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 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 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 resulting in 19 platform awards from 5 OEM's.
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. It deploys as a tubular or curtain-like structure. As a result 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 frontal 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
nineteen platforms for various automakers, that will be delivered for series
production during upcoming model years through 2003. 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
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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 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. 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.
COMMERCIAL AIRCRAFT SYSTEMS
Seating
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.
Through Airline Interiors, the Company entered the commercial airliner
new seating business in 1996. In 1997, 1998, and 1999 the Company made a
substantial investment in ramping up this business. The Company's efforts
resulted in Airline Interiors becoming the first successful entrant into the
airline seating market in 25 years, achieving an estimated 6% worldwide market
share by December 31, 1999. However, the Company never achieved profitable
operations in this business and completed the sale of this operating unit to a
major competitor in January 2000 under an agreement dated December 24, 1999.
Airline Soft Goods
The Company retains its operation which repairs, refurbishes, and
retrofits existing commercial aircraft seats. Services include the supply of
seat components, including upholstery, cushioning, and fire blocking.
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ADVANCED POLYMER MATERIALS
Simula 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 materials and is
negotiating supply contracts with commercial customers in various markets. In
1999, the Company's newest operating unit actively pursued commercialization of
the polymer technology and product manufacturing. In 1999 this unit successfully
aligned with two strategic partners who licensed the material for their markets.
The Company intends to leverage this license portfolio to move up the
distribution channel and manufacture products for other applications.
GOVERNMENT AND DEFENSE SEGMENT
In 1999, the Government and Defense Segment included four operating
units in seating systems, airbag, parachute, sensor, and protective devices
businesses.
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 remains healthy but very
competitive. 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 trend is the
consolidation in the 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
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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.
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 "body armor" products for
personnel, has grown significantly and the Company anticipates it will devote
continuing and additional efforts to increase its market share in both defense
and civilian markets.
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 deflates 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 2000.
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 is the sole source on this Navy
contract.
Information About Government Contracting
As a contractor and subcontractor to the United States government, the
Company is subject to various laws and regulations that are more restrictive
than those applicable to non-government contractors, and many of the Company's
products are governed by rules favoring the government's contractual position.
As a consequence, such contracts may be subject to protest or challenge by
unsuccessful bidders or to termination, reduction, or modification in the event
of changes in government requirements, reductions of federal spending, or other
factors. The Company's government-related revenue has resulted almost
exclusively from firm, fixed-price contracts. Fixed-price contracts involve
certain inherent risks to the Company, including under estimating costs,
problems with new technologies, and economic and other changes that may occur
over the contract period. The accuracy and appropriateness of certain costs and
expenses used to substantiate direct and indirect costs of the Company for the
United States government under both cost-plus and fixed-price contracts are
subject to extensive regulation and
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audit by the Defense Contract Audit Agency ("DCAA") arm of the United States
Department of Defense. The DCAA has the right to challenge the Company's cost
estimates or allocations with respect to such contract.
TECHNOLOGY DEVELOPMENT
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 1999, 1998, and 1997 were approximately $12.0 million, $13.5
million, and $11.8 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 23 patents. In addition, the Company has 16 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 quality assurance. A total of four of the Company's operating units are
ISO certified.
The Company conducts manufacturing operations principally in
metro-Phoenix, Arizona. The Company also has manufacturing operations in
Atlanta, Georgia and Asheville, North Carolina. 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.
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Depending upon the product, the Company typically employs one of four
methods for marketing: (i) direct sales, (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 55% of the Company's total revenue in 1999 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)
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. Sales of the Company's products to all branches of the
United States armed forces represented approximately 10%, 12%, and 13% of the
Company's revenue in 1999, 1998, and 1997, 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
that 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 Automotive Systems, and others, to market and produce the Company's
products.
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.
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.
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BACKLOG
The Company's backlog at December 31, 1999 and 1998 was approximately
$74 million and $121 million, respectively. The backlog at December 31, 1999 and
1998 consisted of approximately $56 million and $62 million, respectively, under
defense contracts and approximately $18 million and $59 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. In the case of
automotive safety devices the backlog only includes anticipated production for
the next 6 months.
EMPLOYEES
The Company had approximately 1,300 full-time employees at its locations
in Arizona, California, Illinois, New York, North Carolina, Georgia, and
Ashington, England through most of 1999, that was reduced to approximately 700
employees after the 1999-2000 business restructuring. 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.
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
The Company's corporate headquarters are located in Phoenix, Arizona.
The Company conducts operations in three U.S. states and in the United Kingdom.
Manufacturing facilities are located in Tempe, Arizona; 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.
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. 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
9
<PAGE> 11
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. In late 1999, the Delaware court similarly stayed the
proceedings pending arbitration. In 1999, the Company commenced an international
arbitration proceeding under the rules of the International Chamber of Commerce.
The arbitration includes the same legal claims as made in the U.S. litigation.
The forum is in Zurich, Switzerland. This arbitration 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 1999 to a
vote of security holders, through the solicitation of proxies, or otherwise.
10
<PAGE> 12
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.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
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
Second Quarter....................................................... 7.81 4.44
Third Quarter........................................................ 7.44 4.81
Fourth Quarter....................................................... 7.38 4.50
2000:
First Quarter........................................................ $ 6.69 $ 3.50
</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, 2000, is estimated to be greater than 2,000. On March 28, 2000, the
closing price of the Common Stock was $4.19 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, 1999. 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,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Income statement data:
Revenue $ 131,392 $ 100,645 $ 67,362 $ 42,125 $ 35,153
Cost of revenue 102,984 85,724 51,781 36,769 20,029
--------- --------- --------- --------- ---------
Gross margin 28,408 14,921 15,581 5,356 15,124
Administrative expenses 26,679 20,421 18,698 15,861 11,847
Restructuring charge 18,377
--------- --------- --------- --------- ---------
Operating (loss) income (16,648) (5,500) (3,117) (10,505) 3,277
Interest expense (7,246) (5,099) (4,173) (1,700) (983)
Other 1,298
--------- --------- --------- --------- ---------
(Loss) income before taxes (23,894) (10,599) (5,992) (12,205) 2,294
Income tax benefit (expense) 8,487 3,786 2,390 5,010 (158)
--------- --------- --------- --------- ---------
(Loss) earnings before discontinued operations,
cumulative effect of change in accounting
principle and extraordinary loss (1) (2) (15,457) (6,813) (3,602) (7,195) 2,136
(Loss) earnings from discontinued
operations (1) (2,320) 62 277 521
Loss on disposal (1) (7,238) (18,576)
Cumulative effect of change in
accounting principle (2) (3,132)
Extraordinary loss on early retirement
of debt (151)
--------- --------- --------- --------- ---------
Net (loss) earnings $ (22,846) $ (27,709) $ (3,540) $ (10,050) $ 2,657
Dividends on preferred stock 280
--------- --------- --------- --------- ---------
Net (loss) earnings available for common
shareholders $ (23,126) $ (27,709) $ (3,540) $ (10,050) $ 2,657
========= ========= ========= ========= =========
PER SHARE AMOUNTS (3):
Earnings per common share - basic:
(Loss) earnings before discontinued operations,
accounting change and extraordinary item $ (1.54) $ (0.69) $ (0.39) $ (0.79) $ 0.26
(Loss) earnings from discontinued operations -- (0.23) 0.01 0.03 0.07
Loss on disposal (0.71) (1.88) -- -- --
Cumulative effect of accounting change -- -- -- (0.36)
Extraordinary loss on early retirement of debt (0.01) -- -- -- --
========= ========= ========= ========= =========
Net (loss) earnings $ (2.26) $ (2.80) $ (0.38) $ (1.12) $ 0.33
========= ========= ========= ========= =========
Earnings per common share - assuming dilution:
(Loss) earnings before discontinued operations,
accounting change and extraordinary item $ (1.54) $ (0.69) $ (0.39) $ (0.79) $ 0.25
(Loss) earnings from discontinued operations -- (0.23) 0.01 0.03 0.06
Loss on disposal (0.71) (1.88) -- -- --
Cumulative effect of accounting change -- -- -- (0.36) --
Extraordinary loss on early retirement of debt (0.01) -- -- -- --
========= ========= ========= ========= =========
Net (loss) earnings $ (2.26) $ (2.80) $ (0.38) $ (1.12) $ 0.31
========= ========= ========= ========= =========
PRO FORMA AMOUNTS (2) (3):
Net earnings $ 194
=========
Earnings per share - basic $ 0.02
=========
Earnings per share - assuming dilution $ 0.02
=========
OTHER DATA:
Research and development
Funded by the Company $ 4,350 $ 3,383 $ 4,394 $ 1,916 $ 1,419
Costs incurred on funded contracts $ 7,642 $ 10,066 $ 7,383 $ 8,588 $ 4,722
</TABLE>
12
<PAGE> 14
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance sheet data:
Assets:
Current assets $ 52,907 $ 62,424 $ 73,409 $ 44,280 $ 29,211
Property and equipment - net 13,947 21,495 18,666 17,462 10,476
Deferred income taxes 33,438 20,550 4,477 1,782 812
Deferred costs 4,898 2,628 3,137 929 6,206
Intangibles - net 1,788 3,452 3,701 3,832 3,758
Other 362 430 498 731 1,800
Net assets of discontinued operations 13,471 13,926 13,166
-------- -------- -------- -------- --------
Total assets $107,340 $110,979 $117,359 $ 82,942 $ 65,429
======== ======== ======== ======== ========
Liabilities:
Current liabilities $ 47,895 $ 45,176 $ 24,754 $ 21,075 $ 8,142
Long-term debt 53,820 47,233 46,963 24,680 11,200
-------- -------- -------- -------- --------
Total liabilities 101,715 92,409 71,717 45,755 19,342
Redeemable convertible preferred stock 2,250
Shareholders' equity (4) 3,375 18,570 45,642 37,187 46,087
-------- -------- -------- -------- --------
Total liabilities and shareholders' equity $107,340 $110,979 $117,359 $ 82,942 $ 65,429
======== ======== ======== ======== ========
</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. In August 1999, the Company
completed the sale of the rail and mass transit operations resulting in
an additional loss upon disposal.
(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 assume the new accounting method is applied retroactively.
(3) 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, 1999, 1998
and 1997 are calculated using only weighted average outstanding shares
of 10,230,720, 9,880,283 and 9,288,416, respectively. Options to
purchase common stock and shares to be issued upon conversion of the
Preferred Stock, 8% Notes and 10% Notes totaling 6,119,039 for the year
ended December 31, 1999 were not used for computing diluted earnings
per share because the result would be anti-dilutive. Options to
purchase common stock and shares to be issued upon conversion of the 8%
Notes and 10% Notes totaling 4,546,065 and 3,896,966 for the years
ended December 31, 1998 and 1997, 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,
1995 is calculated using weighted average shares outstanding of
8,175,300 and earnings per share assuming dilution is calculated
including 401,517 additional shares for stock options and warrants.
(4) The Company has not paid any cash dividends on common stock 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, 1999 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. Except
for the historical information contained herein, this discussion contains
forward looking statements (including statements in the future tense and
statements using the terms "believe," "anticipate," "except," "intend," or
similar terms) which are made pursuant to safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. These forward looking statements
involve risks and uncertainties that could cause the Company's actual results to
differ materially from those discussed herein. See Forward Looking Information
and Risks of the Business.
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 product developments since 1993, the Company became
a supplier of seating systems for rail and other mass transit vehicles and a 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").
In 1993 and 1994, the Company pursued an acquisition strategy designed to
enable the Company to exploit its energy absorption technology within the
commercial airline seating business. In 1993, it acquired an airline passenger
seat reupholstery and refurbishing business, which provided certain FAA
certifications and seat assembly capacity. In 1994, it acquired two competing
companies in the rail and mass transit seating business, which provided large
scale manufacturing capacity synergistic with the airline seating business. In
1996, the Company entered the commercial airline seating market. In 1998, the
Company decided to discontinue its rail and mass transit businesses when its
commercial airline seating business no longer needed the manufacturing capacity
supplied by these operations, and it sold these businesses in 1999. In late 1999
the Company decided to sell its commercial airline seating business to
concentrate on more profitable businesses.
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.
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 18 of the
Notes to Consolidated Financial Statements provides a break down of revenues for
each significant segment of the Company.
14
<PAGE> 16
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,
-------------------------------------------
1999 1998 1997
--------- --------- ---------
(Dollars in Thousands)
REVENUE:
<S> <C> <C> <C>
Commercial Transportation Products $ 83,603 $ 64,749 $ 36,997
Government and Defense 47,588 35,877 30,348
Other 201 19 17
--------- --------- ---------
Total $ 131,392 $ 100,645 $ 67,362
========= ========= =========
GROSS MARGIN:
Commercial Transportation Products $ 14,775 $ 4,141 $ 4,781
Government and Defense 13,432 10,760 10,792
Other 201 20 8
--------- --------- ---------
Total $ 28,408 $ 14,921 $ 15,581
========= ========= =========
ADMINISTRATIVE EXPENSES:
Commercial Transportation Products $ 14,744 $ 9,842 $ 7,207
Government and Defense 10,360 9,225 10,096
Other 1,575 1,354 1,395
--------- --------- ---------
Total $ 26,679 $ 20,421 $ 18,698
========= ========= =========
OPERATING (LOSS)/INCOME:
Commercial Transportation Products $ (18,296) $ (5,701) $ (2,427)
Government and Defense 3,072 1,536 696
Other (1,424) (1,335) (1,386)
--------- --------- ---------
Total $ (16,648) $ (5,500) $ (3,117)
========= ========= =========
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Company defines liquidity as the ability to access cash to meet
operating and capital needs. The Company's primary source of cash in the 1999
period was from financing activities.
The Company's ability to fund working capital requirements and debt service
during the next year will be dependent upon improved cash flow from the
remaining operating units. Following the 1999 restructuring, the remaining
operations have a recent history of profitability and positive cash flow. The
Company has significantly reduced it's working capital needs and believes that
existing availability under its RLC is adequate to fund its operations. The
Company is continuing to work with it's investment banker to address the
September 2000 maturity of the $5.0 million Term Note. The alternatives
currently being considered include repayment of the note through a combination
of cash flow and availability under the RLC, refinance the note through an
expansion of a banking facility or a new note, work with the note holder to
extend the note beyond the current due date until one of the above is
accomplished or strategic asset sales or technology licensing.
Company believes it has sufficient manufacturing capacity, at December 31,
1999, to meet its anticipated future delivery requirements.
The Company may, however, seek to obtain additional capital should demand
for it's 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.
During the fourth quarter of 1999, the Company undertook a
restructuring plan which included the refinancing of its then outstanding bank
debt and certain term notes payable which were maturing. On December 30, 1999
the company executed a Financing Agreement (the "Financing Agreement") with an
asset based lender which provided a $17.0 million Revolving Line of Credit (the
"RLC") and a $5.0 million term note. The proceeds from this financing, together
with the proceeds from the Senior Secured Notes discussed below, were used to
retire the then existing Senior Credit Agreement and two term notes payable to a
bank and to retire $4.3 million of the Company's Senior Subordinated Convertible
Notes. The Company's availability under the RLC is dependent upon the relative
balances of accounts receivable and inventories and each of their relative
advance percentages. The RLC accrues interest payable monthly at the Chase
Manhattan prime rate or LIBOR plus 2.4% based upon the rate selected by the
Company. The RLC matures on December 30, 2003 and renews automatically unless
terminated by either party with 60 days notice prior to each anniversary date of
the agreement. If the Financing Agreement is terminated at any other time, an
early termination fee based upon the outstanding principal under the revolving
line of credit of 1 1/2% during the first year and 3/4% after the first
anniversary and before the second anniversary shall be assessed. At December 31,
1999, the Company had available and outstanding borrowings of $17.0 million and
$12.8 million, respectively.
The Financing Agreement contains covenants that require the maintenance of
certain defined financial ratios and income and limits additional borrowings and
capital expenditures. The Financing Agreement is secured by the assets of the
Company. The $5.0 million term note was retired on February 2, 2000 with
proceeds received from the sale of the Company's airline new seat manufacturing
operation. At December 31, 1999 the Company was in compliance with all covenants
relating to the Financing Agreement.
On December 30, 1999, the Company executed an agreement with an accredited
investor for two Senior Secured Notes in the amounts of $5,000,000 (the "Term
Note A") and $15,000,000 (the "Term Note B") (together the "Term Notes") and a
warrant to purchase 850,000 shares of common stock at $5.00 per share. The
warrant is immediately exercisable and expires in 7 years. The Term Note A
matures on September 30, 2000, accrues interest payable monthly at 15% and
provides for an additional monthly bridge fee of $25,000. The Term Note A may be
redeemed with a 30 day notice at any time without penalty. The Term Note B
matures on June 30, 2003 and provides for cash interest to be paid monthly at
12.25% and interest which is to be capitalized into the note principal balance
at 3% per annum. The Term Note B may be redeemed with a 30 day notice at certain
specified redemption prices plus accrued interest payable to the redemption
date.
The Term Notes contain covenants that require the maintenance of certain
defined financial ratios and income and limits additional borrowings and capital
expenditures. The Term Notes are secured by the assets of the Company. At
December 31, 1999 the Company was in compliance with all covenants relating to
the Term Notes.
In October and December 1999 the Company entered into two separate $1
million Promissory Notes with it's Chairman of the Board of Directors. The notes
bear interest at 12%, and each note provides for a placement fee of $20,000 to
be paid upon maturity or any accelerated repayment of the note. One note was
paid with the proceeds from the Term Notes and the remaining note matures on
December 31, 2003. Voluntary prepayment of the note is prohibited, however, the
note is subject to mandatory prepayment at the option of the holder if all of
the following conditions have been satisfied: (1) The $5,000,000 Senior Secured
Note to the asset based lender has been paid in full; (2) The $5,000,000 Senior
Secured Note to the outside accredited investor has been paid in full; (3) after
giving effect to the mandatory prepayment to be made hereunder, the availability
under the Company's revolving line of credit is not less the $2,000,000.
On March 29, 1999, the Company completed a private placement to an
accredited investor of $7.5 million of the Company's Series A Convertible
Preferred Stock (the "Series A"). The Series A bears 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 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
was initially set at $8.60 per share and was subject to an interim adjustment.
On August 1, 1999 the Conversion Cap was adjusted to $8.04. In addition, the
Conversion Cap is subject to an annual adjustment to the lesser of the then
existing Conversion Cap or 130% of the average of the closing bid price for 20
consecutive trading days immediately proceeding the annual adjustment
anniversary date. 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 Series
A is subject to mandatory redemption at May 1, 2004. The proceeds from this
offering were used to pay down the then existing revolving line of credit.
During 1999 $5.25 million of the Series A plus accrued dividends of $.175
million were exchanged for 1,077,074 shares of the Company's common stock. In
1999, dividends totaling $279,536 were paid on the Series A. At December 31,
1999 $2.25 million of the series A remain outstanding.
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.
With regard to operating units retained by the company, contract receivables,
net of contract advances, increased $3.8 million for the year ended December 31,
1999 principally due to the timing of work performed and the billing provisions
of the related contracts. In addition, trade receivables in the Commercial
Transportation Products segment decreased $1.1 million for the year ended
December 31, 1999 due to the timely collection of amounts due.
Operating activities required the use of $8.8 million of cash during the
year ended December 31, 1999, compared to the use of $19.2 million of cash
during the same period in 1998. Cash used for operating activities in 1999 was
primarily used to fund operating losses and working capital needs of businesses
disposed of during the year. With regard to operating units retained by the
company, cash was utilized primarily to fund contract and trade receivables
noted above.
15
<PAGE> 17
Investing activities required the use of $3.9 million of cash during the
year ended December 31, 1999. Approximately $2.8 million was used for capital
improvements and the amounts were equally split between the two operating
segments. In the second quarter of 1999, the Company sold real property in a
sale and leaseback transaction. The sale generated net cash proceeds of $2.4
million that was used to pay down the revolving line of credit at that time.
Financing activities provided $17.0 million of cash during the year ended
December 31, 1999 with $7.5 million coming from placement of the Series A
Preferred Stock offset partially by $0.1 million in dividends paid thereon, $0.5
million for issuance of common shares, and the balance, $9.1 million coming
from net borrowing after reduction of the revolving line of credit by $4.1
million.
1999 Compared to 1998
Revenue for the year ended December 31, 1999 increased 31% to $131.4
million from $100.6 million for the comparable period in 1998. Commercial
Transportation Products revenue increased 29% or $18.8 million principally as a
result of increased deliveries of ITS, new commercial airliner seats and growth
in the airliner seat refurbishing business. Government and Defense revenue
increased 33% or $11.7 million due to a general increase in ongoing government
contracts.
For the year ended December 31, 1999, gross margin increased 90% to $28.4
million from $14.9 million for the comparable period in 1998. As a percent of
sales, gross margins increased to 22% from 15%. Gross margins for Commercial
Transportation Products increased 257% or $10.6 million and the gross margin
percentage increased to 18% in 1999 from 6% in 1998. Profitability of the new
airliner seating business was seriously impacted in the last six months of 1999
by the Company's efforts to sell the
16
<PAGE> 18
assets of the business. Despite the disruption, gross margin associated with the
production of new airliner seating improved from a negative margin of ($9.9)
million in 1998 to a negative margin of ($2.9) million in 1999. This change
resulted from improved manufacturing efficiency, fewer pre-contract and start-up
costs and fewer new seat design certifications as the business concentrated on
producing to its existing backlog and repeat orders. Gross margins associated
with the Company's airliner seat refurbishing business improved primarily due to
a more experienced work force and efficiencies from higher volumes. The
increased gross margin as a percentage of sales associated with airline seating
products was partially offset by a 2% decline in the gross margin as a
percentage of sales associated with the Company's automotive products. Although
gross margin as a percentage of sales declined in automotive products as the
result of customer sales volume discounts gross margin dollars increased $1.4
million in 1999 due to the realization of increased customer sales. Gross margin
percentages for Government and Defense decreased to 28% in 1999 from 30% for the
comparable 1998 period. The decrease in gross margin percentages at Government
and Defense was primarily due to less external funding on research and
development contracts.
Administrative expenses for the year ended December 31, 1999 increased 31%
to $26.7 million from $20.4 million for the comparable period in 1998. As a
percent of sales, administrative expenses remained at 20%. Commercial
Transportation Products administrative expenses increased $4.9 million or 50%
and as a percentage of sales increased to 18% from 15% primarily due to sales
growth in these businesses. Government and Defense administrative expenses
increased $1.1 million or 12% and is related to the 29% increase in internally
funded research and development expenses to $4.4 million from $3.4 million in
the comparable 1998 period. Government and Defense administrative expenses as a
percentage of sales decreased to 22% from 26% and is attributable to increased
sales. Corporate operating expenses increased $221,000 or 16% as compared to the
comparable period in 1998. This increase is primarily attributable to an
increase in legal expenses principally related to the Company's claim of patent
infringement on its ITS(R).
In December 1999, management of the Company, with the approval of the board
of directors, committed itself to a plan of restructuring and recorded a charge
to income of $18.4 million. The plan of restructuring included a refinancing of
its outstanding bank line of credit and certain term notes and the divestiture
of the Company's new airline seat manufacturing operation. The Company completed
the sale of substantially all the assets of the airline seat manufacturing
operation in January 2000 and closed the operating facility at that time
terminating approximately 300 management and production employees. Total
proceeds from the sale was approximately $21.9 million and included the
assumption of liabilities of approximately $11.6 million and resulted in a loss
on sale of $10.3 million. The remaining restructuring charge is comprised of
severance costs of $1.6 million, $2.5 million related to the abandonment of
leased operating facilities and equipment, $2.3 million related to the write
down to net realizable value for inventory and fixed assets and $1.6 million in
recognition of additional liabilities related primarily to outstanding purchase
order commitments which were non-cancelable. The Company expects cash flow
savings as a result of not having to fund continued operating losses to offset
the cash required in implementing the restructuring plan within the first year.
The airline seat manufacturing operation had sales of $41.9 million, $32.0
million and $ 27.7 million and operating losses of $25.4 million, $14.5 million
and $3.3 million during the years ended 1999, 1998 and 1997, respectively.
Interest expense for the year ended December 31, 1999 increased 42% to $7.2
million from $5.1 million for the comparable period in 1998. This increase was
due to increased borrowings on the Company's bank credit facilities and monthly
penalty charges assessed by the Company's previous lender. These increased
borrowings were made to fund increased working capital needs and acquire fixed
assets necessary to support the growth in revenues.
The effective income tax rate for the year ended December 31, 1999 and 1998
approximated 35%.
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 new commercial airliner seats.
Government and Defense revenue increased 18% or $5.5 million due to a general
increase in ongoing government contracts.
17
<PAGE> 19
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
airliner seating market, a $2.0 million write down of certain inventory used in
the refurbishment of airliner seating which is no longer a significant component
of operations, and costs incurred related to the move of the airliner seating
operations to a new facility which provided for additional capacity. The effect
of the above results in the airliner 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 22% to $5.1
million from $4.2 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.
The effective income tax rate for the year ended December 31, 1998
approximated 35% as compared to 40% 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.
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 Company executed the sale of its rail and mass transit seating
operation on August 31, 1999 under an Asset Purchase and Sale Agreement dated
June 30, 1999, as amended and restated August 31, 1999 and subsequently on
October 21. 1999, a Note Refinancing Agreement was executed. A former director
of the Company wholly owned the acquiring company. Consideration received
consisted of $100,000 cash, assumptions of approximately $4,700,000 in
liabilities and a promissory note for $9,996,000 which matured on October 15,
1999. On October 21, 1999, the parties entered into the Note Refinancing
Agreement which refinanced the note as two separate notes in the amount of
$1,996,000 and $8,118,008 and reflects the capitalization of $118,008 of
interest related to the original note into principal outstanding. The notes each
carry an interest rate of 8 1/2% and mature on October 15, 2004. Interest is
required to be paid quarterly beginning April 2000 on the $1,996,000 promissory
note and semi-annually beginning April 2001 on the $8,118,008 promissory note.
The negotiated interest rate on the notes did not properly reflect the risk and
current market conditions. Therefore, the company has computed the net present
value of the notes using a discount rate of 23%, which is the Company's
determination of the market rate of interest and market value of the notes.
Management believes this more properly reflects the risk related to the notes
due to their subordinated nature. This resulted in a net present value discount
of $6,750,000 assuming principal only payment at the end of the term.
18
<PAGE> 20
The notes are secured by the underlying assets and a Pledge and Proxy Security
Agreement in the stock of the underlying company and stock of Beacon Industries,
Inc. which is owned under common control of the acquirer and subordinated to
short-term capital financing received subsequent to its disposal.
Although a legal transfer of assets occurred at August 31, 1999, the sale
could not be recognized as a divestiture for accounting purposes at that time
because there was an absence of a significant investment in the business by the
buyer. As a result of losses by the rail and mass transit seating operation
since the sale date and the uncertainty of the ultimate recovery of the entire
principal and interest on a timely basis in accordance with the terms of the
contract, a valuation allowance for the remaining balance has been recorded.
This uncertainty is based on the operating losses sustained by the business
subsequent to disposal, its inability to acquire adequate long-term financing
for repayment of the notes under the terms of the contract, or obtain additional
equity investment. While the contract between the parties remains fully
enforceable, and the Company believes some recovery may occur, the company can
not accurately predict the precise timing and amount of the collection of
principal and interest, accordingly the carrying value of the notes is zero. Any
future payments of principal received will be accounted for under the cost
recovery method of accounting as a component of discontinued operations.
Under the Asset Purchase and Sale Agreement the Company has retained the
liability for claims incurred through August 31, 1999 under its self funded
health insurance plan and has agreed to indemnify the acquiring company for any
customary warranty and litigation claims. An additional charge upon the final
disposal of the rail and mass transit discontinued operation of $7,238,109, net
of tax benefit of $3,898,000, was recorded in the year ended December 31, 1999.
Revenues for the rail and mass transit operations were $8,247,294 for the
eight months ended August 31, 1999, and $15,781,983 and $23,059,525 for the
years ended 1998 and 1997, 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.
19
<PAGE> 21
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 $12.0 million in
1999, of which $4.4 million was internally funded.
SEASONALITY
The Company does not believe that it is currently significantly impacted by
seasonal factors.
FORWARD LOOKING INFORMATION AND FINANCIAL TARGETS
The Company believes that in 1999 and early 2000 it successfully addressed
the manufacturing inefficiencies, operating losses, cash flow and liquidity
problems that Simula experienced in recent years. The Company believes that it
has significant competitive advantages based on its current and developing
technologies and products, and that Simula will continue to benefit from its
worldwide recognition as a premier safety technology company. Management
believes the Company is positioned for consistent revenue and earnings growth
during the next five years.
Management estimates that revenues should exceed $100 million in 2000,
earnings should be in the range of $2.5-3.0 million, and EBITDA should exceed
$17.0 million. It is estimated that revenues, earnings, and EBITDA should exceed
$130 million, $6.0 million, and $20 million, respectively, in 2002. By 2004,
management anticipates that the Company's business will have grown substantially
and targets revenues, earnings, and EBITDA in excess of $200 million, $20
million, and $35 million, respectively.
This forward looking information is subject to, and qualified by, the
trends and uncertainties in the Company's business described below and elsewhere
in this Report.
20
<PAGE> 22
RISKS AND UNCERTAINTIES IN THE BUSINESS
Projected operating results 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 cash
flow from operations, availability of funds under its credit agreement, and
extensions or refinancings of certain indebtedness or, potentially, proceeds
from asset sales or licensing. Other factors pertinent to the Company's ability
to meet its current and five year financial projections include its leveraged
status and the level and cost of debt; success in efforts to reduce fixed
expenses and improve cash flows; ability to maintain margins or grow volumes in
its automotive segment; success in building strategic alliances with large prime
contractors and first tier suppliers to OEMs; competition and competitive
pressures on pricing including from first tier supplier partners; customer order
patterns and seasonality; the cyclical nature of the automobile industry and
other markets addressed by the Company's products; the level and makeup of
military expenditures; the costs of legal proceedings; 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; proof of concept and production validation of certain of the Company's
new technologies and proposed products; technological changes; the level of
orders which are received and can be shipped and invoiced in a quarter;
manufacturing capacity and yield; costs of labor, raw materials, supplies, and
equipment; reliability of vendor base, and economic conditions in the United
States and worldwide markets.
As used throughout this report, the words "estimate," "anticipate,"
"expect," "should," "intend," "project," "target," or other expressions that
indicate future events identify forward looking statements which are made
pursuant to safe harbor provisions of the Private Securities Litigation Reform
Act of 1995. Actual results and trends may differ materially. Risks include
those described herein and in the Company's registration statements and periodic
reports filed with the U.S. Securities and Exchange Commission.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company has short-term borrowings supported by a long-term revolving
Financing Agreement which subjects the Company to the risk of loss associated
with movements in market interest rates.
At December 31, 1999, the Company had $12.8 million in short-term
borrowings outstanding and $68.0 million in long-term debt outstanding after
giving effect to the $2.3 million original issue discount. Of the long-term debt
outstanding, $63.0 million is fixed-rate debt and, accordingly, does not expose
the Company to risk of earnings loss due to changes in market interest rates
(see Note 7 to the Company's Consolidated Financial Statements). While the
remaining $5 million of long-term debt was at a variable rate, it's retirement
in February 2000 eliminated any significant exposure to the Company to interest
rate risk. The short-term borrowings of $12.8 million are variable rate
obligations.
If the variable rates were to change by 10% from December 31, 1999, annual
interest expense associated with the variable-rate debt would change by
approximately $108,000, pretax.
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.
21
<PAGE> 23
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.
22
<PAGE> 24
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. The Company reported the disposition of its rail and
mass transit seating business, through the sale of its wholly-owned subsidiary,
Coach and Car Equipment Corporation, with its report on Form 8-K filed effective
October 25, 1999. No financial statements were filed with the report.
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......... (2)
3.2 Bylaws of Simula, Inc., as amended and restated............................ (1)
*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............ (4)
10.11 1992 Stock Option Plan, as amended effective September 15, 1998............ (8)
10.12 1992 Restricted Stock Plan................................................. (1)
10.21 1994 Stock Option Plan, as amended effective September 15, 1998............ (8)
10.26 Simula, Inc. Employee Stock Purchase Plan.................................. (2)
10.29 Form of Change of Control Agreements, as amended, between the Company and
Donald W. Townsend, Bradley P. Forst, and James A. Saunders................ (6)
10.30 Form of Employment Agreements between the Company and Donald W. Townsend,
Bradley P. Forst, and James A. Saunders.................................... (7)
10.32 Employment Agreement between the Company and James C. Dodd dated March 2,
1999....................................................................... (10)
10.33 Change of Control Agreement between the Company and James C. Dodd dated
March 2, 1999.............................................................. (10)
10.37 Simula, Inc. 1999 Incentive Stock Option Plan.............................. (11)
10.38 Amended and Restated Asset Purchase Agreement for the sale of Coach and
Car Equipment Corporation, a wholly-owned subsidiary of the Company, dated
August 31, 1999 and Note Refinancing Agreement dated October 21, 1999...... (12)
10.39 Promissory Note between the Company and Stanley P. Desjardins dated
October 15, 1999 and Guarantees by Don and Nelda Townsend, James and Linda
Saunders and Bradley and Teresa Forst dated November 2, 1999............... (13)
*10.40 Asset Purchase Agreement for the sale of Airline Interiors, Inc., a
wholly-owned subsidiary of the Company, dated December 24, 1999............
*10.41 Financing Agreement with The CIT Group/Business Credit, Inc. dated
December 30, 1999..........................................................
10.42 Securities Purchase Agreement with Levine Leichtman Capital Partners II,
L.P. dated December 31, 1999............................................... (14)
*10.43 Employment Agreement between the Company and Joseph W. Coltman dated
February 1, 2000...........................................................
*10.44 Change of Control Agreement between the Company and Joseph W. Coltman
dated February 1, 2000.....................................................
*10.45 Promissory Note between the Company and Stanley P. Desjardins dated
December 31, 1999, effective December 14, 1999.............................
18. Preference Letter re: change in accounting principles...................... (3)
*21. Subsidiaries of the Company................................................
*23. Independent Auditors' Consent..............................................
+24. Powers of Attorney - Directors............................................. (5)(9)
*27. Financial Data Schedule
</TABLE>
- ----------
* Filed herewith.
+ Power of Attorney of S. Thomas Emerson filed herewith. All other Powers
of Attorney filed as noted.
<PAGE> 25
(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 Definitive Proxy on May 15, 1996, for the Company's Annual
Meeting of Shareholders held on June 20, 1996.
(3) Filed with report on Form 10-Q/A for the quarter ended June 30, 1996.
(4) Filed with Registration Statement on Form S-3/A, No. 333-13499, under
the Securities Act of 1933, effective April 21, 1997.
(5) Filed with report on Form 10-K for the year ended December 31, 1997.
(6) Filed with report on Form 10-Q for the quarter ended March 31, 1998. The
Change of Control Agreements for Messrs. Townsend, Forst and Saunders
are substantially identical and differ materially only in that Mr.
Townsend is entitled to an amount equal to five (5) years base salary
and benefits upon a change of control while Messrs. Forst and Saunders
are entitled to an amount equal to four (4) years base salary and
benefits upon a change of control.
(7) Filed with report on Form 10-Q for the quarter ended March 31, 1998. The
Employment Agreements for Messrs. Townsend, Forst and Saunders are
substantially identical and differ materially only in the following two
respects: (i) the initial term of the agreement with Mr. Townsend is
five (5) years while the initial term of the agreement with Messrs.
Forst and Saunders is three (3) years; and (ii) the post-termination
non-compete period with Mr. Townsend is thirty (30) months while it is
eighteen (18) months with Messrs. Forst and Saunders.
(8) Filed with report on Form 10-Q for the quarter ended September 30, 1998.
(9) Filed with report on Form 10-K for the year ended December 31, 1998.
(10) Filed with report on Form 10-Q for the quarter ended March 31, 1999.
(11) Filed as Appendix A with Definitive Proxy on May 14, 1999, for the
Company's Annual Meeting of Shareholders held on June 17, 1999.
(12) Filed with report on Form 8-K, under the Securities Act of 1933,
effective October 25, 1999.
(13) Filed with report on Form 10-Q for the quarter ended September 30, 1999.
(14) Filed with Schedule 13D, under the Securities Exchange Act of 1934, on
January 10, 2000 effective December 31, 1999 by Levine Leichtman Capital
Partners II, L.P.
<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 April 14, 2000.
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 April 14, 2000
- ------------------------------------
Donald W. Townsend
/s/ James C. Dodd Executive Vice President, Chief April 14, 2000
- ------------------------------------ Financial Officer and Treasurer
James C. Dodd (Principal Financial and
Accounting Officer)
/s/ Bradley P. Forst Executive Vice President, General April 14, 2000
- ------------------------------------- Counsel, Secretary and Director
Bradley P. Forst
/s/ James A. Saunders Executive Vice President, Chief April 14, 2000
- ------------------------------------ Operating Officer
James A. Saunders
* Chairman of the Board of Directors April 14, 2000
- ------------------------------------
Stanley P. Desjardins
* Director April 14, 2000
- ------------------------------------
James C. Withers
* Director April 14, 2000
- ------------------------------------
Robert D. Olliver
* Director April 14, 2000
- ------------------------------------
John M. Leinonen
* Director April 14, 2000
- ------------------------------------
Lon A. Offenbacher
* Director April 14, 2000
- ------------------------------------
S. Thomas Emerson
*By: /s/Bradley P. Forst
-------------------------------
Bradley P. Forst
Attorney-in-Fact
</TABLE>
25
<PAGE> 27
SIMULA, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Independent Auditors' Report........................................................... F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998........................... F-3
Consolidated Statements of Operations for the three years ended December 31, 1999...... F-4
Consolidated Statements of Shareholders' Equity and Comprehensive Income
for the three years ended December 31, 1999...................................... F-5
Consolidated Statements of Cash Flows for the three years ended December 31, 1999...... F-6 to F-7
Notes to Consolidated Financial Statements............................................. F-8 to F-26
</TABLE>
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, 1999 and 1998, and the related
consolidated statements of operations, shareholders' equity and comprehensive
income, and of cash flows for each of the three years in the period ended
December 31, 1999. 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, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999 in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
March 29, 2000
Phoenix, Arizona
F-2
<PAGE> 29
SIMULA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 5,223,236 $ 933,462
Contract and trade receivables - Net 24,756,984 27,113,757
Inventories 7,540,570 26,021,433
Deferred income taxes 2,621,000 3,173,000
Prepaid expenses and other 728,772 601,614
Net assets held for sale 12,036,242 --
Net current assets of discontinued operations -- 4,580,773
------------- -------------
Total current assets 52,906,804 62,424,039
PROPERTY, EQUIPMENT and LEASEHOLD IMPROVEMENTS - Net 13,947,099 21,494,535
DEFERRED INCOME TAXES 33,438,000 20,550,000
DEFERRED FINANCING COSTS 4,897,773 2,627,765
INTANGIBLES - Net 1,788,057 3,452,402
OTHER ASSETS 362,368 430,340
------------- -------------
TOTAL $ 107,340,101 $ 110,979,081
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Revolving line of credit $ 12,751,595 $ 16,900,000
Trade accounts payable 6,104,583 11,028,062
Accrued restructuring costs 6,742,000 --
Other accrued liabilities 8,267,305 7,496,841
Advances on contracts 2,121,232 2,220,737
Current portion of long-term debt 11,908,303 7,530,222
------------- -------------
Total current liabilities 47,895,018 45,175,862
LONG-TERM DEBT - Less current portion 53,820,177 47,233,558
------------- -------------
Total liabilities 101,715,195 92,409,420
REDEEMABLE CONVERTIBLE 6% SERIES A PREFERRED STOCK,
$.05 par value - issued 2,250 shares 2,250,000
-------------
SHAREHOLDERS' EQUITY
Preferred stock, $.05 par value - authorized 50,000,000 shares;
issued 2,250 shares redeemable convertible 6% series A preferred stock
Common stock, $.01 par value - authorized, 50,000,000 shares;
issued 11,103,827 and 9,915,391 111,038 99,154
Additional paid-in capital 59,987,309 51,742,593
Accumulated deficit (56,384,215) (33,452,571)
Accumulated other comprehensive income (339,226) 180,485
------------- -------------
Total shareholders' equity 3,374,906 18,569,661
------------- -------------
TOTAL $ 107,340,101 $ 110,979,081
============= =============
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE> 30
SIMULA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE YEARS ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Revenue $ 131,392,426 $ 100,644,678 $ 67,362,456
Cost of revenue 102,984,129 85,723,846 51,781,020
------------- ------------- -------------
Gross margin 28,408,297 14,920,832 15,581,436
Administrative expenses 26,679,304 20,420,763 18,697,971
Restructuring charge 18,377,239
------------- ------------- -------------
Operating loss (16,648,246) (5,499,931) (3,116,535)
Interest expense (7,246,105) (5,099,194) (4,173,273)
Other income 1,298,026
------------- ------------- -------------
Loss before income taxes, discontinued operations (23,894,351) (10,599,125) (5,991,782)
and extraordinary item
Income tax benefit 8,437,000 3,786,000 2,390,049
------------- ------------- -------------
Loss before discontinued operations and
extraordinary item (15,457,351) (6,813,125) (3,601,733)
Discontinued Operations:
(Loss) earnings from discontinued operations, net
of the related income tax benefit (expense) of
$1,276,000 and ($126,000) (2,319,388) 62,207
Estimated loss on disposal, net of the
related income tax benefit of $3,898,000 and
$10,224,000 (7,238,109) (18,576,000)
Extraordinary loss on early retirement of debt,
net of the related income tax benefit of $81,000 (151,295)
------------- ------------- -------------
Net loss (22,846,755) (27,708,513) (3,539,526)
Dividends on preferred stock 279,536
------------- ------------- -------------
Net loss available for common shareholders $ (23,126,291) $ (27,708,513) $ (3,539,526)
============= ============= =============
(Loss) earnings per common share - basic and diluted:
(Loss) earnings before discontinued operations and
extraordinary loss $ (1.54) $ (0.69) $ (0.39)
(Loss) earnings from discontinued operations -- (0.23) 0.01
Estimated loss on disposal (0.71) (1.88)
Extraordinary loss on early extinguishment of debt (0.01)
------------- ------------- -------------
Net loss $ (2.26) $ (2.80) $ (0.38)
============= ============= =============
</TABLE>
F-4
<PAGE> 31
SIMULA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
THREE YEARS ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
Additional Accumulated
Common Stock Paid-In (Deficit)
Shares Amount Capital Earnings
------ ------ ------- --------
<S> <C> <C> <C> <C>
BALANCE, January 1, 1997 8,992,598 $ 89,926 $39,031,453 $ (1,966,296)
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 options exercised 433,000
Currency translation adjustment
---------- -------- ----------- ------------
BALANCE, December 31, 1997 9,850,832 98,508 51,109,830 (5,505,822)
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
---------- -------- ----------- ------------
BALANCE, December 31, 1998 9,915,391 99,154 51,742,593 (33,452,571)
Net loss (22,846,755)
Issuance of common shares 111,362 1,114 1,538,362
Conversion of redeemable convertible
Series A Preferred Stock and
accrued dividends thereon 1,077,074 10,770 4,382,354
Preferred Stock dividends (279,536)
Minimum pension liability adjustment 194,647
Warrants Issued 2,300,000
Tax benefit from options exercised 24,000
Currency translation adjustment
---------- -------- ----------- ------------
BALANCE, December 31, 1999 11,103,827 $111,038 $59,987,309 $(56,384,215)
========== ======== =========== ============
</TABLE>
<TABLE>
<CAPTION>
Accumulated Total
Other Comprehensive Shareholders' Comprehensive
Income Equity Income
---------- ------ ------
<S> <C> <C> <C>
BALANCE, January 1, 1997 $ 32,414 $37,187,497
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) (92,524)
--------- ----------- ------------
BALANCE, December 31, 1997 (60,110) 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 240,595 240,595 240,595
--------- ----------- ------------
BALANCE, December 31, 1998 180,485 18,569,661 $(26,538,154)
============
Net loss (22,846,755) $(22,846,755)
Issuance of common shares 1,539,476
Conversion of redeemable convertible
Series A Preferred Stock and
accrued dividends thereon 4,393,124
Preferred Stock dividends (279,536) (279,536)
Minimum pension liability adjustment 194,647 194,647
Warrants Issued 2,300,000
Tax benefit from options exercised 24,000
Currency translation adjustment (519,711) (519,711) (519,711)
--------- ----------- ------------
BALANCE, December 31, 1999 $(339,226) $3,374,906 $(23,451,355)
========= =========== ============
</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, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows used for operating activities:
Net loss $ (22,846,755) $ (27,708,513) $ (3,539,526)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 5,807,563 4,646,531 3,505,328
Deferred income taxes (12,442,000) (15,314,000) (2,262,000)
Currency translation adjustment (519,711) 240,595 (92,524)
Provision for loss on disposal of
discontinued operations 11,136,109 28,800,000
Restructuring Charge 18,326,819
Write down of trade accounts receivable 1,290,394
Gain on sale of property (385,349) (1,298,026)
Loss on early extinguishment of debt 232,295
Changes in net assets and liabilities:
Contract and trade receivables, net of advances (5,515,796) (3,159,038) (8,628,705)
Inventories 431,069 (2,249,003) (10,868,627)
Income taxes receivable 942,665
Prepaid expenses and other (127,158) 733,752 374,448
Deferred costs (229,758)
Other assets 67,972 67,485 233,462
Net assets of discontinued operations (4,398,565) (7,635,772) (628,900)
Trade accounts payable 294,143 1,195,854 3,389,723
Other accrued liabilities (161,662) 1,436,789 2,317,844
------------- ------------- -------------
Net cash used by operating activities (8,810,632) (19,175,078) (16,554,838)
------------- ------------- -------------
Cash flows used for investing activities:
Purchase of property and equipment (2,800,376) (6,188,725) (7,980,581)
Proceeds from sale of property and equipment 2,980,717 6,100,000
Costs incurred to obtain intangibles (4,099,284) (235,273) (326,796)
------------- ------------- -------------
Net cash used by investing activities (3,918,943) (6,423,998) (2,207,377)
------------- ------------- -------------
Cash flows from financing activities:
Net (repayments) borrowings under line of credit (4,148,405) 16,900,000 (6,900,000)
Issuance of 9-1/2% notes - net of expenses 962,054
Issuance of 8% notes - net of expenses 31,186,226
Borrowings under other debt arrangements 27,160,631 7,569,081 4,895,636
Principal payments under other debt arrangements (13,895,931) (8,889,037) (4,412,275)
Issuance of common shares - net of expenses 507,355 623,409 2,060,918
Issuance of preferred shares - net of expenses 7,500,000
Preferred stock dividends (104,301)
------------- ------------- -------------
Net cash provided by financing activities 17,019,349 17,165,507 26,830,505
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents 4,289,774 (8,433,569) 8,068,290
Cash and cash equivalents at beginning of year 933,462 9,637,031 1,298,741
------------- ------------- -------------
Cash and cash equivalents at end of year $ 5,223,236 $ 933,462 $ 9,637,031
============= ============= =============
</TABLE>
F-6
<PAGE> 33
SIMULA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Interest paid $7,587,792 $5,534,092 $3,284,192
========== ========== ==========
Taxes paid $ 36,513 $ 41,200 $ 125,900
========== ========== ==========
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
In 1999, $5,250,000 of Series A Preferred
Stock plus accrued dividends of $175,234
were exchanged for 1,077,074 shares of
common stock.
Tax benefits from exercise of stock options $ 24,000 $ 10,000 $ 433,000
========== ========== ==========
In 1997, $9,550,000 of Series C 10% Senior
Subordinated Convertible Notes and accrued
interest of $475,548 less deferred net
issuance costs of $432,507 were exchanged
for 679,633 shares of common stock. $9,593,041
==========
Property and equipment acquired under capital leases $ 396,411
==========
</TABLE>
F-7
<PAGE> 34
SIMULA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1999
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. The Company periodically
reviews for changes in circumstances to determine whether there are
conditions that indicate that the carrying amount of such assets may
not be recoverable. If such conditions are deemed to exist, the Company
will determine whether estimated future undiscounted cash flows are
less than the carrying amount of such assets, in which case the
F-8
<PAGE> 35
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 7 to 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, 1999, 1998 and 1997 are calculated using only weighted average
outstanding shares of 10,230,720, 9,880,283 and 9,288,416,
respectively. Options to purchase common stock and shares to be issued
upon conversion of the Preferred Stock, 8% Notes and 10% Notes totaling
6,119,039 for the year ended December 31, 1999 were not used for
computing diluted earnings per share because the result would be
anti-dilutive. Options to purchase common stock and shares to be issued
upon conversion of the 8% Notes and 10% Notes totaling 4,546,065 and
3,896,966 for the years ended December 31, 1998 and 1997, respectively
were not used for computing diluted earnings per share because the
result would be anti-dilutive.
j. New accounting pronouncements - 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 (as amended) is effective for the fiscal year
ending 2001. The Company has not completed evaluating the effects this
statement will have on its financial position or results of operations.
2. 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.
F-9
<PAGE> 36
At December 31, receivables include the following:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
United States Government:
Billed receivables $ 3,137,800 $ 1,702,085
Costs and estimated earnings in excess of billings 5,577,074 6,366,253
------------ ------------
Total United States Government 8,714,874 8,068,338
------------ ------------
Other contracts:
Billed receivables 4,135,118 3,171,740
Costs and estimated earnings in excess of billings 6,910,775 4,624,648
------------ ------------
Total other contracts 11,045,893 7,796,388
------------ ------------
Other trade receivables 5,196,217 11,449,031
Less allowance for doubtful accounts (200,000) (200,000)
------------ ------------
Contract and trade receivables - net $ 24,756,984 $ 27,113,757
============ ============
</TABLE>
3. INVENTORIES
At December 31, inventories consisted of the following:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Raw Materials $ 5,101,426 $15,581,952
Work-in-process 1,967,397 9,077,849
Finished goods 471,747 1,361,632
----------- -----------
Total inventories $ 7,540,570 $26,021,433
=========== ===========
</TABLE>
4. PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
At December 31, property, equipment and leasehold improvements consisted of the
following:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Land $ 816,888 $ 1,603,870
Buildings and leasehold improvements 2,061,674 4,120,501
Equipment 21,931,912 26,295,766
------------ ------------
Total 24,810,474 32,020,137
Less accumulated depreciation and amortization (10,863,375) (10,525,602)
------------ ------------
Property, equipment and leasehold improvements - net $ 13,947,099 $ 21,494,535
------------ ------------
</TABLE>
F-10
<PAGE> 37
5. INTANGIBLES
At December 31 intangibles consisted of the following:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Patents and licenses $ 1,570,385 $ 1,245,270
Other 783,963 783,968
Covenants not to compete -- 2,489,356
Goodwill -- 1,059,553
----------- -----------
Total 2,354,348 5,578,147
Less accumulated amortization (566,291) (2,125,745)
=========== ===========
Intangibles - net $ 1,788,057 $ 3,452,402
=========== ===========
</TABLE>
6. REVOLVING LINE OF CREDIT
On December 30, 1999, the Company executed a Financing Agreement with an
asset based-lender which provided for a $17,000,000 revolving line of credit
and a $5,000,000 Senior Secured term note payable. The proceeds received from
this financing together with the proceeds received from the Senior Secured Notes
discussed below, were utilized primarily to replace the Company's then revolving
line of credit and two term notes payable with a bank and retire $4,250,000 of
the Company's 10% Senior Subordinated Convertible Notes (the "10% Notes").
The Company's availability under the revolving line of credit is dependent
upon the relative balances of accounts receivable and inventories and each of
their relative advance percentages. The revolving line of credit accrues
interest at the Chase Manhattan prime rate or LIBOR plus 2.4% based upon the
rate selected by the Company and matures December 30, 2003 and renews
automatically unless terminated by either party with proper notice. The
outstanding balance under this line of credit was $12,751,595 and the average
interest rate was 8.5% at December 31, 1999.
The Financing Agreement contains covenants that require the maintenance of
certain defined financial ratios and income and limits additional borrowings and
capital expenditures. The Company was in compliance with all of these covenants
at December 31, 1999. The Financing Agreement may be terminated with 60 days
notice prior to each anniversary date of the agreement at no additional cost. If
the Financing Agreement is terminated at any other time, an early termination
fee based upon the outstanding principal under the revolving line of credit of
1 1/2% during the first year and 3/4% after the first anniversary and before
the second anniversary shall be assessed. The Financing Agreement is secured by
the assets of the Company.
F-11
<PAGE> 38
7. LONG-TERM DEBT
Long-term debt at December 31 consisted of the following:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
8% Senior Subordinated Convertible Notes $ 34,500,000 $ 34,500,000
Senior Secured Notes, net of discount of $2,300,000 22,700,000 --
10% Senior Subordinated Convertible Notes -- 4,750,000
9 1/2% Senior Subordinated Notes 3,238,000 3,238,000
Note Payable to Chairman of the Board 2,000,000 --
Various loans payable, secured by property and equipment 1,024,224 10,287,560
Various mortgage notes payable, secured by land and buildings 2,036,789 1,330,944
Obligations under capital leases, interest at 10% (Note 13) 229,467 657,276
------------ ------------
Total 65,728,480 54,763,780
Less current portion (11,908,303) (7,530,222)
------------ ------------
Long-term debt $ 53,820,177 $ 47,233,558
============ ============
</TABLE>
On December 30, 1999, the Company executed agreements with an asset based
lender for a $17,000,000 revolving line of credit (Note 6) and a $5,000,000
Senior Secured Note, and with an accredited investor for two Senior Secured
Notes totaling $20,000,000. Net proceeds under these agreements was $34,831,949
and were used to replace the Company's then outstanding revolving line of credit
and two term notes payable with a bank totaling $29,333,334, retire $4,250,000
the Company's 10% Senior Subordinated Convertible Notes and repay one note
payable to the Chairman of the Board in the amount of $1,000,000. As a result of
the above refinancing, a pre-tax extraordinary charge on early retirement of
debt was recorded for the year ended 1999 related to the write-off of deferred
financing fees of $232,295.
The $5,000,000 Senior Secured term note payable with the asset based lender
was retired on February 2, 2000 with proceeds received from the sale of the
Company's airline new seat manufacturing operation. Two Senior Secured Notes in
the amounts of $5,000,000 (the "Term Note A") and $15,000,000 (the "Term Note
B") (together the "Term Notes") were issued with a warrant to purchase 850,000
shares of common stock at $5.00 per share. The warrant is immediately
exercisable and will expire in 7 years. The Company has recorded an original
issue discount related to the stock warrant of $2,300,000 and shall be amortized
over the term of the underlying notes using the effective interest method. The
Term Note A matures on September 30, 2000, accrues interest payable monthly at
15% and provides for an additional monthly bridge fee of $25,000. The Term Note
A may be redeemed with a 30 day notice at any time without penalty. The Term
Note B matures on June 30, 2003 and provides for cash interest to be paid
monthly at 12.25% and interest which is to be capitalized into the note
principal balance at 3% per annum. The Term Note B may be redeemed with a 30 day
notice at certain specified redemption prices plus accrued interest payable to
the redemption date.
The Term Notes contain covenants that require the maintenance of certain
defined financial ratios and income and limits additional borrowings and capital
expenditures. The Company was in compliance with all of these covenants at
December 31, 1999. The Term Notes are secured by the assets of the Company.
On October 15, 1999, the Company entered into a $1,000,000 Promissory Note
with it's Chairman of the Board of Directors. The note bears interest at 12%,
matures on October 15, 2000, and provides for a placement fee of $20,000 to be
paid upon maturity or any accelerated repayment of the note. In addition, the
note provides for an accelerated maturity in the event the Company completes a
senior credit banking agreement, or a public or private offering of debt or
equity securities for proceeds of $10,000,000 or more.
F-12
<PAGE> 39
'The Company repaid the October 15, 1999 note in full on January 6, 2000 from
the proceeds received from the Senior Secured Notes issued on December 30, 1999
discussed above.
On December 14, 1999, the Company entered into a second $1,000,000
Promissory Note with it's Chairman of the Board of Directors. The note is
unsecured and subordinated to the Company's Senior Secured Notes. The note bears
interest at 12%, matures on December 31, 2003, and provides for a placement fee
of $20,000 to be paid upon maturity. Voluntary prepayment of the note is
prohibited, however, the note is subject to mandatory prepayment at the option
of the holder if all of the following conditions have been satisfied: (1) The
$5,000,000 Senior Secured Note to the asset based lender has been paid in full;
(2) The $5,000,000 Senior Secured Note to an outside accredited investor has
been paid in full; (3) after giving effect to the mandatory prepayment to be
made hereunder, the availability under the Company's revolving line of credit is
not less the $2,000,000.
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% 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 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, 1999.
The aggregate principal payments required after amortization of the
original issue discount for the five years subsequent to December 31, 1999 are:
<TABLE>
<CAPTION>
<S> <C>
2000 $11,908,303
2001 792,114
2002 640,443
2003 19,280,954
2004 34,535,945
Thereafter 870,721
-----------
Total $68,028,480
===========
</TABLE>
F-13
<PAGE> 40
Interest expense for the years ended December 31 is comprised of the
following:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Interest $6,847,559 $5,234,857 $4,342,715
Amortization of deferred financing costs 846,808 801,836 725,147
---------- ---------- ----------
Interest expense $7,694,367 $6,036,693 $5,067,862
========== ========== ==========
</TABLE>
Interest expense allocated to discontinued operations for the years ended
1999, 1998 and 1997 was $448,262, $937,499 and $894,589, respectively.
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,
1999 is approximately $53,653,480.
8. REDEEMABLE CONVERTIBLE PREFERRED STOCK
On March 29, 1999, the Company completed a private placement to an
accredited investor of $7.5 million of the Company's Series A Convertible
Preferred Stock (the "Series A"). Under the terms of this offering the Series A
bears a dividend 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 may be converted into shares of the Company's Common Stock at market
value at any time at 101% of the average closing price of any 15 out of 30
consecutive trading days preceding conversion, up to a specified maximum
conversion price (the "Conversion Cap"). The Conversion Cap for the first twelve
months is $8.60 per share and is subject to an annual adjustment to the lesser
of the then existing Conversion Cap or 130% of the average of the closing bid
prices for 20 consecutive trading days immediately proceeding the annual
adjustment anniversary date. In addition, the first year Conversion Cap was
subject to an interim adjustment on August 1, 1999 and was adjusted on that date
to $8.04 per share. 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.
Series A Preferred Stock is subject to a mandatory redemption of the
remaining outstanding shares on May 1, 2004 at which time the Company is
required to redeem all such shares at the greater of 130% of the preferred stock
stated value plus accrued and unpaid dividends, or the average of the closing
bid prices on the ten consecutive trading days immediately preceding the
redemption date. The holders of the Company's Series A Preferred Stock have the
option to require the company to redeem all or a portion of the Series A
Preferred Stock at a redemption price equal to 105% of the preferred stock
stated value plus accrued and unpaid dividends if the Company consolidates or
merges with or into another company.
During the year ended December 31, 1999, $5,250,000 of Series A Preferred
Stock plus accrued dividends of $175,234 were exchanged for 1,077,074 shares of
the Company's common stock.
9. 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 June 1999, the Company adopted the 1999 Stock Option
Plan which
F-14
<PAGE> 41
reserves up to 2,000,000 shares of common stock for issuance under the Plan.
Options granted under the 1994 and 1999 Plans as of December 31, 1999 were
3,060,488. Information with respect to the Plans is as follows:
<TABLE>
<CAPTION>
OPTION WEIGHTED AVERAGE
SHARES OPTION PRICE
------ ------------
<S> <C> <C>
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 $13.83
Granted 753,900 $ 5.64
Exercised (16,250) $ 5.27
Canceled (34,525) $ 7.08
---------
Outstanding at December 31, 1999 2,991,496
=========
</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 options. As of December
31, 1999, 1998, and 1997, exercisable options were 2,622,345, 1,976,854, and
1,127,304, respectively. The Company resinded certain 1999 stock option
exercises subsequent to their original exercise and accordingly, these exercises
are not reflected in the above table.
On December 1, 1998, 584,392 options that had been previously 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, 1999:
<TABLE>
<CAPTION>
<S> <C> <C>
Range of exercise prices ............................................... $3.25-$7.00 $8.63-$20.50
Shares outstanding in range ............................................ 1,071,920 1,842,719
Weighted-average exercise price ........................................ 6.15 12.79
Weighted-average remaining contractual life ............................ 8.01 7.06
Shares currently exercisable ........................................... 823,520 1,721,968
Weighted-average exercise price of shares currently exercisable ........ 6.29 13.16
</TABLE>
The estimated fair value of options granted during 1999 was $2.75 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, 1999 would have been reduced to the pro forma amounts indicated
below:
F-15
<PAGE> 42
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net loss available to common shareholders - as reported $ (22,846,755) $ (27,708,513) $ (3,539,526)
============== ============== ==============
Net loss available to common shareholders - pro forma $ (24,005,217) $ (29,683,277) $ (6,222,900)
============== ============== ==============
Loss per share - basic - as reported $ (2.26) $ (2.80) $ (0.38)
============== ============== ==============
Loss per share - basic - pro forma $ (2.37) $ (3.00) $ (0.67)
============== ============== ==============
</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, 1999
the assumptions used for grants were no dividend yield, and expected volatility
of 61%, a risk free interest rate of 5% and expected lives of 3.5 years. For the
year ended December 31, 1998, the assumptions used for grants were no dividend
yield, an expected volatility of 53%, a risk-free interest rate of 4.5% and
expected lives of 3 years. For the years 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 3 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.
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.
Effective July 1, 1999, the Company froze the Plan for new participants.
F-16
<PAGE> 43
The Plan's funded status and amounts recognized in the Company's balance sheet
at December 31 are as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested $ 2,843,693 $ 2,574,688
Nonvested benefits 479,676 470,672
----------- -----------
Accumulated benefit obligation 3,323,369 3,045,360
Effect of projected future compensation increases 971,316 659,652
----------- -----------
Projected benefit obligation 4,294,685 3,705,012
Plan assets at fair value 2,689,792 2,212,953
----------- -----------
Unfunded status 1,604,893 1,492,059
Unrecognized prior service costs 50,038 216,977
Unrecognized loss (1,075,877) (1,353,003)
Unrecognized transition liability 73,486 79,138
----------- -----------
Accrued benefit cost 652,540 435,171
Additional minimum liability 72,589 397,236
----------- -----------
Accrued benefit liability 725,129 832,407
Accumulated other comprehensive income adjustments 72,589 397,236
----------- -----------
Net amount recognized $ 652,540 $ 435,171
=========== ===========
</TABLE>
Reconciliation of the Plan benefit obligation is as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Beginning benefit obligation $ 3,705,012 $ 2,914,208
Service cost 483,703 366,594
Interest Cost 275,689 211,324
Actuarial (gain)/loss (184,837) 547,798
Plan amendments 154,641 (230,547)
Benefits paid (139,523) (104,365)
----------- -----------
Ending benefit obligation $ 4,294,685 $ 3,705,012
=========== ===========
</TABLE>
Reconciliation of the fair value of plan assets is as follows:
<TABLE>
<CAPTION>
1998 1998
---- ----
<S> <C> <C>
Beginning fair value of plan assets $ 2,212,953 $ 2,034,500
Employer contributions 457,884 444,081
Actual gain/(loss) 156,925 (161,263)
Benefits paid (137,970) (104,365)
----------- -----------
Ending fair value of plan assets $ 2,689,792 $ 2,212,953
=========== ===========
</TABLE>
F-17
<PAGE> 44
Net periodic pension cost includes the following:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Service Cost $ 483,703 $ 366,594 $ 307,249
Interest Cost 275,689 211,324 175,039
Expected return on assets (187,260) (172,330) (144,306)
Transition asset recognition (5,652) (5,652) (5,652)
Prior service cost (12,298) (28,809) (4,572)
Net loss recognition 122,624 52,995 13,021
--------- --------- ---------
Net periodic benefit cost $ 676,806 $ 424,122 $ 340,779
========= ========= =========
</TABLE>
Assumptions at December 31 used in the accounting for the Plan were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Discount or settlement rate 7.75% 6.75% 7.25%
Rate of increase in compensation levels 3.75% 3.00% 3.25%
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.
Company contributions to the 401(k) plan were $79,474, $48,597 and $38,355 for
the years ended December 31, 1999, 1998 and 1997, respectively.
11. OTHER INCOME
Other income for the year ended December 31, 1997 represents the net gain
on real estate transactions.
12. INCOME TAXES
The income tax (benefit) provision for the years ended December 31 are as
follows:
<TABLE>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Current $ 50,000 $ 36,000 $ 431,000
Deferred (12,466,000) (15,483,000) (2,695,000)
------------ ------------ ------------
(Benefit) provision for income taxes $(12,416,000) $(15,447,000) $ (2,264,000)
============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Federal statutory income tax rate 34.0% 34.0% 34.0%
State income taxes 1.7 2.1 5.3
Tax credits and other ( .5) ( .7) ( .3)
---- ---- ----
Effective rate 35.2% 35.4% 39.0%
==== ==== ====
</TABLE>
F-18
<PAGE> 45
The provision for deferred income taxes consists of the following:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Accruals and reserves $ (922,000) $(11,257,000) $ (448,000)
Depreciation and amortization expense (880,000) 371,000 554,000
Net operating loss carryforward (10,575,000) (4,656,000) (2,425,000)
Minimum tax credit carryforwards (199,000) (226,000) (376,000)
Change in valuation allowance 110,000 285,000
------------ ------------ ------------
Total $(12,466,000) $(15,483,000) $ (2,695,000)
============ ============ ============
</TABLE>
The significant tax effected temporary differences comprising deferred taxes at
December 31 are as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Current:
Net operating loss carryforwards $(10,026,000) $ 1,380,000
Extraordinary loss 7,536,000
Accrued vacation and self insurance 356,000 489,000
Inventory and warranty reserves 1,119,000 1,004,000
Other 3,636,000 300,000
------------ ------------
Total current deferred tax asset 2,621,000 3,173,000
------------ ------------
Long-term:
Excess of tax over book depreciation and amortization 19,000 (861,000)
Net operating loss carryforwards 31,988,000 9,848,000
Minimum tax credit carryforward 963,000 764,000
Deferred start-up costs 313,000 313,000
Discontinued Operations -- 10,385,000
Other 155,000 101,000
------------ ------------
Total long-term deferred tax asset 33,438,000 20,550,000
------------ ------------
Net deferred tax asset $ 36,059,000 $ 23,723,000
------------ ------------
</TABLE>
The company increased its deferred tax valuation allowance $110,000 in 1999
and $285,000 in 1998 because certain tax credits and operating loss carry
forwards are unlikely to be utilized. At December 31, 1999, the Company had
approximately $82,700,000 of net operating loss carry forwards which expire
through 2018.
13. COMMITMENTS AND CONTINGENCIES
The Company leases certain equipment under capital lease agreements and
certain facilities under noncancellable operating leases with various renewal
options. Leased assets of $1,078,384 and $2,030,635 (net of accumulated
depreciation of $772,236 and $1,144,166) are included in property and equipment
as of December 31, 1999 and 1998, 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:
F-19
<PAGE> 46
<TABLE>
<CAPTION>
Capital Leases Operating Leases
-------------- ----------------
<S> <C> <C>
1999 $162,948 $ 1,369,304
2000 44,357 1,088,906
2001 35,409 825,109
2002 5,595 734,949
2003 661,977
Thereafter 6,085,693
-------- -----------
Total minimum lease payments 248,309 $10,765,938
===========
Less amounts representing interest (18,842)
--------
Present value of net minimum lease payments $229,467
========
</TABLE>
Rent expense was $3,370,505, $2,530,932 and $1,889,660 for the years ended
December 31, 1999, 1998 and 1997, respectively.
14. 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 Company executed the sale of its rail and mass transit seating
operation on August 31, 1999 under an Asset Purchase and Sale Agreement dated
June 30, 1999, as amended and restated August 31, 1999 and subsequently on
October 21, 1999, a Note Refinancing Agreement was executed. A former director
of the Company wholly owned the acquiring company. Consideration received
consisted of $100,000, assumption of approximately $4,700,000 in liabilities
cash and a promissory note for $9,996,000 which matured on October 15, 1999. On
October 21, 1999, the parties entered into the Note Refinancing Agreement which
refinanced the note as two separate notes in the amount of $1,996,000 and
$8,118,008 and reflects the capitalization of $118,008 of interest related to
the original note into principal outstanding. The notes each carry an interest
rate of 8 1/2% and mature on October 15, 2004. Interest is required to be paid
quarterly beginning April 2000 on the $1,996,000 promissory note and
semi-annually beginning April 2001 on the $8,118,008 promissory note. The
negotiated interest rate on the notes did not properly reflect the risk and
current market conditions. Therefore, the company has computed the net present
value of the notes using a discount rate of 23%, which is the Company's
determination of the market rate of interest and market value of the notes.
Management believes this more properly reflects the risk related to the notes
due to their subordinated nature. This resulted in a net present value discount
of $6,750,000 assuming principal only payment at the end of the term. The notes
are secured by the underlying assets and a Pledge and Proxy Security Agreement
in the stock of the underlying company and stock of another company which is
owned under common control of the acquirer and subordinated to short-term
capital financing received subsequent to its disposal.
Although a legal transfer of assets occurred at August 31, 1999, the sale
could not be recognized as a divestiture for accounting purposes at the time
because there was an absence of a significant investment in business by the
buyer. As a result of losses by the rail and mass transit seating operation
since the sale date and the uncertainty of the ultimate recovery of the entire
principal and interest on a timely basis in accordance with the terms of the
contract, a valuation allowance for the remaining balance has been recorded.
This uncertainty is based on the operating losses sustained by the business
subsequent to disposal, its inability to acquire adequate long-term financing
for repayment of the notes under the terms of the contract, or obtain additional
equity investment. While the contract between the parties remains fully
enforceable, and the Company believes some recovery may occur, the Company can
not accurately predict the precise timing and amount of the collection of
principal and interest, accordingly the carrying value of the notes is zero. Any
future payments of principal received will be accounted for under the cost
recovery method of accounting as a component of discontinued operations.
Under the Asset Purchase and Sale Agreement the Company has retained the
liability for claims incurred through August 31, 1999 under its self funded
health insurance plan and has agreed to indemnify the acquiring company for any
customary warranty and litigation claims. An additional charge upon the final
disposal of the rail and mass transit discontinued operation of $7,238,109, net
of tax benefit of $3,898,000, was recorded in the year ended December 31, 1999.
Revenues for the rail and mass transit operations were $8,247,294 for the
eight months ended August 31, 1999, and $15,781,983 and $23,059,525 for the
years ended 1998 and 1997, 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-20
<PAGE> 47
15. RESTRUCTURING
In December 1999, management of the Company, with the approval of the board
of directors, committed itself to a plan of restructuring and recorded a charge
to income of $18.3 million. The plan of restructuring included a refinancing of
its outstanding bank line of credit and certain term notes (Note 7) and the
divestiture of the Company's new airline seat manufacturing operation. The
Company entered into an agreement to sell substantially all the assets of the
airline seat manufacturing operation in December 1999 and completed the
transaction in January 2000. The operating facility closed at that time
terminating approximately 300 management and production employees. Total
proceeds from the sale was approximately $12 million resulting in a loss on sale
of $10.3 million. The remaining restructuring charge is comprised of severance
costs of $1.6 million, $2.5 million related to the abandonment of leased
operating facilities and equipment, $2.3 million related to the write down to
net realizable value for inventory and fixed assets and $1.6 million in
recognition of additional liabilities related primarily to outstanding purchase
order commitments which were non-cancelable. The Company expects cash flow
savings as a result of not having to fund continued operating losses to offset
the cash required in implementing the restructuring plan within the first year.
The airline seat manufacturing operation had sales of $41.9 million, $32.0
million and $ 27.7 million and operating losses of $25.4 million, $14.5 million
and $3.3 million during the years ended 1999, 1998 and 1997, respectively.
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>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Research and development expenses classified
as general and administrative expenses $ 4,350,162 $ 3,383,082 $ 4,394,359
============ ============= ============
Funded contracts:
Revenues funded by customers $ 6,495,209 $ 8,916,222 $ 6,933,661
Research and development expenses classified
as cost of such revenue (7,642,366) (10,066,340) (7,382,734)
------------ ------------- ------------
Funded contract deficiency $(1,147,157) $ (1,150,118) $ (449,073)
============ ============= ============
</TABLE>
17. EXPORT SALES
Export sales for the years ended December 31 were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Germany $37,420,006 $ 9,949,416 $ 8,879,713
United Kingdom 19,129,958 14,355,817 2,571,566
Ireland 8,061,186 1,045,417 2,279,659
Canada 3,614,972 1,958,905 3,414,059
Japan 1,713,915 925,578 1,167,752
Other 2,157,756 2,554,393 2,864,530
----------- ----------- -----------
Total export sales $72,097,793 $30,789,526 $21,177,279
=========== =========== ===========
</TABLE>
F-21
<PAGE> 48
18. 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 deliver 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, 1999, 1998 and 1997, inter-segment sales
were insignificant and total intercompany sales of $4,736,052, $10,643,702 and
$10,085,025, respectively, have been eliminated.
<TABLE>
<CAPTION>
1999
------------------------------------------------------------------------------
Commercial
Government Transportation
and Defense Products Other Total
----------- -------- ----- -----
<S> <C> <C> <C> <C>
Revenue:
Contract revenue $ 46,871,663 $ 46,871,663
Product sales:
Airline seat systems 51,313,904 51,313,904
Automotive safety systems 31,372,799 31,372,799
Other 716,712 $ 201,123 917,835
Technology sales and royalties 916,225 916,225
------------- ------------- ------------- -------------
Total revenue $ 47,588,375 $ 83,602,928 $ 201,123 $ 131,392,426
============= ============= ============= =============
Operating (loss) income $ 3,072,246 $ (18,295,659) $ (1,424,833) $ (16,648,246)
Identifiable assets 32,871,455 29,377,329 45,091,317 107,340,101
Depreciation and amortization 1,258,134 3,323,170 1,226,259 5,807,563
Capital expenditures 1,521,939 1,262,161 16,276 2,800,376
</TABLE>
Revenue from three major customers accounted for approximately 42% of total
revenue for the year ended December 31, 1999. Contract and trade receivables
from these customers accounted for approximately 31% of the total contract and
trade receivables at December 31, 1999. The Commercial Transportation Products
segment recognized revenue from Autoliv and Boeing Aircraft that accounted for
approximately 23% and 9%, respectively, of total revenue. The Government and
Defense segment recognized revenue from all branches of the United States armed
forces that accounted for approximately 10% of total revenue for the year ended
December 31, 1999.
The Company anticipates that total sales to Autoliv may increase in the
future, however, as a percentage of revenue may decrease as shipments to
additional first-tier suppliers begin as new vehicle platforms begin in
production. The Company does not expect to have significant sales to Boeing in
the future because of the sale of its new airline seat manufacturing operation
in January 2000 (Note 15). 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.
F-22
<PAGE> 49
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>
1999
--------------------------------
Long-Lived
Revenues Assets
-------- ------
<S> <C> <C>
United States $ 59,294,633 $ 48,781,071
Germany 37,420,006
United Kingdom 19,129,958 5,652,226
Ireland 8,061,186
Other foreign countries 7,486,643
------------ ------------
Total $131,392,426 $ 54,433,297
============ ============
</TABLE>
<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.
F-23
<PAGE> 50
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
-----------------------------------
Revenues Long-Lived Assets
-------- -----------------
<S> <C> <C>
United States $ 69,855,152 $ 40,824,266
United Kingdom 14,355,817 7,730,776
Germany 9,949,416
Other foreign countries 6,484,293
------------ ------------
Total $100,644,678 $ 48,555,042
============ ============
</TABLE>
<TABLE>
<CAPTION>
1997
-----------------------------------------------------------------------------
Commercial
Government Transportation
and 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>
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.
F-24
<PAGE> 51
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
---------------------------------
Revenues Long-Lived 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>
F-25
<PAGE> 52
19. UNAUDITED QUARTERLY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
1999
------------------------------------------------------------------------
First Second Third Fourth
----- ------ ----- ------
<S> <C> <C> <C> <C>
Revenue $ 31,928,262 $ 34,026,137 $ 33,169,131 $ 32,268,896
Cost of Revenue 23,414,109 25,161,644 23,468,135 30,940,241
------------ ------------ ------------ ------------
Gross margin $ 8,514,153 $ 8,864,493 $ 9,700,996 $ 1,328,655
============ ============ ============ ============
Net earnings (loss) from continuing operations $ 484,269 $ 715,729 $ 1,033,731 $(17,691,080)
Discontinued Operations:
Loss on disposal, net of tax $ (7,238,109)
Extraordinary loss on early extinguishment
of debt, net of tax $ (151,295)
------------ ------------ ------------ ------------
Net loss $ 484,269 $ 715,729 $ 1,033,731 $(25,080,484)
Dividends on preferred stock $ (111,205) $ (93,834) $ (74,497)
------------ ------------ ------------ ------------
Earnings (loss) available for common shareholder $ 484,269 $ 604,524 $ 939,897 $(25,154,981)
============ ============ ============ ============
Net earnings per common share - basic
and assuming dilution $ 0.05 $ 0.06 $ 0.09 $ (2.36)
</TABLE>
<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>
F-26
<PAGE> 53
EXHIBIT INDEX
<TABLE>
<CAPTION>
NO. DESCRIPTION REFERENCE
--- ----------- ---------
<S> <C> <C>
3.1 Articles of Incorporation of Simula, Inc., as amended and restated......... (2)
3.2 Bylaws of Simula, Inc., as amended and restated............................ (1)
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............ (4)
10.11 1992 Stock Option Plan, as amended effective September 15, 1998............ (8)
10.12 1992 Restricted Stock Plan................................................. (1)
10.21 1994 Stock Option Plan, as amended effective September 15, 1998............ (8)
10.26 Simula, Inc. Employee Stock Purchase Plan.................................. (2)
10.29 Form of Change of Control Agreements, as amended, between the Company and (6)
Donald W. Townsend, Bradley P. Forst, and James A. Saunders................
10.30 Form of Employment Agreements between the Company and Donald W. Townsend,
Bradley P. Forst, and James A. Saunders.................................... (7)
10.32 Employment Agreement between the Company and James C. Dodd dated March 2, (10)
1999.......................................................................
10.33 Change of Control Agreement between the Company and James C. Dodd dated
March 2, 1999.............................................................. (10)
10.37 Simula, Inc. 1999 Incentive Stock Option Plan.............................. (11)
10.38 Amended and Restated Asset Purchase Agreement for the sale of Coach and
Car Equipment Corporation, a wholly-owned subsidiary of the Company, dated
August 31, 1999 and Note Refinancing Agreement dated October 21, 1999...... (12)
10.39 Promissory Note between the Company and Stanley P. Desjardins dated
October 15, 1999 and Guarantees by Don and Nelda Townsend, James and Linda
Saunders and Bradley and Teresa Forst dated November 2, 1999............... (13)
*10.40 Asset Purchase Agreement for the sale of Airline Interiors, Inc., a
wholly-owned subsidiary of the Company, dated December 24, 1999............
*10.41 Financing Agreement with The CIT Group/Business Credit, Inc. dated
December 30, 1999..........................................................
10.42 Securities Purchase Agreement with Levine Leichtman Capital Partners II,
L.P. dated December 31, 1999............................................. (14)
*10.43 Employment Agreement between the Company and Joseph W. Coltman dated
February 1, 2000...........................................................
*10.44 Change of Control Agreement between the Company and Joseph W. Coltman
dated February 1, 2000.....................................................
*10.45 Promissory Note between the Company and Stanley P. Desjardins dated
December 31, 1999, effective December 14, 1999.............................
18. Preference Letter re: change in accounting principles...................... (3)
*21. Subsidiaries of the Company................................................
*23. Independent Auditors Consent...............................................
+24. Powers of Attorney - Directors............................................. (5)(9)
*27. Financial Data Schedule
</TABLE>
- ----------
* Filed herewith.
+ Power of Attorney of S. Thomas Emerson filed herewith. All other Powers
of Attorney filed as noted.
<PAGE> 54
(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 Definitive Proxy on May 15, 1996, for the Company's Annual
Meeting of Shareholders held on June 20, 1996.
(3) Filed with report on Form 10-Q/A for the quarter ended June 30, 1996.
(4) Filed with Registration Statement on Form S-3/A, No. 333-13499, under
the Securities Act of 1933, effective April 21, 1997.
(5) Filed with report on Form 10-K for the year ended December 31, 1997.
(6) Filed with report on Form 10-Q for the quarter ended March 31, 1998. The
Change of Control Agreements for Messrs. Townsend, Forst and Saunders
are substantially identical and differ materially only in that Mr.
Townsend is entitled to an amount equal to five (5) years base salary
and benefits upon a change of control while Messrs. Forst and Saunders
are entitled to an amount equal to four (4) years base salary and
benefits upon a change of control.
(7) Filed with report on Form 10-Q for the quarter ended March 31, 1998. The
Employment Agreements for Messrs. Townsend, Forst and Saunders are
substantially identical and differ materially only in the following two
respects: (i) the initial term of the agreement with Mr. Townsend is
five (5) years while the initial term of the agreement with Messrs.
Forst and Saunders is three (3) years; and (ii) the post-termination
non-compete period with Mr. Townsend is thirty (30) months while it is
eighteen (18) months with Messrs. Forst and Saunders.
(8) Filed with report on Form 10-Q for the quarter ended September 30, 1998.
(9) Filed with report on Form 10-K for the year ended December 31, 1998.
(10) Filed with report on Form 10-Q for the quarter ended March 31, 1999.
(11) Filed as Appendix A with Definitive Proxy on May 14, 1999, for the
Company's Annual Meeting of Shareholders held on June 17, 1999.
(12) Filed with report on Form 8-K, under the Securities Act of 1933,
effective October 25, 1999.
(13) Filed with report on Form 10-Q for the quarter ended September 30, 1999.
(14) Filed with Schedule 13D, under the Securities Exchange Act of 1934, on
January 10, 2000 effective December 31, 1999 by Levine Leichtman Capital
Partners II, L.P.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 5,223
<SECURITIES> 0
<RECEIVABLES> 24,957
<ALLOWANCES> 200
<INVENTORY> 7,541
<CURRENT-ASSETS> 52,907
<PP&E> 24,810
<DEPRECIATION> 10,863
<TOTAL-ASSETS> 107,340
<CURRENT-LIABILITIES> 47,895
<BONDS> 0
2,250
0
<COMMON> 111
<OTHER-SE> 3,264
<TOTAL-LIABILITY-AND-EQUITY> 107,340
<SALES> 131,392
<TOTAL-REVENUES> 131,392
<CGS> 102,984
<TOTAL-COSTS> 102,984
<OTHER-EXPENSES> 45,057
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,246
<INCOME-PRETAX> (23,894)
<INCOME-TAX> (8,437)
<INCOME-CONTINUING> (15,457)
<DISCONTINUED> (7,238)
<EXTRAORDINARY> (151)
<CHANGES> 0
<NET-INCOME> (22,847)
<EPS-BASIC> (2.26)
<EPS-DILUTED> (2.26)
</TABLE>
