Simula 10-Q 2001 Q3 Quarterly report

SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

(Mark One)
	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period endedSeptember 30, 2001 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          

Simula, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Arizona (State or Other Jurisdiction of Incorporation or Organization)	86-0320129 (I.R.S. Employer Identification No.)
2700 North Central Avenue, Suite 1000, Phoenix, Arizona (Address of Principal Executive Offices)	85004 (Zip Code)

(602) 631-4005

(Registrant’s Telephone Number, Including Area Code)(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       No

(2) has been subject to such filing requirements for the past 90 days.

Yes       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 September 30, 2001
Common Stock, $.01 par value		12,229,613

SIMULA, INC.

TABLE OF CONTENTS

		Page
PART I – FINANCIAL INFORMATION
Item 1 – Interim Consolidated Financial Statements
	Consolidated Balance Sheets as of September 30, 2001 and December 31, 2000		2
	Consolidated Statements of Operations for the Three and Nine-Month Periods Ended September 30, 2001 and 2000		3
	Consolidated Statement of Shareholders’ Equity for the Nine-Month Periods Ended September 30, 2001		4
	Consolidated Statements of Cash Flows for the Nine-Month Periods Ended September 30, 2001 and 2000		5
	Notes to Interim Consolidated Financial Statements		6-10
Item 2 – Management’s Discussion and Analysis of Results of Operations and Financial Condition			11-15
Item 3 – Quantitative and Qualitative Disclosure about Market Risk			15
PART II — OTHER INFORMATION
Item 6 – Exhibits and Reports			16
SIGNATURES			17

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
	Item 1. Interim Consolidated Financial Statements
		CONSOLIDATED BALANCE SHEETS
		UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
		UNAUDITED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ DEFICIT NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2001
		UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOW
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
	Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition.
	Item 3. Quantitative and Qualitative Disclosure about Market Risk
PART II – OTHER INFORMATION
	Item 6. Exhibits and Reports
SIGNATURES
EXHIBIT INDEX
EX-10.41(a)
EX-10.45
EX-10.46
EX-10.47

PART I. FINANCIAL INFORMATION
Item 1. Interim Consolidated Financial Statements

SIMULA, INC.
CONSOLIDATED BALANCE SHEETS

			September 30,			December 31,
			2001			2000
			(unaudited)
ASSETS
CURRENT ASSETS
	Cash and cash equivalents		$	344,568		$	746,078
	Contract and trade receivables — Net			22,821,622			24,992,446
	Inventories			5,898,321			5,927,139
	Deferred income taxes			2,394,000			3,243,000
	Prepaid expenses and other			671,898			739,297
	Net assets held for sale			1,310,834			—
		Total current assets		33,441,243			35,647,960
PROPERTY, EQUIPMENT, and LEASEHOLD IMPROVEMENTS — Net				10,114,355			8,345,520
DEFERRED INCOME TAXES				36,249,000			34,340,000
DEFERRED FINANCING COSTS				4,437,665			3,534,759
INTANGIBLES — Net				3,296,833			3,115,689
OTHER ASSETS				1,906,985			914,474
TOTAL			$	89,446,081		$	85,898,402
LIABILITIES AND SHAREHOLDERS’ DEFICIT
CURRENT LIABILITIES
	Revolving line of credit		$	8,641,991		$	5,329,429
	Trade accounts payable			6,501,770			5,966,003
	Other accrued liabilities			7,116,675			10,688,627
	Deferred revenue			1,832,404			2,327,615
	Accrued restructuring costs			1,643,915			1,911,115
	Advances on contract			1,920,154			1,098,976
	Current portion of long-term debt			1,172,756			19,711,509
		Total current liabilities		28,829,665			47,033,274
DEFERRED REVENUE				1,124,543			2,632,271
DEFERRED LEASE COST				295,790			142,999
LONG-TERM DEBT — Less current portion				60,814,266			36,750,894
		Total liabilities		91,064,264			86,559,438
SHAREHOLDER’S DEFICIT
	Preferred stock, $.05 par value — authorized 50,000,000 shares;
	Common stock, $.01 par value — authorized 50,000,000 shares; issued 12,229,613 and 12,190,011 respectively			122,297			121,900
	Additional paid-in-capital			62,304,242			62,149,281
	Accumulated deficit			(63,616,456	)		(62,482,382	)
	Accumulated other comprehensive income			(428,266	)		(449,835	)
		Total shareholder’s deficit		(1,618,183	)		(661,036	)
TOTAL			$	89,446,081		$	85,898,402

See notes to consolidated financial statements.

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SIMULA, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

	Three-Month Period Ended						Nine-Month Period Ended
	September 30,						September 30,
	2001			2000			2001			2000
Revenue	$	27,078,541		$	24,195,456		$	78,571,206		$	72,701,163
Cost of revenue		17,923,855			13,805,693			50,511,624			46,822,561
Gross margin		9,154,686			10,389,763			28,059,582			25,878,602
Administrative expenses		5,791,566			5,070,436			17,014,055			15,158,238
Restructuring charges								479,000
Employee severance expense		438,000			1,930,081			438,000			1,930,081
Adjustment for net assets held for sale		50,000						650,000
Operating income		2,875,120			3,389,246			9,478,527			8,790,283
Interest expense		(2,640,180	)		(2,928,492	)		(7,808,701	)		(7,494,661	)
Income before taxes		234,940			460,754			1,669,826			1,295,622
Income tax expense		(86,000	)		(119,000	)		(621,000	)		(454,000	)
Income before discontinued operations and extraordinary item		148,940			341,754			1,048,826			841,622
Earnings from discontinued operations, net of related income tax expense of $700,000					1,300,000						1,300,000
Extraordinary (loss) gain on early extinguishment of debt, net of related income tax benefit (expense) of $1,633,000 and ($392,000) respectively		(2,182,900	)		725,750			(2,182,900	)		725,750
Net income (loss)		(2,033,960	)		2,367,504			(1,134,074	)		2,867,372
Preferred stock dividends					28,733						95,416
Net earnings (loss) available for common shareholders	$	(2,033,960	)	$	2,338,771		$	(1,134,074	)	$	2,771,956
Earnings per common share – basic:
Income before discontinued operations and extraordinary item	$	0.01		$	0.03		$	0.09		$	0.07
Earnings from discontinued operations					0.11						0.12
Extraordinary (loss) gain on early extinguishment of debt		(0.18	)		0.06			(0.18	)		0.06
Earnings (loss) per common share – basic	$	(0.17	)	$	0.20		$	(0.09	)	$	0.25
Earnings per common share – diluted:
Income before discontinued operations and extraordinary item	$	0.01		$	0.03		$	0.09		$	0.07
Earnings from discontinued operations					0.11						0.11
Extraordinary (loss) gain on early extinguishment of debt		(0.18	)		0.06			(0.18	)		0.06
Earnings (loss) per common share – diluted	$	(0.17	)	$	0.20		$	(0.09	)	$	0.24

See notes to consolidated financial statements.

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SIMULA, INC.
UNAUDITED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ DEFICIT
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2001

	Common Stock										Accumulated
											Other			Total
					Additional			Accumulated			Comprehensive			Shareholders'			Comprehensive
	Shares		Amount		Paid-in Capital			Deficit			Income			Deficit			Income
BALANCE, JANUARY 1, 2001		12,190,011	$	121,900	$	62,149,281		$	(62,482,382	)	$	(449,835	)	$	(661,036	)
Net loss									(1,134,074	)					(1,134,074	)	$	(1,134,074	)
Repurchase stock options						(19,000	)								(19,000	)
Issuance of common stock		39,602		397		99,961									100,358
Stock option compensation						74,000									74,000
Currency translation adjustment												21,569			21,569			21,569
BALANCE, SEPTEMBER 30, 2001		12,229,613	$	122,297	$	62,304,242		$	(63,616,456	)	$	(428,266	)	$	(1,618,183	)	$	(1,112,505	)

See notes to consolidated financial statements.

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SIMULA, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOW

				Nine-Month Period Ended
				September 30,
				2001			2000
CASH FLOWS FROM OPERATING ACTIVITIES:
	Net Income (Loss)			$	(1,134,074	)	$	2,867,372
	Adjustment to reconcile net income from operating activities:
		Depreciation and amortization			3,370,986			4,134,375
		Deferred income taxes			(1,060,000	)		1,546,000
		Capitalized interest			348,808			345,999
		Stock option compensation			74,000			83,288
		Loss (Gain) on early extinguishment of debt			3,815,900			(1,117,750	)
		Gain on discontinued operations						(2,000,000	)
		Legal settlement						(11,000,000	)
		Restructuring charge			479,000
		Write down net assets held for sale			650,000
		Currency translation adjustment			21,569			(320,250	)
	Changes in net assets and liabilities:
		Contract and trade receivables – net of advances			1,684,240			952,216
		Inventories			(562,178	)		(969,888	)
		Prepaid expenses and other			60,119			(154,111	)
		Other assets			(992,511	)		(246,150	)
		Net assets held for sale						677,582
		Trade accounts payable			777,198			(1,779,273	)
		Deferred revenue			(2,002,938	)		3,294,644
		Deferred lease costs			152,790
		Restructuring reserve			(695,763	)		(3,430,239	)
		Other accrued liabilities			(3,571,952	)		1,278,238
			Net cash provided by (used in) operating activities		1,415,194			(5,837,947	)
CASH FLOWS FROM INVESTING ACTIVITIES:
		Purchase of property and equipment			(3,578,633	)		(469,348	)
		Costs incurred to obtain intangibles			(1,034,525	)		(866,023	)
		Proceeds from note receivable						2,000,000
		Proceeds from sale						11,358,660
			Net cash (used in) provided by investing activities		(4,613,158	)		12,023,289
CASH FLOWS FROM FINANCING ACTIVITIES:
		Net borrowings (repayments) under line of credit			3,312,562			(2,930,383	)
		New borrowings net of costs			22,515,546			(8,006,316	)
		Repayments under other debt arrangements			(23,113,012	)
		Repurchase stock options			(19,000	)
		Dividends paid						(90,814	)
		Issuance of common shares			100,358			208,848
			Net cash provided by (used in) financing activities		2,796,454			(10,818,665	)
NET DECREASE IN CASH AND CASH EQUIVALENTS					(401,510	)		(4,633,323	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD					746,078			5,223,236
CASH AND CASH EQUIVALENTS AT END OF PERIOD				$	344,568		$	589,913

See notes to consolidated financial statements.

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SIMULA, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

		Nine Months Ended
		September 30,
		2001		2000
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 2000, the Company exchanged a note payable in the amount of $950,000 as consideration for the purchase of a certain technology intangible
	Interest paid	$	6,615,183	$	6,472,847
	Taxes paid	$	63,873	$	45,002

See notes to consolidated financial statements.

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SIMULA, INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — Basis of Presentation

         The consolidated financial statements include the accounts of Simula, Inc. and its subsidiaries (collectively “we” and “our”). All of the subsidiaries are wholly owned. All intercompany transactions are eliminated in consolidation.

         We have prepared the accompanying interim consolidated financial statements in accordance with Generally Accepted Accounting Principles (“GAAP”) 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 GAAP 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 extraordinary loss recognized in relation to the refinancing of our Senior Secured Note and employee severance costs in the three-month period ended September 30, 2001, plus restructuring and adjustments necessary to adjust assets held for sale to their net realizable value for the nine-month period ended September 30, 2001. Operating results for the three and nine months ended September 30, 2001 are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. Such interim financial statements should be read in conjunction with our consolidated financial statements and notes thereto included in our 2000 Form 10-K.

Note 2 – New Accounting Pronouncements

         In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,Business Combinationsand SFAS No. 142,Goodwill and Other Intangible Assets. SFAS No. 141 is effective immediately and SFAS 142 will be effective January 2002. The new standards are not expected to have a significant impact on our financial statements.

Note 3 — Inventories

         At September 30, 2001 and December 31, 2000, inventories consisted of the following:

		September 30,		December 31,
		2001		2000
Raw Materials		$	4,153,306	$	4,102,441
Work in Progress			1,583,384		1,551,463
Finished Goods			161,631		273,235
	Total Inventories	$	5,898,321	$	5,927,139

Note 4 – Debt

         On September 26, 2001, we completed a financing of $25 million in a Senior Secured Note due December 31, 2003. The financing allowed us to repay the lender under our previous $5 million and $15 million Senior Secured Notes for which we had been in non-monetary default since December 31, 2000. In connection with the pre-payment of this debt, an extraordinary loss on early extinguishment of debt of $2.2 million, net of an income tax benefit of $1.6 million, has been recorded. The write off included pre-payment penalties and interest charges of $1.4 million and unamortized deferred finance fees and loan discounts totaling $2.4 million pre-tax.

         The new $25 million Senior Secured Note bears interest at 12.5% per annum payable quarterly and accrues payment in kind (“PIK”) interest at 6%, which at our option may be paid quarterly or capitalized into the note balance. The PIK rate may also be reduced as the Company’s leverage ratio is reduced. The Senior Secured Note contains covenants that require the maintenance of certain defined financial ratios and limits additional borrowings

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SIMULA, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

and capital expenditures. We were in compliance with all of these covenants at September 30, 2001. The Senior Note is secured by our assets.

         During the third quarter 2001, we negotiated an amendment to our revolving line of credit (“RLC”) which increased our advance rate related to Revenue in Excess of Billing to 40% from 15% and modified the relative loan advance rate to $3.5 million. This modification provided additional borrowing base availability of $1.8 million at September 30, 2001 resulting in a total borrowing base of $14.8 million of which $8.6 million was outstanding. The loan availability is subsequently reduced $0.5 million each quarter beginning December 31, 2001, until it is reduced to $1.5 million by September 30, 2002. In addition, the RLC was extended to December 31, 2003 and provides for an early termination fee of 1.75% if terminated prior to September 30, 2002 and 1% thereafter. Substantially all the debt covenants were modified to mirror the requirements of the new Senior Secured Note. The Company was in compliance will all of these covenants at September 30, 2001.

Note 5 – Restructuring and Other Charges

         We committed ourselves to a plan of restructuring which includes narrowing the focus of our operations, consolidating certain of our operating units, reducing our workforce, monetizing our technology portfolio, rationalizing internal research and development costs, restructuring our balance sheet by refinancing our debt structure to achieve overall interest savings and a program of debt reduction through improved earnings and strategic disposition of assets. As a result, during the first quarter of 2001, we recorded restructuring costs of $0.5 million consisting of $0.4 million in employee severance and $0.1 million related to remaining facility lease liability and the write down of fixed assets. The headcount reductions occurred in mid March 2001 and all severance benefits have been paid as of September 30, 2001. The facility lease liability is expected to be extinguished prior to 2001 fiscal year end. During the second quarter of 2001, we recorded an additional charge of $0.6 million to write down net assets held for sale to their estimated net realizable value and this estimate was increased $0.1 million during the third quarter. During the third quarter of 2001, we recorded additional charges of $0.4 million in employee severance costs related to the termination of executive management attributable to management re-alignment, and two management positions within our commercial business held for sale. Included in these employee severance costs is $0.1 million in non-cash compensation related to full vesting under outstanding stock options.

         In December 1999, we recorded an $18.3 million restructuring charge related to the divestiture of our commercial airline seat manufacturing operation. At December 31, 2000, $1.9 million in accrued restructuring costs remained outstanding. These costs consist primarily of equipment and facility lease obligations and outstanding purchase order commitments which were non-cancelable. During the nine months ended September 30, 2001, approximately $0.3 million consisting primarily of lease costs were paid and approximately $1.6 million related to the 1999 and 2001 restructuring activities remained outstanding.

Note 6 – Income Taxes

         Statement of Financial Accounting Standards No. 109 requires the recording of a deferred tax asset valuation allowance if the weight of available evidence indicates that some or all of the deferred tax asset will not be realized. Such evidence includes the historical operating performance of the company including its ability to continue as a going concern and tax planning strategies.

         We increased our deferred tax valuation allowance $0.7 million in 2000, $0.1 million in 1999 and $0.3 million in 1998 because certain tax credits and operating loss carry forwards, primarily related to states in which we no longer have operations, are unlikely to be utilized. At December 31, 2000, the Company had approximately $88.0 million of net operating loss carry forwards which expire through 2020.

         We have incurred losses for each of the past five years. These losses were primarily related to certain unprofitable businesses and charges and write-offs related to the disposition of those businesses. In addition, our operating plan, which has been adopted by the Board of Directors, supports our ability to generate sufficient taxable

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SIMULA, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

income to utilize the available net operating losses prior to their expiration. This plan is based on programs and contracts currently in hand. In addition, should we be required to sell assets or liquidate certain business operations, management believes estimated gains would be sufficient to utilize our existing deferred tax assets.

         Accordingly, although realization of the net deferred tax assets are not assured, management believes that it is more likely than not that all of the net deferred tax assets will be realized. The amount of net deferred tax assets considered realizable, however, could be reduced in the near term based on changing conditions.

Note 7 – Segment Reporting

         We are a holding company for wholly owned subsidiaries which operate in two primary business segments. Our Commercial Products segment includes operations encompassing inflatable restraints and related technology for automobiles, airline seating soft goods and polymer materials. Our Aerospace 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. Our remaining segment, entitledOther, represents general corporate operations.

         For the three-month period ended September 30, 2001 and 2000 inter-segment sales were insignificant and total intercompany sales of $315,303 and $461,311, respectively, have been eliminated.

			2001
			Commercial		Aerospace and
			Products		Defense		Other		Total
Revenue:
	Contract revenue		$	0	$	16,287,379	$	0	$	16,287,379
	Product sales:
		Automotive safety systems		8,528,814						8,528,814
		Other		1,876,099						1,876,099
	Technology sales and royalties			290,375		95,874				386,249
Total revenue			$	10,695,288	$	16,383,253	$	0	$	27,078,541
Operating income (loss)			$	275,051	$	2,125,507	$	474,562	$	2,875,120

			2000
			Commercial		Aerospace and
			Products		Defense		Other			Total
Revenue:
	Contract revenue		$	0	$	12,347,698	$	0		$	12,347,698
	Product sales:
		Automotive safety systems		7,273,009							7,273,009
		Other		854,817							854,817
	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 income (loss)			$	3,294,790	$	1,955,110		($1,860,654	)	$	3,389,246

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SIMULA, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

         For the nine-month period ended September 30, 2001 and 2000, inter-segment sales were insignificant and total intercompany sales of $735,923 and $1,625,688, respectively, have been eliminated.

			2001
			Commercial		Aerospace and
			Products		Defense		Other			Total
Revenue:
	Contract revenue		$	0	$	45,502,868	$	0		$	45,502,868
	Product sales:
		Automotive safety systems		26,817,792							26,817,792
		Other		5,199,999							5,199,999
	Technology sales and royalties			859,654		190,893					1,050,547
Total revenue			$	32,877,445	$	45,693,761	$	0		$	78,571,206
Operating income (loss)			$	3,286,050	$	7,316,754		($1,124,277	)	$	9,478,527

			2000
			Commercial		Aerospace and
			Products		Defense		Other			Total
Revenue:
	Contract revenue		$	0	$	36,848,773	$	0		$	36,848,773
	Product sales:
		Airline seat systems		4,275,278							4,275,278
		Automotive safety systems		23,265,380							23,265,380
		Other		3,713,080							3,713,080
	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 income (loss)			$	7,347,262	$	4,113,633		($2,670,612	)	$	8,790,283

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SIMULA, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

Note 8–Earnings per share

         The following is a reconciliation of the numerators and denominators of basic and diluted per share computations. For the nine-month period ended September 30, 2001 and 2000, the effect of 1,774,074 shares and 1,836,752 shares, respectively, to be issued upon conversion of the 8% Notes was not used in determining dilutive earnings per share because the result would be anti-dilutive.

	Three-Months Ended					Nine-Months Ended
	September 30,					September 30,
	2001			2000		2001			2000
Income before discontinued operations and extraordinary item	$	148,940		$	341,754	$	1,048,826		$	841,622
Earnings from discontinued operations					1,300,000					1,300,000
Extraordinary (loss) gain on early extinguishment of debt		(2,182,900	)		725,750		(2,182,900	)		725,750
Net income (loss)		(2,033,960	)		2,367,504		(1,134,074	)		2,867,372
Dividends on preferred stock					28,733					95,416
Net earnings available to common shareholders	$	(2,033,960	)	$	2,338,771	$	(1,134,074	)	$	2,771,956
Basic weighted average shares outstanding		12,228,726			11,418,199		12,206,505			11,230,598
Effect of dilutive securities		324,602			46,472		427,973			134,659
Diluted weighted average shares outstanding		12,553,328			11,464,671		12,634,478			11,365,257
Earnings per common share – basic:
Income before discontinued operations and extraordinary item	$	0.01		$	0.03	$	0.09		$	0.07
Earnings from discontinued operations					0.11					0.12
Extraordinary (loss) gain on early extinguishment of debt		(0.18	)		.06		(0.18	)		0.06
Earnings per common share – basic	$	(0.17	)	$	0.20	$	(0.09	)	$	0.25
Earnings per common share – diluted:
Income before discontinued operations and extraordinary item	$	0.01		$	0.03	$	0.09		$	0.07
Earnings from discontinued operations					0.11					0.11
Extraordinary (loss) gain on early extinguishment of debt		(0.18	)		0.06		(0.18	)		0.06
Earnings per common share – diluted	$	(0.17	)	$	0.20	$	(0.09	)	$	0.24

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Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition.

Results of Operations

Three and Nine-Month Periods Ended September 30, 2001 Compared to
Three and Nine-Month Periods Ended September 30, 2000

CONSOLIDATED

	Three Months Ended												Nine Months Ended
	September 30,												September 30,
										Percent											Percent
(In thousands)	2001			2000			Change			Inc (Dec)			2001			2000			Change		Inc (Dec)
Revenue	$	27,079		$	24,195		$	2,884			12	%	$	78,571		$	72,701		$	5,870		8	%
Gross margin		9,155			10,390			(1,235	)		(12	)%		28,060			25,879			2,181		8	%
Administrative expense		5,792			5,070			722			14	%		17,014			15,158			1,856		12	%
Operating income		2,875			3,389			(514	)		(15	)%		9,479			8,790			689		8	%
Interest expense		2,640			2,928			(288	)		(10	)%		7,809			7,495			314		4	%
Income before tax		235			461			(226	)		(49	)%		1,670			1,296			374		29	%
Tax expense		86			119			(33	)		(28	)%		621			454			167		37	%
Gross margin as a percentage of revenue		34	%		43	%								36	%		36	%
Administrative expenses as a percentage of revenue		21	%		21	%								22	%		21	%
Effective tax rate		37	%		26	%								37	%		35	%

AEROSPACE & DEFENSE

	Three Months Ended											Nine Months Ended
	September 30,											September 30,
									Percent											Percent
(In thousands)	2001			2000			Change		Inc (Dec)			2001			2000			Change		Inc (Dec)
Revenue	$	16,383		$	12,459		$	3,924		31	%	$	45,694		$	37,300		$	8,394		23	%
Gross margin		5,780			4,678			1,102		24	%		16,743			12,495			4,248		34	%
Gross margin as a percentage of revenue		35	%		38	%							37	%		33	%

COMMERCIAL PRODUCTS

	Three Months Ended												Nine Months Ended
	September 30,												September 30,
										Percent												Percent
(In thousands)	2001			2000			Change			Inc (Dec)			2001			2000			Change			Inc (Dec)
Revenue	$	10,695		$	11,346		$	(651	)		(6	)%	$	32,877		$	35,011		$	(2,134	)		(6	)%
Gross margin		3,375			5,322			(1,947	)		(37	)%		11,317			12,993			(1,676	)		(13	)%
Gross margin as a percentage of revenue		32	%		48	%								34	%		37	%

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Results of Operations for the Three-Month Period Ended September 30, 2001

Revenues for the period in 2000 include revenues from the license payment and legal settlement (“Autoliv Payment”) of $3.0 million in our Commercial Products segment and $.4 million in our Other segment. Excluding these items of revenue from the period in 2000, revenues increased 30% for the period from $20.8 million to $27.1 million. Revenue for the period grew 31% in the Aerospace and Defense segment from $12.5 million to $16.4 million due primarily to increases in the armor and parachute product lines. Excluding the effect of the Autoliv Payment in 2000, revenue for the period grew 29% in the Commercial segment from $8.3 million to $10.7 million due primarily to a shift in the 2000 shipment schedule for the Inflatable Tubular Structure (ITS). This timing shift in shipments led to relatively low revenues for the period in 2000.

Gross margins for the period in 2000 also include revenues from the Autoliv Payment of $3.0 million in our Commercial Products segment and $.4 million in our Other segment. These revenues had no associated expenses. Excluding these items of revenue from the period in 2000, gross margins increased 31% for the period from $7.0 million to $9.2 million. Gross margins for the period grew 23% in the Aerospace and Defense segment from $4.7 million to $5.8 million due primarily to increases in revenue. Excluding the effect of the Autoliv Payment in 2000, gross margins for the period grew 48% in the Commercial products segment from $2.3 million to $3.4 million due primarily to the timing shift referred to above.

Administrative expenses for the period in 2001 include a reduction of expenses from the reversal of a lease termination reserve of $.3 million in our Other segment. Excluding the effect of the reserve reversal, administrative expenses increased 20% for the period from $5.1 million to $6.1 million. This increase is due to increases in our research and development activities; sales and marketing; and outside services in support of our restructuring activity.

Operating income for the period was $2.9 million. This included employee severance costs of $.4 million and increased reserve for net assets held for sale of $.05 million offset by the reduction in lease termination reserve of $.3 million. Adjusted for these items, operating income was $3.0 million, an increase of 57% over similarly adjusted operating income for the period in 2000: $3.4 million reported operating income reduced by $3.4 million for the Autoliv Payment and increased $1.9 million for employee severance.

Results of Operations for the Nine-Month Period Ended September 30, 2001

Revenues for the period in 2000 include revenues from the Autoliv Payment of $3.0 million in our Commercial Products segment and $.4 million in our Other segment. Similarly, revenues for the period in 2001 include first time revenues from the reimbursement of development costs on the Cockpit Airbag System (“CABS”) contract (“CABS Payment”) of $1 million in our Aerospace and Defense segment. Excluding these items of revenue from both 2000 and 2001, revenues increased 12% for the period from $69.3 million to $77.6 million.

Excluding the CABS Payment in 2001, revenue for the period grew 20% in the Aerospace and Defense segment from $37.3 million to $44.7 million due primarily to increases in the armor and parachute product lines. Excluding the Autoliv Payment in 2000, revenue for the period grew 3% in the Commercial segment from $32.0 million to $32.9 million. The sales growth was the result of increases in unit sales of the Inflatable Tubular Structure (ITS) offset by a decrease in sale prices.

Gross margins for the period in 2000 also include revenues from the Autoliv Payment of $3.0 million in our Commercial Products segment and $.4 million in our Other segment. Similarly, revenues for the period in 2001 include revenues from the reimbursement of development costs on the CABS contract (“CABS Payment”) of $1 million in our Aerospace and Defense segment. These revenues had no associated expenses. Excluding these items of revenue from the period in 2000, gross margins increased 20% for the period from $22.5 million to $27.1 million.

Excluding the CABS Payment in 2001, gross margins for the period grew 26% in the Aerospace and Defense segment from $12.5 million to $15.7 million due primarily to increases in revenue. Excluding the effect of the Autoliv Payment in 2000, gross margins for the period grew 13% in the Commercial products segment from $10.0 million to $11.3 million as a result of the sales growth discussed above.

Administrative expenses for the period in 2001 include a reduction of expenses from the reversal of a lease termination reserve of $.3 million in our Other segment. Excluding the effect of the reserve reversal, administrative expenses

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increased 14% for the period from $15.2 million to $17.3 million. This increase was caused by the same items discussed in the quarterly results above.

Operating income for the period was $9.5 for 2001. Included in this amount were reductions of $1.5 million ($.5 million restructuring, $.4 million employee severance, and $.6 million adjustment for net assets held for sale) and additions of $1.0 million for CABS Payment and $.3 million for the reversal of the lease termination reserve. Adjusted for these items, operating income was $9.7 million, an increase of 33% over similarly adjusted operating income for the period in 2000: $8.8 million reported operating income reduced by $3.4 million for the Autoliv Payment and increased $1.9 million for employee severance.

         Interest Expense– Cash interest expense for the three and nine months ended September 30, 2001 was $1.9 million and $5.8 million inclusive of default interest of $0.4 million and $0.8, respectively. Cash interest expense for the three and nine-month periods ended September 30 2000 was $1.9 million and $5.6 million, respectively.

         Income Taxes– Our effective income tax rate for the three and nine months ended September 2001 was 37% as compared to 25% and 35% in the comparable 2000 periods. The variation in our tax rate is attributable to rate adjustments based upon anticipated annual earnings and the ability to utilize state and federal net operating loss carryforwards and foreign tax credits.

Liquidity and Capital Resources

Liquidity

         On September 26, 2001, we completed a financing of $25 million in a Senior Secured Note due December 31, 2003. The financing allowed us to repay the lender under our previous $5 million and $15 million Senior Secured Notes for which we had been in non-monetary default since December 31, 2000. In connection with the pre-payment of this debt, an extraordinary loss on early extinguishment of debt of $2.2 million, net of an income tax benefit of $1.6 million, has been recorded. The write off included pre-payment penalties and interest charges of $1.4 million and unamortized deferred finance fees and loan discounts totaling $2.4 million pre-tax.

         The new $25 million Senior Secured Note bears interest at 12.5% per annum payable quarterly and accrues payment in kind (“PIK”) interest at 6%, which at our option, may be paid quarterly or capitalized into the note balance. The PIK rate may also be reduced as the Company’s leverage ratio is reduced. The Senior Secured Note contains covenants that require the maintenance of certain defined financial ratios and limits additional borrowings and capital expenditures. We were in compliance with all of these covenants at September 30, 2001. The Senior Note is secured by our assets.

         We define liquidity as our ability to generate adequate cash to meet our obligations and fund operations. At September 30, 2001, we had cash and cash equivalents of $344,568 compared to $746,078 at December 31, 2000. We had outstanding borrowings under our revolving line of credit (“RLC”) of $8.6 million on an available base of $14.8 million at September 30, 2001 as compared to outstanding borrowings of $5.3 million on an available base of $13.7 million at December 31, 2000.

         During the third quarter 2001, we negotiated an amendment to our RLC which had the effect of increasing our loan availability by approximately $1.8 million. This temporary modification will be eliminated by quarterly reductions.

         For the nine months ended September 30, 2001, operations provided approximately $1.4 million of cash as compared to a cash usage of $5.8 million for the comparable period in 2000. The increase in cash provided by operations is due to increased operating earnings, increased cash provided from collection of contract and trade receivables net of advances on contracts, and increases in accounts payable, offset partially by cash used to build inventories, other assets, and reductions of restructuring and other liabilities. The increase in cash provided from contract and trade receivables, net of advances on contracts, is principally due to timing of contract billing provisions and actual costs incurred. The increase in cash used to build inventories is attributable to increased sales in the Aerospace and Defense segment, while the increase in other assets is attributable to deferred development costs reimbursable under a supply contract in our Commercial business segment. The cash used to reduce restructuring and other liabilities is attributable to the reduction of restructuring lease liabilities ($0.3 million), severance obligations ($0.7 million), health costs related to the terminated self funded medical plan ($0.8 million), funding of our pension plan in excess of current

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year expense ($0.7 million), and the effect of semi-annual payment of accrued interest ($0.8 million), and scheduled payments related to the Talgo litigation settlement ($0.9 million).

         Investing activities used $4.6 million during the nine months ended September 30, 2001, principally attributable to leasehold improvements made in relation to the relocation of our largest manufacturing division and additional investment in our patent portfolio.

         Financing activities provided net cash of $2.8 million for the nine months ended September 30, 2001, primarily the result of increased borrowing under our RLC. We entered into a new Senior Secured Note agreement for $25 million and received $22.5 million net of expenses. With the entire proceeds received from our Senior Secured Note financing, the $5 million and $15 million Senior Secured Notes, with a face value of $20.8 million, for which we were in non-monetary default, were retired. For the comparable period in 2000, approximately $10.8 million of cash was used to pay down debt, of which $11.4 million was provided from the sale of assets and $2.0 million was provided from a note receivable.

         We believe that our existing available line of credit and cash generated from operations will be sufficient to fund our operations and planned expenditures for the next twelve months. We may, however, encounter additional funding requirements to fund expansion or increased working capital needs. We can give no assurances that those potential additional needs can be met.

Research and Development

         Historically, we have made significant investments in research and development. Our research and development expenditures have fluctuated based on available government-funded contracts and available company funding. We anticipate that future fluctuations will continue as a result of our efforts to expand product lines and enhance our existing technologies.

Inflation

         We do not believe that we are significantly impacted by the current inflationary environment.

Seasonality

         We do not believe that we are significantly impacted by seasonal factors.

Risks and Uncertainties in the Business and Forward-Looking Information

         A wide variety of factors will affect our projected operating and financial results and could adversely impact our revenues, profitability and cash flows. Our liquidity and available working capital will largely depend upon our cash flow from operations and, potentially, upon proceeds from asset sales or licensing. Improved cash flow from operations will depend on our ability to continue to implement our cost cutting initiatives. Continued compliance with our debt covenants is a requirement for maintaining access to funds available under our RLC.

         Many of our products are subassemblies in final products. We act as subcontractor to defense industry prime contractors and as a component supplier to automotive original equipment manufacturers (“OEM”) first tier systems suppliers. Accordingly, to gain and retain market acceptance, we must continue to demonstrate that our products will provide advantages to the manufacturers of final products, including increasing product safety and providing such manufacturers with competitive cost advantages.

         Although we have long established relationships with a number of our Aerospace and Defense customers, we do not have significant long-term supply contracts with any of these customers. Our customers typically do not commit to long-term production schedules and, as a result, customer orders generally are subject to cancellation or delay. Reliance upon defense contracts involves certain risks, including dependence on Congressional appropriations and changes in governmental policies that reflect military and political developments.

         In our Commercial Products segment, we operate in the highly competitive automotive safety industry. As most of our competitors have greater resources than we do, our success in this industry is largely dependent on our ability to innovate. Our ability to compete effectively in this industry also depends on our ability to remain competitive in pricing,

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service, and performance. In addition, automotive OEMs continually exert downward pressure on prices, forcing us to innovate in order to maintain or increase margins from year to year.

         Other factors pertinent to our ability to meet our current and future financial projections include:

• our leveraged status and the level and cost of our debt;

• the continued reduction of our fixed expenses;

• our ability to continue to provide design and manufacturing services products and new product applications that compare favorably on the basis of time to introduction, cost, and performance with those of our competitors;

• the cyclical nature of the automobile industry and other markets addressed by our products;

• the level and makeup of military expenditures;

• contract mix and shifting production and delivery schedules among our market segments;

• the amount of resources available for independent research and development;

• proof of concept and production validation of certain of our new technologies and proposed products, as well as our financial ability to establish manufacturing capacity for such products;

• technological changes introduced by competitors and customers.

         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. We undertake no obligation to update any of these forward-looking statements to reflect events or circumstances after the date on which such statements were made or to reflect the occurrence of unanticipated events. Actual results and trends may differ materially. Risks include those described herein and in our registration statements and periodic reports filed with the U.S. Securities and Exchange Commission.

Item 3. Quantitative and Qualitative Disclosure about Market Risk

         There have been no material changes to our exposures to market risk since December 31, 2000.

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PART II – OTHER INFORMATION

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		(6	)
10.11	1992 Stock Option Plan, as amended effective September 15, 1998		(4	)
10.12	1992 Restricted Stock Plan		(1	)
10.21	1994 Stock Option Plan, as amended effective September 15, 1998		(4	)
10.26	Simula, Inc. Employee Stock Purchase Plan		(2	)
10.37	Simula, Inc. 1999 Incentive Stock Option Plan		(5	)
10.41	Financing Agreement with The CIT Group/Business Credit, Inc. dated December 30, 1999		(6	)
10.41A	Amendment Number Three to Financing Agreement between the Company and The CIT Group/Business Credit, Inc. dated September 26, 2001		*
10.43	Employment Agreement between the Company and Joseph W. Coltman dated February 1, 2000		(6	)
10.44	Change of Control Agreement between the Company and Joseph W. Coltman dated February 1, 2000		(6	)
10.45	Loan Agreement between the Company and Allied Capital Corporation dated September 26, 2001		*
10.46	Employment Agreement between the Company and Bradley P. Forst dated November 12, 2001, effective October 1, 2000		*
10.47	Employment Agreement between the Company and J. Michael Miller dated November 12, 2001, effective January 8 , 2001		*
18.	Preference Letter re: change in accounting principles		(3	)
21.	Subsidiaries of the Company		(6	)

*	Filed herewith.
(1)	Filed with Registration Statement on Form S-18, No. 33-46152-LA, under the Securities Act of 1933, effective April 13, 1992.
(2)	Filed with 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 for the quarter ended June 30, 1996.
(4)	Filed with report on Form 10-Q for the quarter ended September 30, 1998.
(5)	Filed as Appendix A with Definitive proxy on May 14, 1999, for the Company’s Annual Meeting of Shareholders held on June 17, 1999.
(6)	Filed with report on Form 10-K for the year ended December 31, 1999.

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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, 2001 to be signed on its behalf by the undersigned thereunto duly authorized.

	SIMULA, INC.
DATE: November 14, 2001	/s/ Bradley P. Forst BRADLEY P. FORST President Chief Executive Officer
	/s/ J. Michael Miller J. MICHAEL MILLER Executive Vice President Chief Operating Officer Acting Chief Financial Officer

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EXHIBIT INDEX

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		(6	)
10.11	1992 Stock Option Plan, as amended effective September 15, 1998		(4	)
10.12	1992 Restricted Stock Plan		(1	)
10.21	1994 Stock Option Plan, as amended effective September 15, 1998		(4	)
10.26	Simula, Inc. Employee Stock Purchase Plan		(2	)
10.37	Simula, Inc. 1999 Incentive Stock Option Plan		(5	)
10.41	Financing Agreement with The CIT Group/Business Credit, Inc. dated December 30, 1999		(6	)
10.41A	Amendment Number Three to Financing Agreement between the Company and The CIT Group/Business Credit, Inc. dated September 26, 2001		*
10.43	Employment Agreement between the Company and Joseph W. Coltman dated February 1, 2000		(6	)
10.44	Change of Control Agreement between the Company and Joseph W. Coltman dated February 1, 2000		(6	)
10.45	Loan Agreement between the Company and Allied Capital Corporation dated September 26, 2001		*
10.46	Employment Agreement between the Company and Bradley P. Forst dated November 12, 2001, effective October 1, 2000		*
10.47	Employment Agreement between the Company and J. Michael Miller dated November 12, 2001, effective January 8 , 2001		*
18.	Preference Letter re: change in accounting principles		(3	)
21.	Subsidiaries of the Company		(6	)

*	Filed herewith.
(1)	Filed with Registration Statement on Form S-18, No. 33-46152-LA, under the Securities Act of 1933, effective April 13, 1992.
(2)	Filed with 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 for the quarter ended June 30, 1996.
(4)	Filed with report on Form 10-Q for the quarter ended September 30, 1998.
(5)	Filed as Appendix A with Definitive proxy on May 14, 1999, for the Company’s Annual Meeting of Shareholders held on June 17, 1999.
(6)	Filed with report on Form 10-K for the year ended December 31, 1999.