SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
/X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended SEPTEMBER 30,
2000 or
/ / Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 For the transition period from
___________ to _________
Commission file number 1-12410
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SIMULA, INC.
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(Exact Name of Registrant as Specified in Its Charter)
ARIZONA 86-0320129
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2700 NORTH CENTRAL AVENUE, SUITE 1000, PHOENIX, ARIZONA 85004
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(Address of Principal Executive Offices) (Zip Code)
(602) 631-4005
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(Registrant's Telephone Number, Including Area Code)
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(Former Name, Former Address and Former Fiscal Year, if Changed Since
Last Report)
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)
Yes /X/ No
-------- ---------
(2) has been subject to such filing requirements for the past 90 days.
Yes /X/ No
--------- ----------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class Outstanding at October 30, 2000
------------------------------ ---------------------------------------
Common Stock, $.01 par value 12,136,559
<PAGE>
SIMULA, INC.
INDEX
PART I - FINANCIAL INFORMATION
PAGE
----
Item 1 - Financial Statements
Consolidated Balance Sheets
September 30, 2000 and December 31, 1999....................2
Consolidated Statements of Operations
Three and Nine Months Ended September 30, 2000 and 1999 ....3
Consolidated Statement of Shareholders' Equity
Nine Months Ended September 30, 2000 .......................4
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2000 and 1999 ..........5 - 6
Notes to Interim Consolidated Financial Statements .........7 -12
Item 2 - Management's Discussion and Analysis of
Results of Operations and Financial Condition .........13 -18
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings...................................................19
Item 5 - Other...............................................................19
Item 6 - Exhibits and Reports...........................................21 - 22
SIGNATURE....................................................................23
1
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
SIMULA, INC.
CONSOLIDATED BALANCE SHEETS
-----------------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30 DECEMBER 31,
2000 1999
------------- -------------
<S> <C> <C>
ASSETS (Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 589,913 $ 5,223,236
Contract and trade receivables - Net 22,853,123 24,756,984
Legal settlement 11,000,000
Inventories 8,510,458 7,540,570
Deferred income taxes 2,621,000 2,621,000
Prepaid expenses and other 882,883 728,772
Net assets held for sale 12,036,242
------------- -------------
Total current assets 46,457,377 52,906,804
PROPERTY, EQUIPMENT and LEASEHOLD IMPROVEMENTS - NET 12,182,230 13,947,099
DEFERRED INCOME TAXES 31,892,000 33,438,000
DEFERRED FINANCING COSTS 4,074,956 4,897,773
INTANGIBLES - Net 3,107,276 1,788,057
OTHER ASSETS 608,518 362,368
------------- -------------
TOTAL $ 98,322,357 $ 107,340,101
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Revolving line of credit $ 9,821,212 $ 12,751,595
Trade accounts payable 4,325,310 6,104,583
Accrued restructuring costs 2,511,761 6,742,000
Other accrued liabilities 9,545,543 8,267,305
Advances on contracts 1,169,587 2,121,232
Current portion of long-term debt 1,528,408 11,908,303
------------- -------------
Total current liabilities 28,901,821 47,895,018
LONG-TERM DEBT - Less current portion 57,345,542 53,820,177
DEFERRED INCOME 3,294,644
------------- -------------
Total liabilities 89,542,007 101,715,195
------------- -------------
REDEEMABLE CONVERTIBLE 6% SERIES A PREFERRED STOCK,
$.05 par value - issued 1,900 shares 1,900,000 2,250,000
------------- -------------
SHAREHOLDERS' EQUITY
Preferred stock, $.05 par value - authorized 50,000,000 shares; issued
1,900 shares redeemable convertible 6% series A preferred stock
Common stock, $.01 par value - authorized, 50,000,000 shares;
issued 11,418,200 and 10,376,233 respectively 114,181 111,038
Additional paid-in capital 61,037,904 59,987,309
Accumulated deficit (53,612,259) (56,384,215)
Accumulated other comprehensive income (659,476) (339,226)
------------- -------------
Total shareholders' equity 6,880,350 3,374,906
------------- -------------
TOTAL $ 98,322,357 $ 107,340,101
============= =============
</TABLE>
See notes to consolidated financial statements
2
<PAGE>
<TABLE>
<CAPTION>
SIMULA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
------------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue $ 24,195,456 $ 33,169,131 $ 72,701,163 $ 99,123,530
Cost of revenue 13,805,693 23,468,135 46,822,561 72,043,888
------------ ------------ ------------ ------------
Gross margin 10,389,763 9,700,996 25,878,602 27,079,642
Administrative expenses 5,070,436 6,278,521 15,158,238 18,272,771
Employee severance expenses 1,930,081 1,930,081
Operating income 3,389,246 3,422,475 8,790,283 8,806,871
Interest expense (2,928,492) (1,699,744) (7,494,661) (5,084,142)
------------ ------------ ------------ ------------
Income before taxes 460,754 1,722,731 1,295,622 3,722,729
Income tax expense (119,000) (689,000) (454,000) (1,489,000)
------------ ------------ ------------ ------------
Income before discontinued operations and
extraordinary item 341,754 1,033,731 841,622 2,233,729
Earnings from discontinued operations, net of related
income tax expense of $700,000 1,300,000 0 1,300,000 0
Extraordinary gain on early extinguishment of debt, net
of related income tax expense of $392,000 725,750 0 725,750 0
------------ ------------ ------------ ------------
Net income 2,367,504 1,033,731 2,867,372 2,233,729
Preferred stock dividends 28,733 93,834 95,416 205,039
------------ ------------ ------------ ------------
Net earnings available for common shareholders $ 2,338,771 $ 939,897 $ 2,771,956 $ 2,028,690
============ ============ ============ ============
Earnings per common share - basic:
Income before discontinued operations and
extraordinary item $ 0.03 $ 0.09 $ 0.07 $ 0.20
Earnings from discontinued operations 0.11 0.12
Extraordinary gain on early extinguishment of debt 0.06 0.06
------------ ------------ ------------ ------------
Earnings per common share - basic $ 0.20 $ 0.09 $ 0.25 $ 0.20
============ ============ ============ ============
Earnings per common share - diluted:
Income before discontinued operations and
extraordinary item $ 0.03 $ 0.09 $ 0.07 $ 0.20
Earnings from discontinued operations 0.11 0.11
Extraordinary gain on early extinguishment of debt 0.06 0.06
------------ ------------ ------------ ------------
Earnings per common share - diluted $ 0.20 $ 0.09 $ 0.24 $ 0.20
============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
<TABLE>
<CAPTION>
SIMULA, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2000 (UNAUDITED)
--------------------------------------------------------------------------------------------------------------------------------
Accumulated
Additional Other
Common Stock Paid-in Accumulated Comprehensive
----------------------------
Shares Amount Capital Deficit Income
-------------- ------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
BALANCE, January 1, 2000 11,103,827 $ 111,038 $ 59,987,309 $ (56,384,215) $ (339,226)
Net earnings (loss) 2,867,372
Issuance of common shares 127,125 1,271 207,577
Conversion of redeemable convertible
Series A Preferred Stock 187,248 1,872 352,730
Effect of stock warrant repricing 407,000
Stock option compensation 83,288
Preferred stock dividends (95,416)
Currency translation adjustment (320,250)
-------------- ------------- ----------------- ----------------- ---------------
BALANCE, September 30, 2000 11,418,200 $ 114,181 $ 61,037,904 $ (53,612,259) $ (659,476)
============== ============= ================= ================= ===============
</TABLE>
<TABLE>
<CAPTION>
Total
Shareholders' Comprehensive
Equity Income
----------------- ------------------
<S> <C> <C>
BALANCE, January 1, 2000 $ 3,374,906 $ -
Net earnings (loss) 2,867,372 2,867,372
Issuance of common shares 208,848
Conversion of redeemable convertible
Series A Preferred Stock 354,602
Effect of stock warrant repricing 407,000
Stock option compensation 83,288
Preferred stock dividends (95,416)
Currency translation adjustment (320,250) (320,250)
----------------- ------------------
BALANCE, September 30, 2000 $ 6,880,350 $ 2,547,122
================= ==================
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
<TABLE>
<CAPTION>
SIMULA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
----------------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER
30,
---------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,867,372 $ 2,233,729
Adjustment to reconcile net income to net cash from operating activities:
Depreciation and amortization 4,134,375 4,264,762
Deferred income taxes 1,546,000 1,489,000
Capitalized interest 345,999
Stock option compensation 83,288
Gain on sale of assets (356,809)
Gain on early extinguishment of debt (1,117,750)
Gain on discontinued operations (2,000,000)
Currency translation adjustment (320,250) (665,487)
Changes in net assets and liabilities:
Contract and trade receivables - net of advances 952,216 (3,946,601)
Legal settlement (11,000,000)
Inventories (969,888) (6,056,737)
Prepaid expenses and other (154,111) (828,827)
Other assets (246,150) 71,887
Net assets held for sale 677,582 (4,398,565)
Trade accounts payable (1,779,273) (3,031,165)
Restructuring reserve (3,430,239)
Deferred income 3,294,644
Other accrued liabilities 1,278,238 764,150
------------ ------------
Net cash used in operating activities (5,837,947) (10,460,663)
------------ ------------
Cash flows from investing activities:
Proceeds from sale 11,358,660 (2,147,713)
Proceeds from note receivable 2,000,000
Purchase of property and equipment (469,348) 2,960,362
Costs incurred to obtain intangibles (866,023) (832,916)
------------ ------------
Net cash provided by (used in) investing activities 12,023,289 (20,267)
------------ ------------
Cash flows from financing activities:
Net borrowings under line of credit (2,930,383) 7,900,000
Principal payments under other debt arrangements (8,006,316) (2,586,539)
Dividends paid (90,814) (104,302)
Issuance of common shares 208,848 507,355
Issuance of preferred shares 7,500,000
------------ ------------
Net cash (used in) provided by financing activities (10,818,665) 13,216,514
------------ ------------
Net (decrease) increase in cash and cash equivalents (4,633,323) 2,735,584
Cash and cash equivalents at beginning of period 5,223,236 933,462
------------ ------------
Cash and cash equivalents at end of period $ 589,913 $ 3,669,046
============ ============
</TABLE>
See notes to consolidated financial statements
5
<PAGE>
<TABLE>
<CAPTION>
SIMULA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
------------------------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2000 1999
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<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
In June 2000, the Company executed a note payable in the amount of
$800,000 in exchange for the termination of one of its facility
operating leases related to the airliner seat operation which was
disposed of in January 2000.
In June 2000, $350,000 of Series A Preferred Stock plus accrued
dividends of $4,602 were exchanged for 187,248 shares of the
Company's common stock
In August the Company exchanged a note payable in the amount of
$950,000 as consideration for the purchase of a certain technology
intangible
Interest paid $6,472,847 $4,859,357
========== ==========
Taxes paid $ 45,002 $ 36,513
========== ==========
</TABLE>
See notes to consolidated financial statements
6
<PAGE>
SIMULA, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION:
The accompanying unaudited interim consolidated financial statements of
Simula, Inc. (the "Company") have been prepared by management in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q.
Accordingly, they do not include all of the information and notes
required by generally accepted accounting principles for complete
financial statements. In the opinion of Management, all adjustments and
reclassifications considered necessary for a fair and comparable
presentation have been included and are of a normal recurring nature
except for the impact on quarterly results and balance sheet amounts
related to the Autoliv legal settlement, employee severance costs,
earnings from discontinued operations and the extraordinary gain in the
three and nine months ended September 30, 2000. Operating results for
the three and nine months ended September 30, 2000 are not necessarily
indicative of the results that may be expected for the year ending
December 31, 2000. Such interim financial statements should be read in
conjunction with the Company's consolidated financial statements and
notes thereto included in the Company's 1999 Form 10-K.
NOTE 2 - INVENTORIES:
At September 30, 2000 and December 31, 1999, inventories consisted of
the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
----------------- -----------------
<S> <C> <C>
Raw materials $5,123,897 $5,101,426
Work in process 3,129,109 1,967,397
Finished goods 257,452 471,747
---------- ----------
Total inventories $8,510,458 $7,540,570
========== ==========
</TABLE>
NOTE 3 - DEBT:
On May 25, 2000, the Company and its senior lender entered into a
non-cancelable Investment Monitoring Agreement and First Amendment to
Securities Purchase Agreement dated December 31, 1999 to address
disagreements about compliance with certain technical, non-monetary
loan terms. Pursuant to these agreements, the senior lender agreed to
provide ongoing operating overviews and consulting and amended certain
of the Company's information reporting obligations. The Company pays an
investment monitoring fee of $150,000 per annum payable in equal
monthly installments of $12,500 for a three year period ending May 31,
2003.
On August 17, 2000, the Company entered into a Second Amendment to the
Securities Purchase Agreement thereby extending the maturity date of
the Term Note A discussed above to October 1, 2001. The Second
Amendment also modified certain terms and covenants to provide for
certain transactions the Company contemplated and addressed
disagreements about compliance with other technical, non-monetary, loan
terms. In consideration for this amendment, the Company paid a fee of
$200,000 and re-priced the lender's warrant to purchase 850,000 shares
of the Company's common stock to $1.625 per warrant share which
represented the market value of its common stock at that time. Such
re-pricing resulted in an additional discount on the underlying debt
and credit to additional paid in capital of $407,000.
At September 30, 2000 the Company was in compliance with all covenants
relating to its Financing Agreement, Term Notes and 8% Convertible
Notes.
In June 2000, the Company executed a note payable in the amount of
$800,000 in exchange for the termination of one of its facility
operating leases related to the airline seat operation which was
disposed of in January 2000. The note requires payments of monthly
principal and interest at 8% of $16,221 and matures in June 2005.
This represents approximately $1.5 million less than rents payable
under the lease over the remaining lease term.
7
<PAGE>
SIMULA, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
In August 2000, the Company executed an agreement to purchase certain
intellectual property in exchange for $350,000 and the issuance of a
$950,000 note payable. The note payable provides for principal payments
on December 31, 2000, June 29, 2001 and June 28, 2002 of $500,000,
$250,000 and $200,000, respectively, each with accrued interest earned
thereon. The interest earned under this note accrues at prime plus
3.5%.
During the three months ended September 30, 2000, the Company
repurchased a total of $2,265,000 in principal of it's 8% Convertible
Notes due in May 2004 for $1,147,250 including transaction costs, which
resulted in a gain from early retirement of debt of $1,117,750.
NOTE 4 - 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 at
the holders option into shares of the Company's Common Stock at any
time at 101% of the average closing price of any 15 out of the 30
consecutive trading days preceding conversion, up to a specified
maximum conversion price (the "Conversion Cap"). The Conversion Cap for
the first twelve months 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.
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 maximum number of common shares available
("Common Share Limit") for conversion is limited to 1,982,681. If the
Company is unable to convert tendered shares as a result of Common
Share Limit, it is required to redeem those shares in accordance with a
redemption formula.
In June 2000, $350,000 of Series A Preferred Stock plus accrued
dividends of $4,602 were exchanged for 187,248 shares of the Company's
common stock.
Subsequent to September 30, 2000, the holder elected to exercise all of
the remaining Series A Preferred shares with a face value of $1,900,000
plus accrued dividends of $5,301. As a result of the Common Share
Limit, the Company could satisfy conversion of $952,529 and will issue
718,359 shares of its common stock. In accordance with the provisions
of the Preferred Stock Securities Purchase Agreement, the Company will
redeem the remaining preferred shares, and in accordance with the
redemption formula and will pay the holder $1,934,831 by November 9,
2000. The redemption premium of $982,059 shall be recorded as a
dividend on the preferred shares. The Company will satisfy the
redemption through utilization of available funds under its RLC.
NOTE 5 - LEGAL SETTLEMENT:
On September 27, 2000, the Company entered into a Settlement Agreement
with Autoliv, Inc. in connection with litigation commenced in 1998 and
international arbitration initiated in 1999. Autoliv was a licensee of
the Company's ITS head protection system. The dispute revolved around
breach of contract, unfair competition and patent infringement claims.
As part of the settlement, the companies have outlined a future
business relationship and have dismissed all claims in the pending
litigation and proceedings. The Settlement Agreement provides for
payment by Autoliv to Simula of $11.0 million which is recorded as an
account receivable at September 30, 2000 and received by the Company in
October 2000.
The settlement superceded the previous license agreement on the ITS and
granted additional non-exclusive licenses for the company's inflatable
technology. In exchange for licensing its technology, the Company
received $7.0 million, of which $3.0 million was recognized as revenue
in the current quarter attributable to the additional licenses granted
which require no additional significant action by the Company, $0.7
million was applied to royalties earned and unpaid under the previous
ITS licensing agreement and $3.3 million related to the ITS technology
which was deferred and will be recognized as revenue over the next
three years. In addition, the company received $3.0 million as a
prepayment for product, which will be recognized as revenue as the
product is shipped and $1.0 million related to reimbursement of legal
8
<PAGE>
SIMULA, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
expense, which offset approximately $0.6 million of legal fees incurred
in the current quarter.
NOTE 6 - EMPLOYEE SEVERANCE:
In September 2000 the Company provided for a severance liability of
approximately $1.9 related to its obligations under employment
contracts and severance agreements with terminated employees.
Approximately $1.8 million will be paid in cash, of which $1.3 million
was paid in October 2000. The balance will be paid in installments
until September 2001.
NOTE 7 - 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 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. At that time approximately 300 management and production
employees were terminated and the operating facility was closed. During
the nine months ended September 30, 2000, the Company has incurred and
paid total restructuring costs of approximately $4.0 million comprised
of $1.5 million of employee severance, $1.5 million in transaction and
shut down costs and $1.0 million in lease termination costs leaving a
balance of $2.5 million of accrued restructuring costs which management
believes will be adequate.
NOTE 8 - DISCONTINUED OPERATIONS:
In August 2000 the Company amended its Asset Purchase and Sale
Agreement related to the disposal of its rail and mass transit seating
operation. In consideration for the modification, the Company received
$2.0 million in cash and a $2.1 million note due in 2004 requiring
quarterly interest payments at 8%. In 1998 the Company elected to treat
the disposition of this business as a Discontinued Operation and in
1999 the Company elected to account for proceeds from the sale using
the cost recovery method of accounting. Therefore, proceeds received in
the current quarter are reported, net of tax, as income from
discontinued operations.
NOTE 9 - SEGMENT REPORTING:
The Company is a holding company for wholly owned subsidiaries
which operate in two business segments. The Commercial Products segment
includes operations which primarily manufacture inflatable restraints
and related technology for automobiles, airline seating soft goods and
polymer materials. The Government and Defense segment includes
operations that design and manufacture crash resistant components,
energy absorbing devices, ballistic armor and composites principally in
connection with branches of the United States armed forces procurement.
The remaining segment, entitled Other, represents general corporate
operations.
9
<PAGE>
SIMULA, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
For the three month period ended September 30, 2000 and 1999
inter-segment sales were insignificant and total intercompany sales of
$461,311 and $1,453,084, respectively, have been eliminated.
<TABLE>
<CAPTION>
2000
------------------------------------------------------------------------
Commercial Government and
Products(1) Defense Other(1) Total
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue:
Contract revenue $ - $12,347,698 $ - $12,347,698
Product sales:
Airline seat systems 837,146 837,146
Automotive safety systems 7,273,009 7,273,009
Other 17,671 17,671
Technology sales and royalties 3,218,204 111,728 390,000 3,719,932
----------- ----------- ----------- -----------
Total revenue $11,346,030 $12,459,426 $ 390,000 $24,195,456
=========== =========== =========== ===========
Operating (loss) income (1)(2) $ 3,294,790 $ 1,955,110 $(1,860,654) $ 3,389,246
</TABLE>
(1) Includes effect of technology license revenue and legal expense
reimbursement related to legal settlement (Note 5)
(2) Includes effect of employee severance costs (Note 6)
<TABLE>
<CAPTION>
1999
----------------------------------------------------------------------------
Commercial Government and
Products Defense Other Total
------------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
Revenue:
Contract revenue $ - $ 12,489,890 $ - $ 12,489,890
Product sales:
Airline seat systems 12,206,257 12,206,257
Automotive safety systems 8,107,959 8,107,959
Other 118,981 0 118,981
Technology sales and royalties 246,044 246,044
------------- -------------- ----------- ------------
Total revenue $ 20,560,260 $ 12,608,871 $ - $ 33,169,131
============= ============== =========== ============
Operating (loss) income $ 3,097,645 $ 1,174,556 $ (849,726) $ 3,422,475
</TABLE>
10
<PAGE>
SIMULA, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended September 30, 2000 and 1999, inter-segment
sales were insignificant and total intercompany sales of $1,625,688 and
$3,576,537 respectively, have been eliminated.
<TABLE>
<CAPTION>
2000
------------------------------------------------------------------------
Commercial Government and
Products(1) Defense Other(1) Total
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue:
Contract revenue $ - $36,848,773 $ - $36,848,773
Product sales:
Airline seat systems 7,791,315 7,791,315
Automotive safety systems 23,265,380 23,265,380
Other 197,043 197,043
Technology sales and royalties 3,756,981 451,671 390,000 4,598,652
----------- ----------- ----------- -----------
Total revenue $35,010,719 $37,300,444 $ 390,000 $72,701,163
=========== =========== =========== ===========
Operating (loss) income (1)(2) $ 7,347,262 $ 4,113,633 $(2,670,612) $ 8,790,283
</TABLE>
(1) Includes effect of technology license revenue and legal expense
reimbursement related to the legal settlement (Note 5)
(2) Includes effect of employee severance costs (Note 6)
<TABLE>
<CAPTION>
1999
------------------------------------------------------------------------
Commercial Government and
Products Defense Other Total
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue:
Contract revenue $ - $33,978,567 $ - $33,978,567
Product sales:
Airline seat systems 41,029,095 41,029,095
Automotive safety systems 22,538,297 22,538,297
Other 710,894 $ 199,547 910,441
Technology sales and royalties 667,130 667,130
----------- ----------- ----------- -----------
Total revenue $64,234,522 $34,689,461 $ 199,547 $99,123,530
=========== =========== =========== ===========
Operating (loss) income $ 7,650,583 $ 2,857,047 $(1,700,759) $ 8,806,871
</TABLE>
11
<PAGE>
SIMULA, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - EARNINGS PER SHARE:
The following is a reconciliation of the numerators and denominators of
basic and diluted per share computations. For the three and nine month
period ended September 30, 2000, diluted earnings per share does not
include the effect of shares to be issued upon conversion of the Company's
8% Senior Subordinated Convertible Notes (the "8% Notes") and Redeemable
Convertible Preferred Stock of 2,684,171 and 2,753,845 shares,
respectively, because the result would be anti-dilutive. For the three and
nine month period ended September 30, 1999, diluted earnings per share
does not include the effect of options to purchase common stock and shares
to be issued upon conversion of the Company's 8% Notes and 10% Notes of
2,248,223 and 2,251,668, respectively, because the result would be
anti-dilutive.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Income before discontinued operations and
extraordinary item $ 341,754 $ 1,033,731 $ 841,622 $ 2,233,729
Earnings from discontinued operations 1,300,000 0 1,300,000 0
Extraordinary gain on early extinguishment of debt 725,750 0 725,750
----------- ----------- ----------- -----------
Net income 2,367,504 1,033,731 2,867,372 2,233,729
Preferred stock dividends 28,733 93,834 95,416 205,039
----------- ----------- ----------- -----------
Net earnings available for common shareholders $ 2,338,771 $ 939,897 $ 2,771,956 $ 2,028,690
=========== =========== =========== ===========
Basic weighted average shares outstanding 11,418,199 10,301,721 11,230,598 10,090,510
Effect of dilutive securities 46,472 1,346,228 134,659 964,941
----------- ----------- ----------- -----------
Diluted weighted average shares outstanding 11,464,671 11,647,949 11,365,257 11,055,451
=========== =========== =========== ===========
Earnings per common share - basic:
Income before discontinued operations and
extraordinary item $ 0.03 $ 0.09 $ 0.07 $ 0.20
Earnings from discontinued operations 0.11 - 0.12 -
Extraordinary gain on early extinguishment of debt 0.06 - 0.06 -
----------- ----------- ----------- -----------
Earnings per common share - basic $ 0.20 $ 0.09 $ 0.25 $ 0.20
=========== =========== =========== ===========
Earnings per common share - diluted:
Income before discontinued operations and
extraordinary item $ 0.03 $ 0.08 $ 0.07 $ 0.18
Earnings from discontinued operations 0.11 - 0.11 -
Extraordinary gain on early extinguishment of debt 0.06 - 0.06 -
----------- ----------- ----------- -----------
Earnings per common share - diluted $ 0.20 $ 0.08 $ 0.24 $ 0.18
=========== =========== =========== ===========
</TABLE>
12
<PAGE>
SIMULA,INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
GENERAL - The following discussion and analysis provides information that
management of Simula, Inc. (the "Company") believes is relevant to an assessment
and understanding of the Company's results of operations and financial condition
for the three and nine month periods ended September 30, 2000 compared to the
same periods in 1999. This discussion should be read in conjunction with the
Interim Consolidated Financial Statements and the Notes thereto included
elsewhere in this Form 10-Q and the Consolidated Financial Statements and Notes
included in the Company's 1999 Form 10-K. This Form 10-Q contains certain
forward-looking statements and information. The cautionary statements contained
below should be read as being applicable to all related forward-looking
statements wherever they appear. See "Forward Looking Information and Risks of
the Business."
OVERVIEW
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.
Simula is a holding company for operating units in two business
segments. The Commercial Products segment includes technology development,
manufacturing and assembly operations for safety systems for automobiles and
trucks, airline seating soft goods and polymer materials. 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.
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.
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.
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SIMULA,INC.
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.
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 nine
month period ended September 30, 2000 was from the sale of the Company's airline
seating operation and collection of $2 million on a note related to the 1999
sale of the Company's rail and mass transit seating business (See Note 8). In
addition, the Company received $11.0 million in October 2000 from the settlement
of litigation with Autoliv, Inc. (See Note 5).
The Company's ability to fund working capital requirements and debt
service during the next year will be dependent upon improved cash flow from
operations and use of the $11 million attributable to settling the Autoliv
litigation (see Note 5 and Legal Proceedings). Following the 1999 restructuring,
the remaining operations have a recent history of profitability and positive
cash flow. The Company has significantly reduced its working capital needs and
believes that existing availability under its Revolving Line of Credit (the
"RLC") together with the receipt of the litigation settlement is adequate to
fund its operations.
On December 31, 1999 the company executed a Financing Agreement (the
"Financing Agreement") with an asset based lender which provided a $17.0 million
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, 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 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. The Company had availability
under the RLC of approximately $13.0 million and $12.9 million and outstanding
borrowings of $9.8 million and $3.0 million at September 30 and October 31,
2000, 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 airliner seat manufacturing
operation.
On December 31, 1999, the Company executed a Securities Purchase
Agreement with an accredited investor for 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 which have subsequently been repriced to $1.625 per share in
connection with a negotiated extension of the Term Note A discussed below. The
warrant is immediately exercisable and expires in December 2006. The Term Note A
originally matured on September 30, 2000, however, the Company has negotiated an
extension of the maturity date to October 1, 2001 as discussed below. The Term
Note A accrues interest payable monthly at 15% and provides for a monthly bridge
fee of $25,000. 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.
On May 25, 2000, the Company and its senior lender entered into a
non-cancellable Investment Monitoring Agreement and First Amendment to
Securities Purchase Agreement dated December 31, 1999 to address disagreements
about
14
<PAGE>
SIMULA,INC.
compliance with certain technical, non-monetary loan terms. Pursuant to these
agreements, the senior lender agreed to provide ongoing operating overviews and
consulting and amended certain of the Company's information reporting
obligations. The Company pays an investment monitoring fee of $150,000 per annum
payable in equal monthly installments of $12,500 for a three year period ending
May 31, 2003.
On August 17, 2000, the Company entered into a Second Amendment to the
Securities Purchase Agreement thereby extending the maturity date of the Term
Note A discussed above to October 1, 2001. The Second Amendment also modified
certain terms and covenants to provide for certain transactions the Company
contemplated and addressed disagreements about compliance with other technical,
non-monetary, loan terms. In consideration for this amendment, the Company paid
a fee of $200,000 and repriced the lender's warrant to purchase 850,000 shares
of the Company's common stock to $1.625 per warrant share which represented the
market value of its common stock at that time. Such re-pricing resulted in an
additional discount on the underlying debt and credit to additional paid in
capital of $407,000.
At September 30, 2000 the Company was in compliance with all covenants
relating to the Financing Agreement, the Term Notes and its 8% Convertible
Notes.
During the three months ended September 30, 2000, the Company
repurchased a total of $2,265,000 in principal of "its" 8% Convertible Notes due
in May 2004 for $1,147,250 including transaction costs, which resulted in a gain
from early retirement of debt of $1,117,750.
In August 2000, the Company executed an agreement to purchase certain
intellectual property in exchange for $350,000 paid in cash and the issuance of
a $950,000 note payable. The note payable provides for principal payments on
December 31, 2000, June 29, 2001 and June 28, 2002 of $500,000, $250,000 and
$200,000, respectively, each with accrued interest earned thereon. The interest
earned under this note accrues at the prime rate plus 3.5%.
In June 2000, the Company executed a note payable in the amount of
$800,000 in exchange for the termination of one of its facility operating leases
related to the airliner new seat operation which was disposed of in January
2000. The note requires payments of monthly principal and interest at 8% of
$16,221 and matures in June 2005.
Subsequent to September 30, 2000, the holder of the Company's Series A
Preferred Stock elected to exercise all of the remaining Series A Preferred
shares with a face value of $1,900,000 plus accrued dividends of $5,301. As a
result of the Common Share Limit, the Company could satisfy conversion of
$952,529 and will issue 718,359 shares of its common stock. In accordance with
the provisions of the Preferred Stock Securities Purchase Agreement, the Company
will redeem the remaining preferred shares, and in accordance with the
redemption formula and will pay the holder $1,934,831 by November 9, 2000. The
redemption premium of $982,059 shall be recorded as a dividend on the preferred
shares. The Company will satisfy the redemption through utilization of available
funds under its RLC.
The Company believes it has sufficient manufacturing capacity, at
September 30, 2000, to meet its anticipated future delivery requirements.
The Company may, however, seek to obtain additional capital should
demand for its products exceed current capacity. The raising of capital in
public markets will be primarily dependent upon prevailing market conditions,
the financial position of the Company and it's financial performance and the
demand for the Company's products and technologies.
The Company's liquidity is greatly impacted by the nature of the
billing provisions under its contracts. Generally, in the early period of
contracts, cash expenditures and accrued profits are greater than allowed
billings while contract completion results in billing previously unbilled costs
and profits. Contract and trade receivables, net of advances on contracts,
decreased approximately $1.0 million for the nine months ended September 30,
2000. This decrease is primarily attributable to a decrease in the Government
and Defense segment primarily due to completion of certain contracts and the
timing of collections under those contracts.
Operating activities required the use of $5.8 million of cash during
the nine months ended September 30, 2000, compared to the use of $10.5 million
of cash during the same period in 1999. Cash used by operating activities in the
2000 period was primarily used to fund an increase in inventories, decrease in
accounts payable and satisfy costs related to the disposal of the Company's
airline seating system product line.
15
<PAGE>
SIMULA,INC.
Investing activities provided $12.0 million principally from the sale
of the Company's airline seating system product line and payment made in
connection with a re-negotiated note receivable related to the 1999 disposition
of the Company's rail and mass transit business, offset by investments in
operating and office equipment and the acquisition of patents and other
intangibles.
Financing activities used $10.8 million of cash during the nine months
ended September 30, 2000 as a result of the Company's use of proceeds received
in the sale of its airline seating systems to retire $5 million in term debt,
retire $2.3 million of the Company's 8% notes resulting in a gain on early
retirement of $1.1 million and reduction of its line of credit and other
scheduled principal reductions.
RESULTS FROM CONTINUING OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO 1999:
Revenue for the three and nine months ended September 30, 2000
decreased 27% to $24.2 million from $33.2 million for the three month period and
$72.7 million from $99.1 million for the nine month period as compared to
comparable periods in 1999. The decreases in revenue are attributable to the
Company's Commercial Products segment offset partially by increases in revenue
from the Government and Defense segment. Commercial Products revenue for the
three months ended decreased 45% to $11.4 million from $20.6 million and for the
nine month period ended decreased 45% to $35.0 million from $64.2 million. The
decrease in Commercial Products revenue is principally due to the sale of the
Company's airline seating systems product line in January 2000 which generated
revenues of $9.9 million of the three month period and $33.7 million in the nine
month period in 1999. The decrease in Commercial Products revenue in the three
month period is offset partially by an increase in revenue in the Company's
continuing Commercial Products businesses due to recognizing $3.0 million in
license revenue attributable to technology licensing in conjunction with the
settlement of the Company's outstanding litigation with Autoliv. Government and
Defense revenue for the three months ended remained constant at approximately
$12.5 million as compared to $12.6 million in the comparable 1999 period and for
the nine months ended increased 8% to $37.3 million from $34.7 million. The
increase in Government and Defense revenue is primarily attributable to an
overall increase in contracts and the timing of product shipments under those
contracts in production.
Gross margin for the three months ended September 30, 2000 increased 8%
to $10.4 million from $9.7 million and for the nine months ended September 30,
2000 decreased 4% to $25.9 million from $27.1 million for the comparable period
in 1999. Gross margin as a percent of sales for the three months ended increased
to 43% from 29% and for the nine months ended increased to 36% from 27%.
Commercial Products gross margin for the three months ended decreased 10% to
$5.4 million from $6.0 million and for the nine months ended decreased 21% to
$13.0 million from $16.5 million. Commercial Products gross margin as a percent
of sales for the three months ended increased to 48% from 29% and for the nine
months ended increased to 37% from 26%. The changes in Commercial Products gross
margins are primarily attributable to the disposal of the Company's airliner new
seating system product line in January 2000 which produced at overall lower
margins than the remaining continuing Commercial Products businesses and the
effect of license revenue recognized during the third quarter. These increases
in gross margin were partially offset by decreased gross margin attributable to
reduction of selling prices related to the Company's ITS product. Government and
Defense gross margin for the three months ended increased 27% to $4.7 million
from $3.7 million and for the nine months ended increased 20% to $12.5 million
from $10.4 million. Government and Defense gross margin as a percentage of sales
for the three months ended increased to 38% from 29% and for the nine months
ended increased to 33% from 30%. The increase in gross profit margins for
Government and Defense is due to product mix and manufacturing efficiencies
realized as a result of overall increase in contracts.
Administrative expenses for the three months ended September 30, 2000
decreased 19% to $5.1 million from $6.3 million and for the nine months ended
September 30, 2000 decreased 17% to $15.2 million from $18.3 million for the
comparable periods in 1999. Commercial Products administrative expenses for the
three months ended decreased 27% to $2.1 million from $2.9 million and for the
nine months ended decreased 36% to $5.6 million from $8.9 million. The decreases
in the Commercial Products administrative expenses are primarily attributable to
the disposal of the Company's airliner new seating system product line in
January 2000 offset partially by increased administrative expenses for
Commercial Products continuing operations as a result of increased royalty
expense related to product licenses and market development costs related to the
Company's new polymer products. Commercial Products administrative expenses as a
percentage of sales for the three months ended increased to 19% from 14% and for
the nine months ended increased to 16% from 14%. Government and Defense
administrative expenses for the three months ended increased 9% to $2.7 million
from $2.5 million and for the nine months
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<PAGE>
SIMULA,INC.
ended increased 12% to $8.4 million from $7.5 million for the comparable periods
in 1999. Government and Defense administrative expenses as a percentage of sales
for the three months ended increased to 22% from 20% and remained constant at
22% for the nine months ended September 30, 2000 and 1999. Corporate
administrative expenses for the three months ended decreased 44% to $0.3 million
from $0.9 million and for the nine months ended decreased 33% to $1.2 million
from $1.9 million primarily due to legal expense reimbursement provided for in
the settlement of the Autoliv litigation.
In September 2000, the Company provided for a severance liability of
approximately $1.9 million related to its obligations under employment contracts
and severance agreements with terminated employees. Approximately $1.8 million
will be paid in cash, of which $1.3 million was paid in October 2000 and the
remaining $0.5 million will be paid in installments through September 2001.
Interest expense increased 72% to $2.9 million from $1.7 million for
the three months ended September 30, 2000 and 1999, respectively, and increased
47% to $7.5 million from $5.1 million for the nine months ended September 30,
2000 and 1999, respectively. The increase in interest expense is primarily
attributable to the Company's increased cost of capital associated with its debt
refinancing which was completed in December 1999.
Operating income decreased $0.1 million from $3.4 million to $3.3
million for the three month period ended September 30, 2000 and from $8.8
million to $8.7 million for the nine month period ended September 30, 2000.
Operating income during these periods includes the effect in recognition of $3.0
million of technology licensing revenues and $1.0 million of legal expense
reimbursement in conjunction with settlement of a legal dispute with Autoliv.
Income from discontinued operations of $1.3 million net of $0.7 million
tax provision related to the receipt of $2.0 million in cash related to its 1999
disposal of its rail and mass transit seating operation.
Gain on early retirement of debt of $0.7 million net of $0.4 million
tax provision related to the early retirement of $2.3 million principal of the
Company's 8% Convertible Notes.
The effective income tax rate for the three month period ended
September 30, 2000 and 1999 was approximately 26% and 40% respectively and for
the nine month periods ended September 30, 2000 and 1999 approximated 35% and
40%, respectively. The decrease in the income tax rate during the three month
period in 2000 is attributable to a overall adjustment to the expected annual
tax rate from 40% to 35%.
INFLATION
The Company does not believe that it is significantly impacted by inflation.
RESEARCH AND DEVELOPMENT
The Company's research and development occurs under fixed-price,
government-funded and OEM contracts and Company-sponsored efforts. Historically,
research and development efforts have fluctuated based upon available
government-funded contracts and available Company funding. The Company
anticipates that future fluctuations may also occur as a result of efforts to
expand its inflatable restraint, airliner and helicopter seating, and other
technologies. Research and development costs are expenses in the period incurred
unless they are recoverable through customer contracts.
SEASONALITY
The Company does not believe that it is currently significantly
impacted by seasonal factors.
FORWARD LOOKING INFORMATION AND RISKS OF THE BUSINESS
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. During this period, the Company's
focus will be on restructuring its balance sheet to reduce debt and interest
expense.
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SIMULA,INC.
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.
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
positively impacted by 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 financial projections include its leveraged status
and the level and cost of debt; reduction of fixed expenses; 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," "believes" 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.
18
<PAGE>
SIMULA,INC.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On September 27, 2000, the Company entered into a Settlement Agreement
with Autoliv, Inc. in connection with litigation commenced in 1998 and
international arbitration initiated in 1999. Autoliv was a licensee of the
Company's ITS head protection system. The dispute revolved around breach of
contract, unfair competition and patent infringement claims. As part of the
settlement, the companies have outlined a future business relationship and have
dismissed all claims in the pending litigation and proceedings. In the agreement
neither party admitted liability.
As part of the settlement, the companies have outlined a future
business relationship. The Settlement Agreement provides for payment by Autoliv
to Simula of $11.0 million which represents $7.0 million in paid up license fees
related to the ITS and additional inflatable technologies, $3.0 million in
prepaid product to be delivered in the future, and $1.0 million in legal expense
reimbursement. By mutual agreement of the parties certain provisions are
confidential for competitive reasons.
Under the license agreements, the Company retains manufacturing rights
for all or part of the systems sold by Autoliv to OEM customers. The agreement
provides that Simula will be a preferred supplier for manufactured parts as long
as it is competitive as to price, delivery and quality. As is customary in the
automotive business, the product must be competitively priced and Simula will
work with Autoliv to meet customer cost down requirements. To the extent the
Company is not competitive as to price, Autoliv may directly or through other
sub-contractors assume certain manufacturing rights.
The license and manufacturing agreements provided in the Settlement
Agreement places Autoliv in a similar relationship as other licensees with whom
the Company has first tier supplier arrangements made in the ordinary course of
business. See Note 5 of the consolidated financial statements.
The Company has assumed the defense and agreed to indemnify Coach and
Car Equipment Corporation ("CCEC") in a lawsuit instituted in 1999. This
obligation was assumed as part of the negotiated sale of the assets of CCEC
which was completed in August 1999. CCEC was sued in Washington state court by
Talgo, Inc., a customer of CCEC, on February 12, 1999. The lawsuit consisted of
a motion for preliminary injunction, seeking specific performance under a
contract between the parties for the provision by CECC of rail seats to Talgo,
and a complaint accompanying such motion seeking unspecified monetary damages
stemming from alleged missed deliveries by CCEC and defects in seats previously
shipped under the contract. CCEC disputed such allegation. At the time the
lawsuit was filed, Talgo had a $400,000 balance remaining to be paid to CCEC
under the terms of the contract and CCEC then filed a counterclaim against Talgo
for non-payment of the receivable. Subsequent to September 30, 2000, the Company
dismissed its counterclaim for non-payment in exchange for an option to settle
Talgo's claims against the Company no later than January 15, 2001 for $815,000
which the Company has adequately reserved for.
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 5. OTHER - SUBSEQUENT EVENTS
Subsequent to September 30, 2000, the holder of the Company's Series A
Preferred Stock elected to exercise all of the remaining Series A Preferred
shares with a face value of $1,900,000 plus accrued dividends of $5,301. As a
result of the Common Share Limit, the Company could satisfy conversion of
$952,529 and will issue 718,359 shares of its common stock. In accordance with
the provisions of the Preferred Stock Securities Purchase Agreement, the Company
will redeem the remaining preferred shares, and in accordance with the
redemption formula and will pay the holder $1,934,831 by November 9, 2000. The
redemption premium of $982,059 shall be recorded as a dividend on the preferred
shares. The Company will satisfy the redemption through utilization of available
funds under its RLC.
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SIMULA,INC.
As described in the Company's report on Form 8-K filed October 13,
2000, the Chairman of the Company's Board of Directors, Stanley Desjardins,
recently entered into two related agreements: a Proxy Agreement between Mr.
Desjardins and the non-employee members of the Company's Board of Directors and
a Corporate Governance Agreement between Mr. Desjardins and the Company. Under
the Proxy Agreement, Mr. Desjardins covenants that he will not initiate any
proxy contest for at least two years, and irrevocably grants each of the Outside
Directors his proxy for one year on all matters other than those in connection
with a merger, share exchange or sale of substantially all the Company's assets,
or an amendment to the Company's Articles of Incorporation that
disproportionately adversely affects Mr. Desjardins. Under the Corporate
Governance Agreement, Mr. Desjardins and the Company agree (i) to review
existing management contracts and to seek renegotiation of such contracts, (ii)
that Mr. Desjardins remain as Chairman of the Company's Board of Directors for a
minimum of two years, (iii) that Mr. Desjardin's activities as Chairman be
limited to those set forth in the Company's Bylaws or those required by law, and
(iv) that, for a period of two years, only non-employees, other than the
Company's Chief Executive Officer, will be nominated to serve as members of the
Board of Directors.
On November 2, 2000, the Company received final listing approval from
the American Stock Exchange. The Company intends to transfer trading in both its
common stock and its publicly traded convertible debentures to the American
Stock Exchange effective November 13, 2000.
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SIMULA,INC.
PART IV
ITEM 6. EXHIBITS AND REPORTS
a) The following Exhibits are included pursuant to Item 601 of Regulation S-K.
NO. DESCRIPTION REFERENCE
--- ----------- ---------
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.............................(15)
4.8 Certificate of Designation, Preferences, Rights
and Privileges of the Company's $7,500,000
Series A Preferred Stock .....................................(10)
9.1 Proxy Agreement between Stanley P. Desjardins and
Outside Directors of the Company dated
September 29,2000.............................................(17)
9.2 Corporate Governance Agreement between
Stanley P. Desjardins and the Company dated
September 30, 2000............................................(17)
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)
10.40 Asset Purchase Agreement for the sale of
Airline Interiors, Inc., a wholly-owned
subsidiary of the Company,
dated December 24, 1999.......................................(15)
10.41 Financing Agreement with The
CIT Group/Business Credit, Inc.
dated December 30, 1999.......................................(15)
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..............................................(15)
10.44 Change of Control Agreement between
the Company and Joseph W. Coltman dated
February 1, 2000 .............................................(15)
10.45 Promissory Note between the Company
and Stanley P. Desjardins dated December 31, 1999,
effective December 14, 1999...................................(15)
10.46 Second Amendment to Securities Purchase
Agreement with Levine Leichtman Capital
Partners II, L.P. dated August 17, 2000.......................(16)
*10.47 Amendment to Amended and Restated Asset
Purchase Agreement for the sale of Coach
and Car Equipment Corporation dated
September 13, 2000.............................................
18 Preference Letter re: change in accounting
principles.....................................................(3)
*21 Subsidiaries of the Company....................................
24 Powers of Attorney - Directors..........................(5)(9)(15)
*27 Financial Data Schedule........................................
----------
* Filed herewith.
(1) Filed with Registration Statement on Form S-18, No. 33-46152-LA, under
the Securities Act of 1933, effective April 13, 1992.
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SIMULA,INC.
(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 Exchange Act of
1934, on October 26, 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.
(15) Filed with report on Form 10-K for the year ended December 31, 1999.
(16) Filed with Amendment to Schedule 13D, under the Securities Exchange Act
of 1934, on August 25, 2000 by Levine Leichtman Capital Partners II,
L.P.
(17) Filed with report on Form 8-K, under the Securities Exchange Act of
1934, on October 13, 2000.
b) Reports on Form 8-K
The Company filed a report on Form 8-K on October 13, 2000 disclosing a
material change in management, related employee severance costs, and
the execution of a proxy and corporate governance agreement among the
Company, its Board of Directors, and majority shareholder, all as
further described in Item 5 of this Report.
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SIMULA,INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report on Form 10-Q for the quarter ended
September 30, 2000 to be signed on its behalf by the undersigned thereunto duly
authorized.
SIMULA, INC.
DATE: November 7, 2000 /s/ BRADLEY P. FORST
-----------------------------
BRADLEY P. FORST
President
Chief Executive Officer
/s/ JAMES C. DODD
-----------------------------
JAMES C. DODD
Executive Vice President
Chief Financial Officer
23
