1 U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 -------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 COMMISSION FILE NO. 1-12410 ------------- SIMULA, INC. (Exact name of Registrant as specified in its charter) ARIZONA 86-0320129 (State of Incorporation) (I.R.S. Employer Identification No.) 2700 NORTH CENTRAL AVENUE, SUITE 1000 PHOENIX, ARIZONA 85004 (Address of principal executive offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (602) 631-4005 SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Title of Class Common Stock, par value $.01 per share 12% Senior Subordinated Notes Due 1998 (New York Stock Exchange) ------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Check if there is no disclosure of delinquent filings in this Form and no disclosure will be contained in the definitive Proxy incorporated by reference in Part III of this Form 10-K. /X/ Issuer's revenue for its fiscal year: $65,761,957 As of March 21, 1997, the number of shares of Common Stock outstanding was 8,999,948, and the aggregate market value of the Common Stock (based on the closing price as quoted on the New York Stock Exchange on that date) held by non-affiliates of Registrant was approximately $85,123,663. DOCUMENTS INCORPORATED BY REFERENCE: Those sections of the Registrant's Proxy Statement to be filed with the Commission in connection with its 1997 Annual Meeting of Shareholders to be held June 12, 1997, identified in Part III hereof, are incorporated by reference in this report. 2 PART I ITEM 1. BUSINESS With the exception of historical information, the matters discussed or incorporated by reference in this report on Form 10-K may be forward-looking statements that describe matters that involve risks and uncertainties which could cause the Company's actual results to differ materially from those discussed herein. Such risks and uncertainties include, but are not limited to, success in commercialization of new technologies, the Company's new manufacturing capability and capacity, new product development, product acceptance and demand, amount of investment needed to complete development and commercialization and the time frame therefor, ability to enforce proprietary data and information, the regulatory and trade environment, and general economic conditions. Readers are cautioned not to place undue reliance on the Company's forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligations to publicly release any revisions to these forward-looking statements or reflect events or circumstances after the date hereof. OVERVIEW The Company is a diversified technology and manufacturing company which is recognized as a world leader in crash safety and related technologies. The Company designs and manufactures occupant safety systems and devices for a wide range of air, ground, and sea transportation vehicles. The Company's core technologies are in biomechanics and advanced systems, structures, and materials utilized in energy-absorbing seating, inflatable restraints, and composites. As a result of the development of the Company's core technologies, the Company, through its twelve (12) operating subsidiaries, currently operates in three market segments: (a) commercial transportation seating, (b) government and defense contracting, and (c) automobile safety systems. The Company's business operations can generally be described as occurring in three phases: (i) providing contracted research and development activities to third parties to solve specific safety related issues and undertaking Company funded research to expand existing technologies to new applications, (ii) leveraging such research into advanced, high-performance, cost-efficient product solutions to influence market preferences in a wide range of applications and industries, and (iii) manufacturing, selling, and marketing such products. The Company was organized in Arizona in 1975, and made its initial public offering of Common Stock in April 1992. Following its initial public offering, the Company has financed its growth primarily through public and private offerings of securities. In December 1993, the Company completed a public sale of $5.7 million of 12% Senior Subordinated Notes due in 1998. In April 1995, the Company completed a secondary offering of Common Stock, with net proceeds to the Company of approximately $25.6 million. In September 1996, the Company completed a private placement of $14.3 million in aggregate principal amount of 10% Senior Subordinated Convertible Notes. Proceeds have been utilized for product research and development, to expand manufacturing facilities, repay indebtedness, and for working capital. In September 1995, the Company completed a 3-for-2 forward split on its Common Stock. All relevant figures contained herein have been adjusted to reflect such stock split. In its last five fiscal years, the Company has experienced substantial growth resulting from strategic acquisitions, wider application of technologies, and new product introductions. In addition to the 1 3 businesses described above, operating subsidiaries' lines of business include an aviation crash investigation school, advanced sensor technologies, and artificial intelligence computer systems. The Company maintains its principal executive offices at 2700 North Central Avenue, Suite 1000, Phoenix, Arizona 85004, and its telephone number is (602) 631-4005. The Company through its subsidiaries operates facilities in metropolitan Phoenix, Arizona; Chicago, Illinois; Milwaukee, Wisconsin; San Diego, California; Asheville, North Carolina, Albany, New York, and Northumberland County, England. Unless the context indicates otherwise, all references to the "Company" or "Simula" refer to Simula, Inc. and its subsidiaries. OPERATING AND GROWTH STRATEGY The Company's strategy is to maintain its leading position in creating and applying proprietary technologies and advanced solutions addressing safety-related problems, and to develop its products for commercial sale to a wide range of customers. The key elements in executing this strategy are to (i) develop and utilize technology to enhance current products and create new products, (ii) focus on new markets and regulatory requirements, (iii) expand manufacturing capabilities and maximize internal synergies, and (iv) pursue acquisitions and strategic alliances that complement existing businesses or provide manufacturing synergies. OVERVIEW OF MARKETS AND INDUSTRY The Company seeks to position itself to benefit from consumer demand and government regulations requiring progressive safety equipment on all forms of transportation, from automobiles and aircraft, to school buses and high speed trains. The Company's business focuses on three primary market segments: (i) commercial transportation seating, (ii) government and defense contracting, and (iii) automotive safety systems. COMMERCIAL TRANSPORTATION SEATING SYSTEMS Commercial transportation seating includes airline, rail, and mass transit new and refurbished seats. The Company has positioned five operating subsidiaries in this segment. At the end of 1995, there were approximately 11,000 passenger aircraft in operation worldwide, most with in excess of 120 passenger seat placements. A study conducted by the Boeing Commercial Airplane Group projects that the worldwide passenger aircraft fleet will grow to approximately 16,000 by 2005. Historically, annual production of new aircraft seats has been between 120,000 and 130,000 worldwide, exclusive of repaired and refurbished seats. The Company believes that the recent growth of the airline industry, with the resulting increase in passenger miles flown and the recent trend toward installation of communication and entertainment systems in aircraft seats, will increase demand for new seats. Additionally, there has been a recent significant consolidation in the new seat industry, which the Company believes will benefit it because of the desire of airlines to have a broader supplier base. Although the Boeing study did not include refurbished seats, the Company also believes that the demand for refurbished aircraft seats will grow as the airline industry expands and airlines purchase and refurbish used aircraft. 2 4 Additionally, demand for both new and refurbished aircraft passenger seats may further increase as new regulations are adopted or enforced that raise the standards for crashworthiness in light of recent heightened attention to airline safety and FAA initiatives. For example, the continued phase-in of FAA standards requiring airliner passenger seats to withstand the force of 16g's (16 times the force of gravity) in a crash is expected to create increased demand for new aircraft seating systems meeting such requirements. Similarly, in 1988, the FAA adopted regulations requiring that all passengers on an aircraft have a certain specified level of head injury protection, as measured by Head Injury Criteria ("HIC"). Presently, most commercial aircraft certificated since the adoption of the FAA regulations are flying under waivers granted by the FAA because such aircraft do not meet the HIC criteria for passengers sitting immediately behind bulkheads and other cabin partitions. The Company believes that the FAA waiver policy will be reviewed and updated, thus creating an increased demand for installation of inflatable bulkhead airbags on commercial aircraft to improve the safety of passengers. The rail and mass transit industries are undergoing significant changes, including growth in ridership and upgrading of fleets. Demand for rail and mass transit seating results from the traveling public's desire for high-speed trains, safety, and comfort, as well as new laws and regulations, such as proposed Federal Railroad Administration rules to improve safety systems, and the Clean Air Act Amendments of 1990 and the Americans with Disabilities Act, which require that transit authorities and rail operators purchase new, upgrade or retrofit existing equipment. The Company believes that between 1995 and 1998 U.S. railcar-purchasing agencies will purchase up to 3,500 rail and mass transit cars. Rail and mass transit seat manufacturers may also potentially benefit from the development of lighter weight and high-speed rail systems in North America. GOVERNMENT AND DEFENSE CONTRACTING The Company believes that the United States government will continue to fund a significant defense budget and will increasingly support high technology and safety improvements. In addition, the Company expects that pilot and passenger safety will continue to be a critical part of these and other programs, with the United States and many foreign governments placing greater emphasis on transportation safety. The United States is widely regarded as the world leader in military safety and technology development, and expenditures in these areas are expected to continue in the future as military forces become increasingly mobile. The Company believes that there will be continued government spending on and demand for military safety technology products such as those developed and manufactured by the Company, including advanced energy absorbing seating, lightweight armor systems, and inflatable restraints. The Company has positioned four operating subsidiaries in this segment. AUTOMOBILE SAFETY SYSTEMS Demand for automobile safety products results primarily from government regulations and consumer demands. One regulation, adopted in 1984 by NHTSA, provided the impetus for the development of the airbag market in the United States by requiring installation of passive restraints in all new cars sold after 1989. Passive restraints typically consist of either frontal airbags or passive seat belt systems. Applicable 1991 regulations require the use of airbags for both sides of the front passenger compartment of all new cars sold in the United States by the 1998 model year. Frontal impact is the leading cause of automobile injuries and third leading cause of automobile fatalities, accounting for approximately 51% of all injuries and 31% of all fatalities which occur in automobile collisions. 3 5 Consumer demand has outpaced regulation as the primary impetus for the growth of the airbag market. According to publicly available automotive industry data, in the 1989 model year, only 7% of the automobiles produced in the United States included an airbag. This percentage increased to 28% in 1990, 42% in 1991, 59% in 1992, and 71% in 1993. Industry sources estimate that standard driver's side airbags were installed in approximately 90% of 1995 model year autos sold in the United States, and to a lesser extent overseas. This high degree of penetration has been achieved in advance of the regulatory deadline as a result of consumer demand. Side-impact collisions comprise the second leading category of injury accidents and leading category of fatal accidents, accounting for approximately 25% of all injuries and 34% of all fatalities which occur in automobile collisions, with a significant majority of such injuries caused by impact to the head and neck. Present United States side-impact safety standards address the use of foam padding and/or structural beams. However, NHTSA is currently examining head crash standards, measured in quantifiable HICs for side-impact collisions. Rollover injuries are the third leading category of injury accidents and second leading cause of fatalities, accounting for approximately 15% of all automobile injuries and 33% of fatalities. The Company's Inflatable Tubular Structure ("ITS") is the only available product designed specifically to protect the head and neck of vehicle occupants in side-impact collisions and potentially provide containment of occupants in rollover and secondary impact collisions. The Company has positioned two operating subsidiaries in this segment. THE COMPANY'S PRODUCTS AND EMERGING MARKETS As of December 31, 1996, the following table shows each of the Company's products in production, and each of the products the Company expects to commence delivery of, on the rollout schedule indicated. PRODUCT AND TECHNOLOGY STATUS PRODUCT/TECHNOLOGY Status Product Rollout ------------------ ------ --------------- Energy Absorbing Seating Systems -- Military............................ In Production 1975 -- On-going Composite Armor.................................. In Production 1985 -- On-going Airliner Seat Repair and Refurbishment........... In Production Acquired 1993 -- On-going Rail and Transit Seating......................... In Production Acquired 1994 -- On-going New 16g Commercial Airliner Seats................ In Production Rollout 1996 -- Commercial Production Increasing in 1997 Inflatable Tubular Structure..................... Volume Production 1997 Bulkhead Airbag System........................... Certified/Ready for 1997 Production Cockpit Airbag System............................ Ready for Production 1997 Inflatable Body and Head Restraint System......................................... Ready for Production 1997 4 6 ENERGY ABSORBING SEATING SYSTEMS AND COMPONENTS FOR HELICOPTERS, AIRLINERS, RAIL, AND MASS TRANSIT Military Aircraft Seating Systems. The Company has been a major supplier of energy-absorbing seating systems for military helicopters and other military aircraft to various branches of the United States armed forces and their prime defense contractors for approximately 20 years. The seating systems focus on reducing injury and increasing survivability in crashes involving aircraft. These crashworthy seating systems contain proprietary energy-absorbing components and devices that activate upon crash impact to absorb shock that otherwise would be absorbed by the seat occupant. Based on internal market surveys and data, the Company believes that it is the leading provider of crashworthy helicopter seats purchased by the United States and foreign armed forces, and is the supplier for a majority of the world's energy-absorbing helicopter seating system programs under domestic and foreign military contracts. Aircraft for which the Company has designed and manufactured seat assemblies for pilots, flight crews, troops, or SONAR operators include the AH-64A Apache attack helicopter; UH-60A Blackhawk transport and cargo helicopter; SH-60B Sea Hawk reconnaissance helicopter; SH-3 Sea King utility helicopter; CH-53 Sea Stallion transport and cargo helicopter; V-22 Osprey tilt-roar aircraft; Indian Hindustan Aeronautics, Ltd. ALH utility helicopter; and C-17 fixed wing utility aircraft. Aircraft manufacturers in the Company's customer base include the Boeing Company, McDonnell Douglas Corporation, and Sikorsky Aircraft. Commercial Airliner Seating Systems and Components. The Company, through its wholly owned subsidiary Airline Interiors, Inc. ("Airline Interiors") manufactures and sells commercial airline seating systems that comply with FAA-mandated 16g standards for airline seats and repairs, refurbishes, and retrofits commercial aircraft seats. With the acquisition of Airline Interiors in 1993, the Company obtained FAA certifications and an established customer base of commercial airlines as well as the operations to repair, refurbish, and retrofit commercial aircraft seats. The Company's entrance into the airline seating market is an outgrowth of both the Company's technologies and Airline Interiors' traditional core business -- the repair, refurbishment, and retrofitting of commercial aircraft seats. The Company's 16g seats ("16g Seats") are designed to absorb 16 times the force of gravity upon impact. The prices and features of the Company's new 16g Seats are competitive with more established 16g seat suppliers, but exceed existing and currently anticipated industry and regulatory standards for crashworthiness. The Company's 16g Seats have been tested, approved, and certified for use in numerous classes of commercial aircraft. The Company's customer base for its 16g Seats includes Air Transit, The Boeing Company, GATX Leasing, International Leasing Finance Corp., Onur Air, Flying Colors Airlines, and two major U.S. carriers. The Company also repairs, refurbishes, and retrofits existing commercial aircraft seats. Its services include (i) the supply of seat components, including upholstery, cushioning, and fiber blocking; (ii) the overhaul and modification of seat assemblies, including arm rests and tray tables; and (iii) the design and integration of communication and entertainment systems into aircraft seats. Customers of Airline Interiors for such services include America West Airlines, Continental Airlines, Southwest Airlines, and United Airlines. The Company believes that various developments in the airline industry may increase the demand for new energy-absorbing seats and for the repair, refurbishment, and retrofitting of existing airliner seats. These factors include the potential for increased federal regulation requiring 5 7 improvements in passenger seat crashworthiness, increased safety concerns by passengers, the growth of airline travel, restructurings and reorganizations of air carriers, the need to reconfigure and upgrade existing aircraft interiors, the delivery of new aircraft, and the growth of demand for communications and entertainment features in aircraft seats. Rail and Other Mass Transit Seats. The Company's acquisition of Coach and Car Equipment Corporation and Artcraft Industries Corp. in 1994 brought to the Company an established seat manufacturing identification, contract backlog, and additional manufacturing capacity for airline seats. In addition to these synergies with Airline Interiors and its seat technology, the Company became, and continues to be, based on internal data, the leading North American provider of seating systems for rail and other mass transit vehicles. Through an integrated design, development, and production capability, the Company supplies seating in a variety of styles, materials, colors, configurations, and optional features. The Company produces stainless steel, plastic, and fiberglass seating systems for subways, cushioned and upholstered seating for other mass transit vehicles, and deluxe recliners for railroad cars. The seating systems feature lightweight construction; ease of installation and maintenance; vandal resistant, durable, and long-lasting components; reinforced structures for superior strength and support; fire and smoke resistance; sound and energy absorption; and passenger safety and comfort. Customers include Amtrak, ABB Traction, Inc., Bombardier, Inc., Amerail (formerly Morrison Knudsen Corporation), Siemens Duewag Corporation, Kawasaki Rail Car, Inc., and the metropolitan transit authorities in major North American cities. The Company believes that additional opportunities exist in its seating business as a result of the need to expand and modernize mass transit systems across the United States, the Company's pursuit of international business, and potentially the application of various aspects of the Company's energy-absorption and other safety technologies to rail and other mass transit vehicles, including high-speed trains. COMPOSITE MATERIALS INCLUDING ARMOR SYSTEMS As an outgrowth of its military aircraft seating systems the Company developed an expertise in armor, which comprises a significant portion of both materials in, and costs of, such seating systems. In addition, the Company has developed a variety of other composite materials for integration in its existing and proposed products and for sale as raw material to customers. Composites are structures, typically made of layered materials, glues, resins, metal alloys, and ceramics, which provide advantages in terms of weight, flexibility, and strength over traditional metal components. Composite materials are often much lighter than conventional materials such as basic metals, and by their complex nature are generally more expensive than such materials. Composite materials have a wide variety of product applications, ranging from shaped or molded plastic structures to advanced, lightweight, protective ballistic armor systems. Advanced composite materials with which the Company has expertise include silicon carbide, aluminum, and ceramics matched with fiber reinforcements of Kevlar, carbon, Spectra, S-glass, E-glass, and hybrid weaves. The Company also has the capability to process thermoset resins including epoxies, polyesters, and vinyl esters. The Company's principal composite products are high-strength, lightweight armor systems that have been incorporated into a variety of United States armed forces vehicles, including aircraft, naval landing craft, and personnel carriers. The Company is a principal supplier of such lightweight armor systems in the United States. The Company develops and manufactures armor systems for seats as well as for structural and other vital components of military aircraft. Aircraft components incorporating armors developed or produced by the Company include V-22 Osprey crew seats; C-17 cockpit 6 8 components; AH-64A Apache crew seats; Blackhawk crew seats and floor armor; CH-53 Sea Stallion crew seats; United States Navy landing craft air cushion pilot station armor; and high-mobility, multi-wheeled vehicles ("HMMWV") and transport vehicles ("HEMTT"). The Company has an on-site ballistics firing range, enabling it to conduct tests on armor products. The Company has recently developed a number of commercial applications for its composites technology, including high-strength transparent armors and portable armor kits for use in police cars and other vehicles, high-performance sporting equipment such as archery bows and bicycle components, and 16g airliner seat frames and backs. The Company believes that composite materials will increasingly be incorporated in a wide range of goods requiring strong, advanced, or lightweight components. INFLATABLE RESTRAINT SYSTEMS FOR AIRCRAFT AND AUTOMOBILES The Company developed its core inflatable restraint technology in the 1980's under a contract with the United States government and has expanded and developed such technology into numerous applications in various products and industries. The Company currently produces or is developing four types of inflatable restraint systems for automobiles and three systems for commercial and military aircraft. Automobile Inflatable Restraint Systems. The Company developed, patented, and is manufacturing the inflatable tubular structure ("ITS"), which is an automobile inflatable restraint system. The ITS occupies a stored position above a side window and inflates upon impact to extend diagonally across the side window, which provides protection against head and neck injuries from side- impact collisions. An automobile may be equipped with an ITS at each side window. The Company's ITS technology comprised two of the 36 finalists out of 4,000 technology entrants submitted for Discovery Magazine's 1996 "Technology of the Year Award." The ITS provides protection in certain side-impact collisions beyond that provided by conventional airbags currently utilized in automobiles. Unlike a conventional airbag, which must be trapped by a structure such as a steering wheel, dashboard, or door, the ITS is attached to and supported by the structure of the vehicle frame and door pillars. During a side-impact crash, a tube located above the door inflates and becomes shorter in length, which causes it to drop out of its molding and form a tight diagonal structure across the side window. As a result, the ITS provides protection despite the window being open or breaking upon impact, while a conventional airbag would not have adequate support in these situations. Therefore, the ITS is able to substantially reduce head rotation to the side, preventing contact with vehicle components. Additionally, the diagonal arrangement of the activated ITS offers protection for occupants of different sizes, weights, and seating positions, and in different types of side-impact collisions, as well as in rollover, secondary impact, and ejection situations. Recent tests have shown that a side-impact collision at approximately 30 miles per hour with a combination of the most extensive safety protection systems available in 1996 model automobiles (consisting of a seat belt and shoulder harness along with conventional frontal and side impact airbags) results in a HIC of about 1500, which is an impact sufficient to cause a fatal injury to the vehicle occupant. Conversely, tests performed under the same conditions with the addition of an ITS resulted in a HIC of only approximately 560, which, barring injury to other parts of the anatomy not addressed by the ITS, would allow the occupant to survive the crash. 7 9 The Company has developed various additional applications for the ITS technology. Through different configurations, the ITS provides protection to other parts of the body and in other types of collisions. Such applications include the inflatable tubular cushion ("ITC"), a seat mounted torso side protection system, the inflatable tubular bolster ("ITB"), an under-dash system to protect knees and legs, and the inflatable tubular torso restraint ("ITTR"), an inflatable restraint harness and seat belt application. The Company through Autoliv GmbH, is currently manufacturing the ITS for sale to BMW, a major European automobile manufacturer which is including it in 1997 models of its automobiles. The Company also has agreements with a first tier auto supplier to provide ITS to a second automobile manufacturer and to provide a different application of the ITS technology to an automobile manufacturer. The Company's high-volume manufacturing line is located in Northumberland County in the northeast of England, and it is currently building a second production line to be located in this facility. Alone and with Autoliv GmbH, Morton International, and other first tier component suppliers, the Company is actively pursuing ITS and other product applications with other automobile manufacturers. The Company has entered into strategic alliances with these first tier component suppliers because the Company is able to leverage off of the size and industry strength of such large manufacturers and benefit from their market contacts. Further, such relationships facilitate the marketing and distribution of the ITS and related products through the combined marketing and manufacturing efforts of the Company and the strategic partners. Although the first tier component suppliers produce airbag products, the ITS and related technologies are unique proprietary products and not auto part commodities as are most forms of traditional airbags. Aircraft Inflatable Restraint Systems. The Company has completed development of and plans to market various inflatable restraint systems for military and commercial aircraft. These systems include the inflatable body and head restraint system ("IBAHRS") for the protection of military helicopter crew members, a cockpit airbag system ("CABS") for the protection of the flight crew in military aircraft, and a bulkhead airbag system ("BABS") for the protection of passengers sitting immediately behind the bulkhead and other cabin partitions in commercial aircraft. Under a contract with the United States Army, the Company served as the prime contractor for the development of the IBAHRS. Following the completion of the initial development, the Company was awarded a contract to serve as the prime contractor to complete the development, perform production design, produce hardware, and perform testing procedures for the IBAHRS. During a crash, the airbags inflate between the aviator and the seat harness, causing the aviator to be pushed back into the seat and providing support under the aviator's chin to reduce the forward rotation of the head. The Company anticipates that it will commence production of the IBAHRS in late 1997. The Company is engaged in research and development efforts for CABS under a contract with the United States Army. CABS incorporates airbags in a configuration surrounding the aviator that inflate following sensor detection of crash impact from a variety of directions. CABS then retracts following deployment and thereby protects against mishaps caused by accidental deployment during the normal operations of the aircraft. The Company anticipates that it will complete the development project and commence production of CABS in late 1997. The Company developed BABS at its own expense to provide a product that satisfies FAA regulations requiring protection against head injuries to passengers sitting immediately behind the 8 10 bulkhead and other cabin partitions in commercial aircraft certificated after 1988, which includes only complete new aircraft designs. Prior to BABS, no other company had introduced a product that satisfied the FAA regulations, and newly certified aircraft have operated under FAA waivers from the regulations. In addition, the regulations have not been extended to aircraft certificated prior to 1988. Although the Company believes that BABS satisfies the FAA regulations, the Company cannot assess weather the FAA will withdraw its waivers as a result of the forthcoming availability of BABS and extend its regulations to apply to presently exempt commercial aircraft. The Company has an agreement with Jetstream Aircraft Ltd. ("Jetstream") to manufacture and sell BABS for implementation of the system in the Jetstream J-41. With its introduction of BABS in Jetstream aircraft in 1997, the Company believes that the FAA waiver policy will be reviewed by the agency. The Company is also discussing the introduction of BABS with other aircraft manufacturers. In addition, the Company is developing the related systems for sensors, electronics, and other applications for its inflatable restraint technology. DEVELOPMENTAL STAGE TECHNOLOGIES Smart Structures. The Company has recently combined its composite technologies with its neural network computer capabilities as part of the development of products known as "smart structures." Smart structures contain sensors and fiber optics that communicate through computers to monitor the integrity or status of a system or structure. As an example, military vehicles equipped with sensors incorporating smart structure technology can be remotely monitored for battlefield status. Similarly, structures such as bridges and overpasses can be remotely monitored to detect early signs of deterioration in structural integrity. The Company is also exploring the development of smart system sensors and software programs that have potential in a variety of product applications, including crash sensors for airbag and other safety systems in both automobiles and aircraft. Parachutes. Under contract with the United States Navy, the Company recently applied its technologies and overall knowledge of materials and structures to develop a parachute that solves numerous functional problems attendant to traditional military parachutes. Specifically, many parachutes traditionally used by the military have (i) been large and heavy, (ii) been unable to be worn during flight or by females, and (iii) had limited shelf life, requiring the labor intensive process of unpacking and repacking parachutes every six months. The parachute developed by the Company is small, lightweight, unisex, capable of being worn during flight, and vacuum-packed so that it maintains more than a five-year shelf life without repacking. The Company will commence initial production of its parachute in 1997 for Navy aircraft. Other Advanced Materials. As an outgrowth of its development of a proprietary "bladder" for the ITS, the Company has recently developed and tested a number of advanced polymers and urethanes, possessing a wide variety of potential product applications. Such materials are generally high-strength and lightweight and can be developed to withstand extreme temperatures. Potential uses for such materials include laser protective aircraft canopies, high-performance windows for aircraft and automobiles, and protective lenses and visors. 9 11 PROPRIETARY TECHNOLOGY The Company maintains a design, development, research, testing, and engineering staff whose duties include the modification and improvement of existing products and the development of new products and applications. The Company regards its research, development, and engineering capabilities as a particular strength and intends to continue to emphasize this aspect of its business. The Company retains proprietary rights in the products and services it develops, including those initially financed under government contracts. As an integral component of its strategy, the Company seeks to transfer all of its technology to product applications. The Company's costs for research and development in 1995 and 1996 were approximately $6.1 million and $10.5 million, respectively. These amounts include government-funded, other customer-funded, and Company-funded research and development contracts. Since much of its research and development generates proprietary technology, the Company has patent protection on certain products. The Company's ability to compete effectively depends, in part, on its ability to maintain the proprietary nature of its technologies. The Company also relies on unpatented proprietary information and know-how, typically protecting such information as trade secrets, but there can be no assurance that others will not develop such information and know-how independently or otherwise obtain access to the Company's technology. The Company holds 13 patents, including those recently issued for its ITS and 16g Seat technologies. In addition, the Company has 34 patent applications pending for such items as its ITB and ITC technologies and various of its advanced materials. The Company is also currently developing six additional patent applications for filing. Patents protect inventions for a period of 20 years after the application is first filed. All of the Company's patents issued or applied for involving its principal products have been issued or pending for three years or less. The Company does not presently own or maintain any trademarks which are material to its business. PRODUCTION AND MANUFACTURING The Company's production and manufacturing consist principally of the bending and welding, molding, ceramic and composites composition and processing, sewing, upholstery, component fabrication, and final assembly, along with airbag and restraint assembly. After assembly, products are functionally tested on a sample basis as required by applicable contracts. The Company's manufacturing capability features computer-integrated manufacturing programs which, among other things, schedule and track production, update inventories, and issue work orders to the manufacturing floor. Products manufactured for government programs must meet rigorous standards and specifications for workmanship, process, raw materials, procedures, and testing. Customers, and in some cases the United States government as the end user, perform periodic quality audits of the manufacturing process. Certain customers, including the United States government, periodically send representatives to the Company's facilities to monitor quality assurance. In 1996 the Company consolidated certain operations, expanded and upgraded certain of its existing manufacturing capabilities, and established a new manufacturing facility in England for the production of inflatable restraints. Consolidation principally placed sewing and upholstery operations in a central location and placed airline and train seat parts manufacturing in a central location. Such steps were taken for efficiency purposes and did not have a material effect on the Company's financial condition or results of operations. 10 12 MARKETING AND SALES Depending upon the product, the Company typically employs one of four methods for marketing: (i) direct sales, which, for example, it utilizes in the marketing of its 16g Seats, (ii) technical teams, typically comprised of a combination of administrative personnel and development engineers, which it utilizes in the marketing of inflatable restraints and advanced materials, (iii) strategic alliances with first tier component suppliers, which it utilizes in the marketing of inflatable restraints and (iv) responses to formal requests for proposals in bidding for governmental contracts. In marketing its commercial seating and restraint products, the Company endeavors to maintain close relationships with existing customers and to establish new customer relationships. Ongoing relationships and repeat customers are an important source of business for the Company's current and new products. For example, the Company believes that its aircraft seat refurbishment customers are excellent prospects for its proposed new aircraft seats. Similarly, the Company will rely in part on forming strategic alliances to gain the established marketing capabilities of first tier component suppliers in connection with the distribution of the Company's automobile restraint systems. The Company's marketing and sales activities in the government sector focus primarily upon identifying research and development and other contract opportunities with various agencies of the United States government or with others acting as prime contractors on government projects. Key members of the Company's engineering, contracts, and project management staffs maintain close working relationships with representatives of the United States armed forces and their prime contractors. Through these relationships, the Company monitors needs, trends, and opportunities within current or potential military product lines. Approximately 24% of the Company's total revenue in 1996 resulted from products sold internationally, either directly by the Company or indirectly through sales made to the United States government or domestic prime contractors for export. Historically, as United States government contracts are awarded and filled, prime contractors have thereafter typically marketed their products to foreign military allies, resulting in sales of the Company's products abroad. The Company has also recently entered into development contracts directly with foreign military organizations. Accordingly, the Company anticipates that its international defense sales will continue to grow. The initial customer of the ITS is BMW, a European automobile manufacturer. The Company believes that there are opportunities for additional sales of the ITS, commercial aircraft, and rail seating systems in foreign markets and is conducting marketing efforts internationally. Countries in which the Company is actively marketing include Germany, France, the United Kingdom, Japan, India, Korea, Singapore, Australia, Canada, Turkey, and China. CUSTOMERS Sales of the Company's products to all branches of the United States armed forces represented approximately 27% of the Company's revenue in 1996. No other customer accounted for more than 10% of the Company's revenue during 1996. The Company's historical and acquired businesses have relied to a great extent on relatively few major customers, although the mix of major customers has varied from year to year depending on the status of then existing contracts. The Company believes that historical customers, such as the United States Army and other branches of the United States armed forces, to which the Company has 11 13 supplied products for approximately 20 years, will continue to represent major customers although the percentage of the Company's revenue attributable to them can be expected to decrease as a result of the Company's expanding commercial operations. Other historical customers of the Company include the Boeing Company, McDonnell Douglas Corporation, and Sikorsky Aircraft. The loss of or reduction in sales to a major customer may have a more adverse effect on the Company's operations or financial condition than if the Company's revenue was less concentrated by customer. As the Company has applied its technologies to additional products and markets and grown through strategic acquisitions, the list of customers for the Company's commercial products has expanded rapidly in recent years. Among current customers of the Company include, in addition to its historical customers, America West Airlines, Amtrak, Autoliv GmbH, BMW, Continental Airlines, Morton International, Southwest Airlines, United Airlines, and the metropolitan transit authorities in major North American cities. COMPETITION Based on internal market surveys and data, the Company believes that it is the largest worldwide supplier of seating systems for military helicopters. Numerous suppliers compete for government defense contracts as prime contractors or subcontractors. Competition relates primarily to technical know-how, cost, and marketing efforts. The competition for government contracts relates primarily to the award of contracts for the development of proposed products rather than for the supply of products that have been developed under contracts. The Company's principal competitors in the crashworthy military seating market are Martin Baker (U.K.) and Israel Aircraft Industries, Ltd. (Israel). The Company does not have financial or market share data concerning these two competitors. Based on internal market surveys and data, the Company believes that it is the largest supplier of rail and mass transit seating systems in North America, with an approximate 70% to 80% market share. The Company has four principal competitors in the North American rail and mass transit seating market, comprising in the aggregate 20% to 30% of such market. Based on internal estimates, the Company believes that it achieved a 2.5% share of the worldwide commercial airline seating market in its first full year of production in 1996. The Company has 10 principal competitors in the commercial airline seating market, with BE Aerospace, Inc. having approximately 50% of the market. The worldwide automobile airbag market is currently dominated by five large suppliers, all of which are producing airbag systems in commercial quantities. The market served by the Company's inflatable restraint systems is intensely competitive. As a result of the proprietary nature of the Company's ITS and related technologies, the Company has entered into strategic alliances with a number of the largest suppliers of conventional automotive airbags, including Morton, Autoliv, and others, to market and produce the Company's products. Under these arrangements, the Company acts as licensor and supplier and, thus, does not compete with first tier automotive suppliers. The Company does not intend to compete as a first tier supplier of a broad range of safety devices. Autoliv and Morton recently announced a proposed business combination relating to their respective airbag operations. The Company does not believe that any such combination will adversely affect its business relationship with these companies. Most of the Company's competitors have greater marketing capabilities and financial resources than the Company. The Company's present or future products could be rendered obsolete by 12 14 technological advances by one or more of its competitors or by future entrants into its markets. RAW MATERIALS AND SUPPLIES The Company purchases raw materials, components, devices, and subassemblies from a wide variety of sources. Principal raw materials used by the Company include urethanes, ceramics, Kevlar, aluminum, steel, upholstery and fabric products, and fire blocking foam. Components include restraints, harnesses, and gas generators for inflatable restraint products. The Company does not depend upon any single supplier. Because of multiple sources of supply, the Company has not experienced difficulties in obtaining components and raw materials for its manufacturing and assembly processes. The Company is not party to any formal contracts regarding the delivery of its supplies and components, but instead generally purchases such items pursuant to individual or blanket purchase orders. Blanket purchase orders usually provide for the purchase of a large amount of items at fixed prices for delivery and payment on specific dates. BACKLOG The Company's backlog at December 31, 1995 and 1996 was approximately $58 million and $63 million, respectively. The backlog at December 31, 1996 consisted of approximately $17 million under defense contracts and approximately $46 million with commercial customers. The backlog includes contracts for major current products as well as for supplies and replacement components. Backlog includes only $3 million under the Company's agreement to supply the ITS for certain of BMW models to be delivered in 1997. In the case of government contracts, backlog consists of aggregate contract values for firm product orders, exclusive of the portion previously included in operating revenue utilizing the percentage completion accounting method. All orders included in the backlog are believed to be firm and are expected to be filled over the period from the present date to December 31, 1998. EMPLOYEES The Company has over 700 full-time employees at its locations in Arizona, California, Illinois, New York, North Carolina, Wisconsin, and the United Kingdom. The Company believes that its continued success depends on its ability to attract and retain highly qualified personnel. PERSONNEL PROFILE Approximate Number Classification of Employees - -------------- ------------ Research and Development; Scientists; Engineers; Technical Support.......................................................... 150 Manufacturing...................................................... 310 Administration..................................................... 190 Other.............................................................. 65 In connection with its 1994 acquisition of Coach and Car, the Company executed a collective bargaining agreement with the United Electrical Workers. The predecessor corporation's work force was similarly represented by the collective bargaining unit. The Company's other employees are not represented by a labor union, and the Company has no knowledge of any organizing activities. The 13 15 Company has never suffered a work stoppage and considers its relations with employees to be excellent. ENVIRONMENTAL REGULATIONS The Company's operations are subject to a variety of federal, state, and local environmental regulations, including laws regulating air and water quality and hazardous materials and regulations implementing those laws. The Company's principal environmental focus is the handling and disposal of paints, solvents, and related materials in connection with product finishes, welding, and composite fabrication. The Company contracts with a qualified waste disposal company for services. The Company regards its business as being subject to customary environmental regulations, but does not believe it faces unique or special problems. The cost to the Company of complying with environmental regulations is not significant. 14 16 ITEM 2. PROPERTIES The Company is currently expanding its manufacturing and administrative facilities in order to meet the expected demand for its products. Upon the completion of such expansion, the Company believes that its manufacturing and administrative facilities will be adequate for the foreseeable future. The following table summarizes the properties which the Company leased or owned as of December 31, 1996. FACILITIES PROFILE SQUARE COMPANY LOCATION FUNCTION FOOTAGE - ------- -------- -------- ------- Simula, Inc.................. Phoenix, AZ (1) Corporate Headquarters 11,000 Simula Government Products, Inc.............. Tempe, AZ (2) Manufacturing and Administration 60,000 Tempe, AZ (2) Manufacturing and Administration 24,000 Tempe, AZ (1) Manufacturing and Administration 19,000 Tempe, AZ (1) Manufacturing and Administration 14,000 Tempe, AZ (1) Manufacturing and Administration 14,000 Simula Technologies, Inc..... Phoenix, AZ (2) Research and Development 25,000 Simula ASD, Inc.............. Phoenix, AZ (1) ITS Low Rate Production; 7,000 Testing; Administration Phoenix, AZ (1) ITS Low Rate Production; Testing 20,000 Simula ASD, Ltd.............. Northumberland, ITS Volume Production 30,000 U.K. (1) Airline Interiors, Inc....... San Diego, CA (1) Airliner Seat Refurbishment and 44,000 New Seat Assembly; Administration San Diego, CA (1) Upholstery and Sewing 17,000 San Diego, CA (1) Warehouse 6,000 Coach and Car Equipment Corporation................ Chicago, IL (1) Airline, Rail and Transit Seat 71,000 Manufacturing; Administration Albany, NY (1) Rail Seat Assembly 20,000 Artcraft Industries Corp..... Milwaukee, WI (1) Rail and Airline Seat 45,000 Refurbishment and Upholstery 15 17 Milwaukee, WI (1) Warehouse 20,000 Milwaukee, WI (1) Warehouse 5,000 ViaTech, Inc................. Tempe, AZ (1) Composites Research; 16,000 Fabrication; Administration Safety Equipment, Inc........ Asheville, NC (1) Research and Development; 5,000 Survival Equipment Manufacturing; Parachute Manufacturing Sedona Scientific, Inc....... Sedona, AZ (1) Research and Development; 5,000 Sensors, Smart Systems, Fiber Optics Sedona, AZ (1) Warehouse 2,000 - ---------- (1) Denotes leased facility (2) Denotes Company-owned facility ITEM 3. LEGAL PROCEEDINGS The Company is involved in litigation in the ordinary course of business from time to time. The Company presently is not a party to any material threatened or pending litigation, the negative outcome of which would be material to the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted during the fourth quarter of fiscal 1996 to a vote of security holders, through the solicitation of proxies, or otherwise. 16 18 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock has been listed on the New York Stock Exchange under the symbol "SMU" since January 31, 1996. From October 14, 1993 until January 30, 1996, the Company's Common Stock traded on the American Stock Exchange, and from April 14, 1992 until October 13, 1993, the Company's Common Stock traded on the Nasdaq National Market System. On September 28, 1995, the Company completed a 3-for-2 forward stock split for all holders of record of the Company's Common Stock as of September 15, 1995, thereby increasing the number of shares of the Company's Common Stock issued and outstanding from 5,904,647 to 8,856,952. Giving effect to the stock split, the following table sets forth the quarterly high and low closing prices of the Company's Common Stock for each calendar quarter of the years indicated. HIGH LOW ---- --- 1995: First Quarter.......................................................... $14.92 $12.83 Second Quarter......................................................... 16.42 13.50 Third Quarter.......................................................... 25.13 14.83 Fourth Quarter......................................................... 24.13 16.50 1996: First Quarter.......................................................... $19.25 $12.75 Second Quarter......................................................... 20.63 15.88 Third Quarter.......................................................... 18.38 15.75 Fourth Quarter......................................................... 15.88 13.00 1997: First Quarter (through March 26)....................................... $18.38 $13.63 The number of holders of the Common Stock of the Company, including beneficial holders of shares held in street name, as of the close of business on March 26, 1997, is estimated to be greater than 2200. On March 26, 1997, the closing price of the Common Stock was $15.75 per share. 17 19 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The Selected Consolidated Financial Data presented below has been derived from historical audited consolidated financial statements of the Company for each of the five years in the period ended December 31, 1996. The following data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's Consolidated Financial Statements and the Notes thereto. YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- (Dollars in thousands, except per share data) INCOME STATEMENT DATA: Revenue.......................................... $ 65,762 $ 59,089 $ 41,158 $ 24,781 $ 18,833 Cost of revenue.................................. 55,239 39,037 27,709 15,728 12,135 ---------- ---------- ---------- ---------- ---------- Gross margin..................................... 10,523 20,052 13,449 9,053 6,698 Administrative expenses.......................... 19,749 15,609 8,265 5,469 4,311 Unusual item..................................... 919 ---------- ---------- ---------- ---------- ---------- Operating (loss) income.......................... (9,226) 4,443 5,184 2,665 2,387 Interest expense................................. (2,377) (2,030) (1,832) (800) (209) Interest income.................................. 52 440 22 57 ---------- ---------- ---------- ---------- ---------- (Loss) income before taxes....................... (11,551) 2,853 3,374 1,865 2,235 Income tax benefit (expense)..................... 4,741 (196) (1,260) (744) (965) ---------- ---------- ---------- ---------- ---------- (Loss) earnings before cumulative effect of change in accounting principle (1) ......... (6,810) 2,657 2,114 1,121 1,270 Cumulative effect of change in accounting principle (1)....................... (3,240) ---------- ---------- ---------- ---------- ---------- Net (loss) earnings (1) (2)...................... ($10,050) $ 2,657 $ 2,114 $ 1,121 $1,270 ========== ========== ========== ========== ========== PER SHARE AMOUNTS: (Loss) earnings before cumulative effect of a change in accounting principle..................................... ($0.76) $.31 $.37 $.22 Cumulative effect of change in accounting principle.......................... (0.36) ---------- ---------- ---------- ---------- Net (loss) earnings per share.................... ($1.12) $.31 $.37 $.22 ========== ========== ========== ========== PRO FORMA AMOUNTS (1) (2): Net earnings................................... $194 $1,675 $947 $1,313 ========== ========== ========== ========= Net earnings per share......................... $.02 $.29 $.19 $.29 ========== ========== ========== ========= Weighted average shares outstanding (3).......... 8,947,060 8,576,817 5,704,926 5,024,679 4,608,825 OTHER DATA: Research and development: Funded by the Company.......................... $ 1,916 $ 1,419 $ 688 $ 376 $ 240 Costs incurred on funded contracts............. $ 8,588 $ 4,722 $ 3,165 $ 1,813 $ 4,529 18 20 YEAR ENDED DECEMBER 31, ------------------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- BALANCE SHEET DATA: Assets: Current assets ......................... $48,010 $36,857 $20,594 $13,779 $ 9,616 Property and equipment ................. 23,356 15,779 13,199 7,803 7,540 Deferred costs ......................... 929 6,385 1,460 1,460 595 Intangibles ............................ 10,964 11,455 12,164 3,517 169 Other .................................. 3,429 2,660 274 228 87 ------- ------- ------- ------- ------- Total assets ............................. $86,688 $73,136 $47,691 $26,787 $18,007 ======= ======= ======= ======= ======= Liabilities: Current liabilities .................... $24,804 $15,788 $15,358 $ 5,570 $ 5,567 Long-term debt ......................... 24,697 11,261 15,339 12,794 4,839 Other .................................. 345 345 369 ------- ------- ------- ------- ------- Total liabilities ........................ 49,501 27,049 31,042 18,709 10,775 Shareholders' equity (4) ................. 37,187 46,087 16,649 8,078 7,232 ------- ------- ------- ------- ------- Total liabilities and shareholders' equity .................................. $86,688 $73,136 $47,691 $26,787 $18,007 ======= ======= ======= ======= ======= - ------------------------------------------------------------------------------- (1) During the second quarter of 1996, the Company adopted a new method of accounting for pre-contract costs. These costs were previously deferred and recovered over the revenue streams from the Company's customers. Effective January 1, 1996, these costs have been expensed. Pro forma amounts for 1995, 1994 and 1993 assume the new accounting method is applied retroactively. The change in accounting would not have affected 1992. (2) Prior to the Company's April 1992 initial public offering, the Company was an S Corporation for tax purposes. Pro forma net earnings and net earnings per share amounts for 1992 reflect pro forma tax provisions as if all income taxes for 1992 had been payable by the Company. (3) The Company effected a 3-for-2 split of its Common Stock on September 28, 1995. As a result, all shares and related references have been restated for all prior periods and transactions. (4) The Company has not paid any cash dividends since its April 1992 initial public offering. 19 21 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION GENERAL The following discussion and analysis provides information that the Company's management believes is relevant to an assessment and understanding of the Company's results of operations and financial condition for the three years ended December 31, 1996 compared to the same periods of the prior years. This discussion should be read in conjunction with the Consolidated Financial Statements and the Notes thereto included elsewhere in this Form 10-K. This Form 10-K contains certain forward-looking statements and information. The cautionary statements made in this Form 10-K should be read as being applicable to all related forward-looking statements wherever they appear in this Form 10-K. The Company's actual future results could differ materially from those discussed herein. OVERVIEW The Company designs and manufactures occupant safety systems and devices engineered to safeguard human life in a wide range of air, ground, and sea transportation vehicles. Utilizing its substantial proprietary technology in energy-absorbing seating, inflatable restraints, and composite materials, the Company focuses on reducing injury and increasing survivability in vehicle crashes. The Company's historic core business has been as a government contractor. Additionally, through recent acquisitions, the Company has become the largest North American-based supplier of seating systems for rail and other mass transit vehicles and a successful new entrant in the manufacture of new commercial airliner seating. Utilizing its proprietary safety technology, customer relationships, and manufacturing capacity expertise, recently enhanced through acquisitions, the Company has introduced crashworthy seating systems for a variety of aircraft, various inflatable restraint systems for automobiles, a bulkhead airbag system for commercial airliners, and two cockpit inflatable restraint systems for military aircraft. In 1993, management made a strategic decision to enter the commercial aircraft seating market to bring its proprietary energy-absorbing technologies to a new industry and take advantage of positive industry trends. To implement its decision the Company completed three acquisitions that allowed it to develop the necessary infrastructure to support future growth. In August 1993, the Company acquired Airline Interiors, Inc. (the "Airline Acquisition"), which was primarily involved with the refurbishment, reupholstery, reconditioning, and reconfiguring of existing passenger seats. The Airline Acquisition provided certain FAA certifications, enhanced the Company's management team and customer base, and provided substantial assembly capacity. During 1994, the Company acquired Coach & Car Equipment Corporation ( "Coach and Car") and Artcraft Industries Corp. ("Artcraft"). The acquisitions of Coach and Car and Artcraft are collectively referred to as the 1994 Acquisitions. The 1994 Acquisitions' existing operations included providing a majority of all manufacturing and refurbishment of rail and mass transit seating systems in North America. The 1994 Acquisitions also provided the Company with substantial large-scale manufacturing capacity and synergies, which will be utilized in the production of its 16g seat for airliners. The Company has taken advantage of the synergies between these three entities in the manufacture of rail and mass transit seating systems. The full strategic value of these businesses will not be realized until the Company begins large scale manufacturing of its 16g seat. As a result of the size and timing of its acquisitions, the financial statements for the years 1996, 1995, and 1994 may not be directly comparable. 20 22 Simula's revenue has historically been derived from three sources: sales of Company manufactured products; contract research and development for third parties; and, technology sales and royalties. A substantial portion of its current revenue is accounted for under the percentage of completion method of accounting. Under this method, revenue is recorded as production progresses so that revenue less costs incurred to date yields the percentage of gross margin estimated for each contract. Overall gross margin percentages can increase or decrease based upon changes in estimated gross margin percentages over the lives of individual contracts. Note 18 of the Notes to Consolidated Financial Statements provides a break down of revenues for each significant segment of the Company. Note 17 of the Notes to Consolidated Financial Statements provides the revenues and related costs associated with contract research and development for third parties. The Company is a holding company for wholly owned subsidiaries, including Simula Government Products, Inc., the principal entity conducting the Company's "Government and Defense" business, and Simula Transportation Equipment Corporation ("SimTec" - formerly known as Intaero), an entity conducting the Company's commercial seating businesses. Other includes general corporate operations and subsidiaries engaged in technology development including Simula Automotive Safety Devices, Inc. ("Simula ASD") which was established in 1995 and conducts substantially all of the Company's operations encompassing inflatable restraints for automobiles. Through 1996, Simula ASD has not had significant revenue. RESULTS OF OPERATIONS (Dollars in Thousands) Year Ended December 31, ------------------------------------- 1996 1995 1994 ---- ---- ---- REVENUE: Government and Defense.............. $32,312 $25,533 $22,034 SimTec.............................. 32,603 29,609 18,093 Other............................... 847 3,947 1,031 ------- ------- ------- Total.................. $65,762 $59,089 $41,158 ======= ======= ======= GROSS MARGIN: Government and Defense.............. $ 9,253 $ 9,632 $ 8,652 SimTec.............................. 3,740 7,537 4,944 Other............................... ( 2,470) 2,883 (147) ------- ------- ------- Total.................. $10,523 $20,052 $13,449 ======= ======= ======= ADMINISTRATIVE EXPENSES: Government and Defense.............. $ 7,897 $ 6,337 $ 5,114 SimTec.............................. 10,068 6,885 2,775 Other............................... 1,784 2,387 376 ------- ------- ------- Total.................. $19,749 $15,609 $ 8,265 ======= ======= ======= OPERATING (LOSS) INCOME: Government and Defense.............. $ 1,356 $ 3,295 $ 3,038 SimTec.............................. (6,328) 652 2,168 Other............................... (4,254) 496 (22) ------- ------- ------- Total.................. ($9,226) $ 4,443 $ 5,184 ======= ======= ======= 21 23 The following table sets forth, for the periods indicated, the components of the consolidated statements of income expressed as a percentage of revenues. Year Ended December 31, ----------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- INCOME STATEMENT DATA Revenue 100% 100% 100% 100% 100% Cost of revenue 84 66 67 63 64 Gross margin 16 34 33 37 36 Administrative expenses 30 26 20 22 23 Unusual item 4 ---- ---- ---- ---- ---- Operating (loss) income (14%) 8% 13% 11% 13% ==== ===== ===== ===== ===== During the second quarter of 1996, the Company adopted a new method of accounting for pre-contract costs as more fully described in Note 2 of the Notes to Consolidated Financial Statements. Beginning in 1996, the Company now expenses these pre-contract costs as incurred rather than deferring these costs to be amortized over the revenue streams from the Company's customers. This change resulted in a cumulative catch-up adjustment for the effect of costs capitalized as of December 31, 1995. The effect of the change on the year ended December 31, 1996 was to increase cost of revenue by $5.3 million, resulting in an increase in the loss before cumulative effect of a change in accounting principle of $3.2 million ($.36 per share) net of the related income tax benefit. In addition, net income for year ended December 31, 1996 was reduced by $3.2 million ($.36 per share) for the cumulative effect on prior years (to December 31, 1995) of changing accounting for pre- contract costs. Assuming the change in accounting had been applied retroactively to the year ended December 31, 1995, cost of revenue would have increased $4.1 million to $43.2 million and gross margins would have decreased from 34% to 27%. 1996 Compared to 1995 Revenue for the year ended December 31, 1996 increased 11% to $65.8 million from $59.1 million in 1995. Government and Defense revenue increased 27%, or $6.8 million as a result of increased contract activity principally resulting from an armor contract completed during the second quarter of 1996 and funded research and development. SimTec revenue increased 10%, or $3.0 million, primarily as a result of increased deliveries of the 16g Seats. Other revenue decreased principally as a result of a reduction of technology sales and royalties which approximated $2 million in 1995. Gross margin for the year ended December 31, 1996 decreased 48% to $10.5 million from $20.1 million for 1995. As a percent of sales, gross margin decreased to 16% from 34%. The effect of expensing pre-contract costs increased cost of revenue $5.3 million for the year ended December 31, 1996. Excluding the effect of expensing pre-contract costs, the gross margin percentage for 1996 would have been 24%. Gross margin percentages of Government and Defense in 1996 decreased to 29% from 38%. The decrease in gross margin percentage at Government and Defense was primarily due to: 1) The expensing of pre-contract costs principally related to the bulkhead airbag ("BABS") which is anticipated to begin deliveries in 1997; 2) Funding deficiencies incurred on funded research and development contracts which typically result in follow-on production contracts in future years; and 3) a decrease in royalties. The gross margin percentage at SimTec decreased to 11% from 25% in 1995. The decrease in gross margin percentage at SimTec was primarily due to: 1) The expensing of pre-contract costs principally related to the 16g seat, including the related new "composite" seat back; 2) High material costs related to the low volume production of the 16g seat; 3) Reduced throughput at Coach & Car as it was repositioned to begin high volume manufacturing of 22 24 16g seat components; and 4) Lower individual gross margin percentages from the mix of contracts in process or completed during the year at Coach & Car and Artcraft. The negative gross margins of the Other category was primarily due to the expensing of pre-contract costs for the Inflatable Tubular Structure ("ITS") and certain start-up costs related to the production facilities in Arizona and the United Kingdom which are not anticipated to begin production until March 1997. Administrative expenses for the year ended December 31, 1996 increased 27% to $19.7 million from $15.6 million for 1995. As a percent of sales, administrative expenses increased to 30% from 26%. Research and development expenses increased 35% to $1.9 million from $1.4 million as a result of the Company's increased investment in several products and developmental subsidiaries that are expected to begin generating revenue subsequent to 1996. Government and Defense administrative expenses increased 25% or $1.6 million primarily as a result of increased activity and increased research and development. SimTec's administrative expenses increased 46% or $3.2 million, primarily as a result of the corporate and sales infrastructure necessary to support the anticipated increase in activity related to the 16g Seat. Other administrative expenses decreased 25% or approximately $600,000, primarily as a result of the elimination or reduction of the supporting operations for certain technologies. For the year ended December 31, 1996, the Company incurred an operating loss of $9.2 million compared to operating income of $4.4 million in 1995. The reduction in operating income resulted primarily from the reduction in gross margins and increased administrative expenses noted above. Excluding the effect of expensing pre-contract costs during 1996, the operating loss would have been $3.9 million. This loss is primarily due to the start-up costs of the ITS manufacturing facilities in Phoenix, Arizona and the United Kingdom and 16g Seat manufacturing facilities in San Diego, California and Chicago, Illinois, losses arising from research and development contracts for which the Company anticipates profitable follow-on contracts, increased research and development and the expenses of the administrative and sales infrastructure that will be necessary in 1997 to support manufacturing and the generation of sales of the ITS and 16g Seat. Interest expense for the year ended December 31, 1996 increased 17% to $2.4 million from $2.0 million in 1995. This increase is due to increased borrowings on the Company's bank credit facilities and the issuance of $14.3 million of Series C 10% Senior Subordinated Convertible Notes (the "10% Notes") in a private placement to accredited investors in September 1996. These borrowings were made to fund the growth in working capital and fixed assets necessary to support the anticipated growth in revenues in 1997. The effective income tax rate approximated the statutory rate of 40% in 1996. For 1995, the effective income tax rate was disproportionate at 7% primarily due to the realization of tax attributes of an acquired subsidiary. The effects of the tax attributes of this acquired subsidiary were substantially recognized in 1995. 1995 Compared to 1994 Revenue for the year ended December 31, 1995 increased 44% to $59.1 million from $41.2 million in 1994. Government and Defense increased 16%, or $3.5 million as a result of increased contract activity including increases in funded research and development. SimTec revenue increased 64%, or $11.5 million, primarily as a result of the full year inclusion of the 1994 Acquisitions and the initial delivery of the 16g Seats. Other revenue increased principally as a result of technology sales and royalties of approximately $2.0 million in 1995. Gross margin for the year ended December 31, 1995 increased 50% to $20.1 million from $13.4 in 1994. The increase is attributable to increased revenue noted above. As a percent of sales, gross margin increased to 34% from 33%. Gross margin percentages of Government and Defense in 1995 decreased to 23 25 38% from 39%. The gross margin percentage at SimTec decreased to 25% from 27% in 1994. The decrease for SimTec resulted from $2.4 million in losses recorded on contracts which were acquired in the acquisition of Artcraft. These losses were substantially offset by the full integration of the 1994 Acquisitions, which allowed the Company to increase its vertical integration, thereby eliminating several third party vendors. These benefits were offset to a certain extent by the acceleration of two low-margin contracts that were committed to by Coach and Car prior to its acquisition by the Company. The gross margin percentage of the Other category increased to 73% from a negative margin of (14%) in 1994 as a result of the technology sales and royalties. Administrative expenses for the year ended December 31, 1995 increased 89% to $15.6 million from $8.3 million for the comparable periods in 1994. As a percent of sales, administrative expenses increased to 26% from 20%. Research and development expenses increased 106% to $1.4 million from approximately $700,000 as a result of the Company's increased investment in several products and developmental subsidiaries that are expected to begin generating revenue subsequent to 1996. Depreciation and amortization expenses increased 86% to $3.1 million from $1.7 million, primarily as a result of amortization relating to the 1994 Acquisitions. Government and Defense administrative expenses increased 24% or $1.2 million, primarily as a result of increased activity and increased research and development. SimTec's administrative expenses increased 148% or $4.1 million, primarily as a result of the inclusion of the acquired companies for the entire 1995 period and the expansion of the corporate and sales infrastructure necessary to support the anticipated increase in activity related to the 16g Seat. Other administrative expenses increased 536% or $2.0 million, primarily as a result of an increased investment in personnel and operations of the Company's developmental subsidiaries. Operating income for the year ended December 31, 1995 decreased 14% to $4.4 million from $5.2 million for the comparable period in 1994. Operating income decreased primarily due to the recording of losses on the contracts at Artcraft and increased administrative costs. These costs were substantially offset by the increased gross margins resulting from increased revenue. Interest expense for the year ended December 31, 1995 increased by approximately $200,000 over the comparable period in 1994 as a result of a higher average debt balance in 1995. Additional debt was incurred to finance working capital requirements and assumed in connection with the 1994 Acquisitions. Approximately $8.2 million of debt was retired in the second quarter of 1995 with a portion of the proceeds of the Company's 1995 public offering. The effective income tax rate was approximately 7% for 1995 and 37% for 1994. The decrease in the effective tax rate in 1995 is attributable to the realization of tax attributes of an acquired subsidiary. The effects of the tax attributes of this acquired subsidiary were substantially recognized in 1995. Accordingly, management does not expect that the remaining tax attributes will have a significant impact on the Company's effective income tax rate in future periods. LIQUIDITY AND CAPITAL RESOURCES The Company has historically financed its operations through operating cash flow, lines of credit and debt and equity offerings. In August 1993, the Company began to acquire companies, primarily with borrowed funds. The Company issued $5.7 million of 12% Senior Subordinated Notes (the "12% Notes) in connection with the acquisition of Airline Interiors in August 1993; the Company issued approximately $6.5 million of 9% Senior Subordinated Convertible Notes (the "9% Notes") in connection with the acquisition of Coach and Car in June 1994; and the Company issued Common Stock and assumed a bank 24 26 line of credit of $1.7 million, of which $650,000 was repaid simultaneously with the closing, in connection with the acquisition of Artcraft in September 1994. But for the acquisitions, the Company would have been able to satisfy its financial needs through operating cash flow. These acquisitions resulted in substantially increased working capital needs to fund the large vendor payable balances, contract advances of Coach and Car existing at the date of acquisition, and the increase in receivables and inventories of all the acquired companies after the respective dates of acquisition. In addition, restrictive covenants under the Company's then existing bank line of credit required the Company to seek alternative financing. In September 1994, prior to the closing of the Artcraft acquisition, the Company obtained an aggregate of $6.2 million of financing from three non-bank lenders, including $2.0 million from the Company's Chairman. The 9% Notes were converted into Common Stock during 1994. The Company completed a public offering of Common Stock, which closed and funded in April 1995. As a result of this offering, 2,328,750 shares were sold by the Company at $12 per share. Approximately $8.2 million of indebtedness was repaid at that time, including the $6.2 million described above. In September 1996, the Company issued $14.3 million of the 10% Notes in a private placement to accredited investors. The 10% Notes bear interest at 10% payable semi-annually and are due in September 1999. At the date of issuance, the 10% Notes were convertible into common stock of the Company at 103% of the average closing price of the Company's common stock as quoted on the New York Stock Exchange for the 10 consecutive trading days immediately preceding notice by the individual holder fixing the conversion price. Based upon the conversion prices fixed prior to December 31, 1996 and the average market price of the Company's common stock for the 10 days ended December 31, 1996 for the 10% Notes not yet fixed, the 10% Notes would be convertible into approximately 930,000 shares of the Company's common stock. At the date of issuance, the Company had the right to call the 10% Notes at par plus accrued interest through the date of redemption any time after June 15, 1997 and earlier under certain circumstances. The Indenture relating to the 10% Notes and the Company's 12% Senior Subordinated Notes, contains certain covenants including limitations on the incurrence of additional indebtedness, limitation on sale of assets, transactions with affiliates, and restricted dividend payments. In accordance with the Indenture, the Company may incur indebtedness based upon the specified ratio of cash flow, as defined, to interest expense. All of the Company's 1996 borrowings, including the availability under the Company's line of credit are allowable borrowings under the terms of the Indenture. The Company was in compliance with all covenants of the Indenture at December 31, 1996. Subsequent to December 31, 1996, the Company undertook to obtain the consent of the holders of the 10% Notes and the 12% Notes to amend the Indenture to eliminate the covenants limiting the incurrence of additional indebtedness and making certain dividend payments, to allow the Company greater flexibility with future financings consistent with the Company's growth. Consistent with the procedures under the Indenture, effective March 14, 1997, the Company obtained the consent of in excess of the majority of the principal amount of such notes and by act of the Company and the Trustee under the Indenture, the amendments eliminating these covenants were adopted. In consideration for the consent of the holders of the 10% Notes, the 10% Notes were amended to change the conversion ratio from 103% to 98% or reduce the conversion price for the 10% Notes previously fixed by $.75 per share. In addition, the Company's optional redemption date was extended from June 15, 1997 to December 15, 1997 and certain fees to be paid to the holders of the 10% Notes were eliminated. Based on the revised terms of the 10% Notes and the average market price of the Company's common stock for the 10 days ended December 31, 1996, the 10% Notes would be convertible into approximately 975,000 shares of the Company's common stock. In 1996, the Company entered into a modification of its existing loan agreement with Wells Fargo Bank, N.A. This modification provided for an increase in the existing revolving line of credit to $20 million 25 27 and $1.5 million of availability for equipment purchases. The modified agreement contains a covenant that limits the Company's ability to incur additional indebtedness. Specifically, the modified agreement allows the Company to incur up to $30.7 million of subordinated debt, a foreign loan facility of $5.0 million, computer equipment financing and certain refinancing indebtedness. In addition, the modified agreement contains certain covenants that require the maintenance of various financial ratios, including minimum tangible net worth, as defined, of $45 million, a maximum leverage ratio, a minimum current ratio of 1.5 to 1 and a minimum debt coverage ratio. The Company was in compliance with all covenants at December 31, 1996. The Company's liquidity is greatly impacted by the nature of the billing provisions under its government contracts. Generally, in the early period of contracts, cash expenditures and accrued profits are greater than allowed billings while contract completion results in billing previously unbilled costs and profits. Contract receivables increased $4.1 million for the year ended December 31, 1996 principally due to the timing of billings, increased volume at Coach and Car the reduction of advances on contracts at Coach and Car and Artcraft. Operating activities required the use of $15.6 million of cash during the year ended December 31, 1996, compared to the use of $14.5 million of cash during 1995. This resulted primarily from significant investment in research and development expenses, pre-contract costs and plant start-up costs, including the associated general and administrative costs, all of which have been expensed, for products the Company will not begin to ship in substantial quantities until 1997, the working capital required for the reduction in advances on contracts noted above and the funding of the $7.0 million investment in inventories primarily at SimTec and Government and Defense. The increase in inventories at SimTec primarily represents the buildup necessary to support anticipated future deliveries of the 16g Seat. The increase in inventories at Government and Defense represents inventory necessary to support certain programs which require the buildup of components necessary to support rapid deliveries of various configurations of seats. In addition, both SimTec and Government and Defense have purchased inventory in larger quantities to reduce per unit costs. Investing activities required the use of $9.3 million of cash during the year ended December 31, 1996 primarily for the purchase of equipment for the Company's new ITS manufacturing facilities in Phoenix, Arizona and the United Kingdom, manufacturing equipment for the 16g seat and computer and test equipment at Government and Defense. For 1995, cash used by investing activities was $3.4 million and was expended primarily for the acquisition of property and equipment. Financing activities provided $23 million of cash during the year ended December 31, 1996, of which $6.9 million resulted from borrowings on the revolving credit facility primarily for working capital needs and $3.2 million resulted from borrowings on the equipment credit facility for the financing of fixed assets. In addition, the Company issued the 10% Notes in September 1996. Cash provided by financing activities for 1995 was $20.1 million and primarily resulted from the sale of the Company's stock for $26.4 million offset by the net reduction of borrowings of $6.3 million. Included in current portion of long-term debt is a mortgage of $2.6 million on one of the Company's facilities that is due in March 1998. The Company is currently pursuing various alternatives for this property and believes it will be able to repay or refinance the mortgage on a long term basis prior to its maturity. The Company believes it has sufficient manufacturing capacity, at December 31, 1996, to meet its estimated 1997 delivery requirements. The Company anticipates cash provided by operating activities and the availability under its bank credit facilities will be sufficient to meet its current working capital requirements. However, to fund purchases of property and equipment and future working capital 26 28 requirements necessary to address the anticipated growth of demand and markets for its new technologies and products, the Company will look to obtain additional capital. The modification to the Indenture noted above will allow the Company more flexibility in pursuing financing alternatives. The raising of additional capital in public markets will be primarily dependent upon prevailing market conditions and the demand for the Company's technologies and products. In relation to this, the Company filed a registration statement on October 4, 1996 for 1,200,000 shares of Convertible Preferred Stock. The terms, conditions, preferences and pricing of the Convertible Preferred Stock will depend on market conditions and have not been set. This filing was made to enable the Company to more efficiently and timely pursue public capital sources should the market become favorable. The proceeds to be raised will be used to establish new and expand existing manufacturing facilities, primarily for the manufacture of aircraft and rail seating systems and components related to the Company's automobile inflatable restraint systems, working capital requirements attendant to growth in markets and revenues and other general corporate purposes, including potential future acquisitions. In the event the Company does not complete the Preferred Stock offering, and it has capital requirements, the Company may look to bank lines of credit, equipment financing arrangements, and private offerings of debt or equity securities. INFLATION The Company does not believe that it is significantly impacted by inflation. RESEARCH AND DEVELOPMENT The Company's research and development occurs primarily under fixed-price, government-funded contracts as well as Company-sponsored efforts. The revenue received under government-funded contracts is recorded under the percentage completion method of accounting, and the costs of independent research and development efforts are expensed as incurred. Historically, research and development efforts have fluctuated based upon available government-funded contracts. The Company anticipates that future fluctuations may also occur and that absent government funded research, the Company will directly fund research and development efforts to expand its inflatable restraint, commercial airliner seating, and rail seating technologies. As noted in Note 17 to the Consolidated Financial Statements, the Company's costs for research and development to advance its technologies were $10.5 million in 1996. SEASONALITY The Company's operations and financial results are affected by the seasonal variations in deliveries by suppliers. Historically, the Company has experienced its highest level of deliveries of materials in the fourth quarter and its lowest level of deliveries in the first quarter. Accordingly, for those contracts accounted for under the percentage of completion method, the Company has historically recorded its highest revenue in the fourth quarter and lower revenue in the first quarter. 27 29 FORWARD LOOKING INFORMATION AND RISKS OF THE BUSINESS The Company expects that during fiscal 1997, it will complete roll-out and enter large scale production of new products, including, ITS, CABS, BABS, IBAHRS, and 16g airliner seats. The Company expects that in late 1997 and in 1998, it will begin to realize significant revenues from the introduction of these products. The other core businesses of the Company are expected to remain at current revenue and profit levels. Projected operating results and capital needs will be affected by a wide variety of factors which could adversely impact revenues, profitability and cash flows, many of which are beyond the control of the Company. The factors include the Company's ability to design and introduce new products on a timely basis; market acceptance and demand of both the Company's and its customers' products; success in building strategic alliances with large prime contractors and first tier suppliers; the level of orders which are received and can be shipped and invoiced in a quarter; customer order patterns and seasonality; levels of accounts receivable; changes in product mix; product performance and reliability; product obsolescence; availability and utilization of manufacturing capacity; fluctuations in manufacturing yield; the availability and cost of raw materials, equipment, and other supplies; the cyclical nature of the airline, rail and automobile industries and other markets addressed by the Company's products; the level and makeup of military expenditures; technological changes; competition and competitive pressures on pricing; and economic conditions in the United States and worldwide markets served by the Company. The Company's products are incorporated into a variety of transportation vehicles. A slowdown in demand for new transportation vehicles or modifications services to transportation vehicles as a result of economic or other conditions in the United States or worldwide markets served by the Company and its customers or other broad-based factors could adversely affect the Company's operating results or financial condition. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary data are set forth in this report on Form 10-K commencing on page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 28 30 PART III In accordance with Instruction G(3) to Form 10-K, Items 10, 11, 12 and 13 of Form 10-K are incorporated herein by reference from the Company's definitive proxy statement to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K a. Financial Statements. Financial Statements appear beginning at page F-1. b. Reports on Form 8-K. None. c. Exhibits. The following Exhibits are included pursuant to Item 601 of Regulation S-K. NO. DESCRIPTION REFERENCE --- ----------- --------- 3.1 Articles of Incorporation of Simula, Inc., as amended and restated.......................... (11) 3.2 Bylaws of Simula, Inc., as amended and restated............................................. (1) 4.1 Specimen of Common Stock Certificate........................................................ (11) 4.2 Indenture dated December 17, 1993 (including cross-reference sheet to Trust Indenture Act), as amended.................................................................. (3) 4.5 Amended and Restated Supplemental Indenture No. 2 dated September 12, 1996, entered into in connection with the Registrant's issuance of Series C 10% Senior Subordinated Convertible Notes....................................................... (11) *4.6 Form of Supplemental Indenture No. 3, effective March 14, 1997, amending the Indenture of Simula, Inc. dated December 17, 1993 10.8 Employment Agreement between Registrant and Stanley P. Desjardins........................... (1) 10.9 Employment Agreement between Registrant and Donald W. Townsend.............................. (1) 10.11 1992 Stock Option Plan...................................................................... (1) 10.12 1992 Restricted Stock Plan.................................................................. (1) 10.15 Asset Purchase Agreement dated August 2, 1993 between Simula, Inc. and Airline Interiors, Inc...................................................................... (2) 10.16 Asset Purchase Agreement dated June 14, 1994, among Simula, Inc., CCEC Acquisition Corp. and Coach and Car Equipment Corporation................................... (4) 10.18 Asset Purchase Agreement dated September 30, 1994, among Simula, Inc., Artcraft Acquisition Corp., and Artcraft Industries Corp.................................... (5) 10.21 1994 Stock Option Plan...................................................................... (6) 10.22 Agreements dated January 27, 1995 with Autoliv AB, including license agreement, frame supply agreement and joint development agreement........................... (7) 10.23 Agreement with Jetstream Aircraft Limited................................................... (7) 10.25 Asset Purchase Agreement dated November 1, 1995, between Comfab, Inc. and Stanley P. Desjardins, d/b/a Desjardins Engineering; Services Agreement dated November 1, 1995, between Simula, Inc. and Comfab, Inc.; Promissory Note of Stanley P. Desjardins, d/b/a Desjardins Engineering, dated November 1, 1995, for the purchase price of Comfab, Inc............................................. (8) 10.26 Simula, Inc. Employee Stock Purchase Plan................................................... (9) 10.27 Promissory Note representing $650,000 loan from Stanley P. Desjardins dated August 12, 1996............................................................................. (11) 10.28 Promissory Note representing $1,000,000 loan from Stanley P. Desjardins dated August 14, 1996....................................................................... (11) 29 31 *10.29 Form of Change of Control Agreements Between the Company and Key Management Personnel *11. Earnings Per Share 18. Preference Letter re: change in accounting principles....................................... (10) *21. Subsidiaries of Registrant.................................................................. (11) *23. Consent of Independent Auditors *24. Powers of Attorney - Directors 25. Statement of Eligibility of Trustee on Form T-1 (without Indenture) (bound separately).......................................................................... (3) - ---------- * 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 current Report on Form 8-K, dated August 2, 1993. (3) Filed with Registration Statement on Form SB-2, No. 33-61028 under the Securities Act of 1933, effective December 10, 1993. (4) Filed with current Report on Form 8-K, dated June 14, 1994. (5) Filed with current Report on Form 8-K, dated September 30, 1994. (6) Filed with Registration Statement on Form SB-2, No. 33-87582, under the Securities Act of 1933, effective December 28, 1994. (7) Filed with Registration Statement on Form S-1, No. 33-89186, under the Securities Act of 1933, effective March 28, 1995, as amended by Post-Effective Amendment No. 1, effective March 31, 1995. (8) Filed with Report on Form 10-K for the year ended December 31, 1995. (9) Filed with Report on Form 10-Q for the quarter ended March 31, 1996. (10) Filed with Report on Form 10-Q/A for the quarter ended June 30, 1996. (11) Filed with Registration Statement on Form S-3, No. 333-13499, under the Securities Act of 1933, dated October 4, 1996. 30 32 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) the Securities Exchange Act of 1934, as amended, the registrant has duly caused this Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Phoenix, State of Arizona, on March 27, 1997. SIMULA, INC. By /s/ Donald W. Townsend ------------------------------------- Donald W. Townsend, President Pursuant to the requirements of the Securities Exchange Act of 1934, this Form 10-K has been signed by the following persons in the capacities and on the dates indicated. SIGNATURE TITLE DATE --------- ----- ---- /s/ Donald W. Townsend President and Director March 27, 1997 - ------------------------------------------ (Principal Executive Officer) Donald W. Townsend /s/ Sean K. Nolen Vice President, Chief Financial March 27, 1997 - ------------------------------------------ Officer, Treasurer and Director Sean K. Nolen (Principal Financial and Accounting Officer) /s/ Bradley P. Forst Vice President, General Counsel, March 27, 1997 - ------------------------------------------ Secretary and Director Bradley P. Forst * Chairman of the Board of Directors March 27, 1997 - ------------------------------------------ Stanley P. Desjardins * Director March 27, 1997 - ------------------------------------------ James C. Withers * Director March 27, 1997 - ------------------------------------------ Robert D. Olliver * Director March 27, 1997 - ------------------------------------------ Scott E. Miller *By: /s/ Bradley P. Forst ---------------------------------------- Bradley P. Forst, Attorney-in-Fact 33 SIMULA, INC. INDEX TO FINANCIAL STATEMENTS Independent Auditors' Report ....................................................................... 1 Consolidated Balance Sheets as of December 31, 1995 and 1996 ....................................... 2 Consolidated Statements of Operations for the three years ended December 31, 1996 .................. 3 Consolidated Statements of Shareholders' Equity for the three years ended December 31, 1996 ........ 4 Consolidated Statements of Cash Flows for the three years ended December 31, 1996 .................. 5-6 Notes to Consolidated Financial Statements.......................................................... 7-24 34 SIMULA, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994, AND INDEPENDENT AUDITORS' REPORT 35 INDEPENDENT AUDITORS' REPORT Directors and Shareholders Simula, Inc. and Subsidiaries Phoenix, Arizona We have audited the accompanying consolidated balance sheets of Simula, Inc. and subsidiaries (the "Company") as of December 31, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Simula, Inc. and subsidiaries at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. Deloitte & Touche LLP March 20, 1997 Phoenix, Arizona 36 SIMULA, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1996 AND 1995 - ---------------------------------------------------------------------------------------------- ASSETS 1996 1995 CURRENT ASSETS: Cash and cash equivalents $ 1,298,741 $ 3,175,172 Contract and trade receivables - Net (Notes 4 and 16) 25,164,350 24,814,754 Inventories (Note 5) 15,644,157 8,104,194 Income taxes receivable (Note 10) 1,089,564 Deferred income taxes (Note 10) 3,763,000 Prepaid expenses and other 1,050,215 762,836 ------------ ----------- Total current assets 48,010,027 36,856,956 PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS - Net (Notes 6 and 9) 23,356,025 15,778,819 DEFERRED INCOME TAXES (Note 10) 1,782,000 812,000 DEFERRED COSTS (Notes 2 and 7) 928,728 6,385,328 INTANGIBLES - Net (Notes 3 and 7) 10,964,139 11,455,005 OTHER ASSETS 1,647,537 1,848,028 ------------ ----------- TOTAL $ 86,688,456 $73,136,136 ============ =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Revolving line of credit (Note 8) $ 6,900,000 Trade accounts payable 9,200,214 $ 7,884,141 Other accrued liabilities 4,019,534 2,607,849 Advances on contracts 148,194 3,920,533 Deferred income taxes (Note 10) 8,000 Current portion of long-term debt (Note 9) 4,536,508 1,367,187 ------------ ----------- Total current liabilities 24,804,450 15,787,710 LONG-TERM DEBT - Less current portion (Notes 9 and 14) 24,696,509 11,261,365 ------------ ----------- Total liabilities 49,500,959 27,049,075 COMMITMENTS AND CONTINGENCIES (Note 14) SHAREHOLDERS' EQUITY (Notes 11 and 15) Preferred stock, $.05 par value - authorized, 50,000,000 shares; no shares issued or outstanding Common stock, $.01 par value - authorized, 50,000,000 shares; issued, 8,992,598 and 8,970,627 shares 89,926 89,706 Additional paid-in capital 39,031,453 37,981,759 Retained (deficit) earnings (1,966,296) 8,295,434 Currency translation adjustment 32,414 Treasury stock - at cost, 82,500 shares (279,838) ------------ ----------- Total shareholders' equity 37,187,497 46,087,061 ------------ ----------- TOTAL $ 86,688,456 $73,136,136 ============ =========== See notes to consolidated financial statements. -2- 37 SIMULA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS THREE YEARS ENDED DECEMBER 31, 1996 - ----------------------------------------------------------------------------------------------- 1996 1995 1994 Revenue (Notes 3, 16 and 18) $ 65,761,957 $ 59,088,613 $ 41,157,794 Cost of revenue 55,239,176 39,036,471 27,708,610 ------------ ------------ ------------ Gross margin 10,522,781 20,052,142 13,449,184 Administrative expenses (Note 17) 19,748,851 15,609,005 8,264,864 ------------ ------------ ------------ Operating (loss) income (9,226,070) 4,443,137 5,184,320 Interest expense (Notes 8 and 9) (2,376,607) (2,029,854) (1,831,505) Interest income 51,711 440,076 21,608 ------------ ------------ ------------ (Loss) income before taxes (11,550,966) 2,853,359 3,374,423 Income tax benefit (expense) (Note 10) 4,741,000 (196,000) (1,260,000) ------------ ------------ ------------ (Loss) earnings before cumulative effect of a change in accounting principle (6,809,966) 2,657,359 2,114,423 Cumulative effect on prior years (to December 31, 1995) of changing accounting for pre-contract costs - Net of the related income tax benefit of $2,160,000 (Note 2) (3,239,948) ------------ ------------ ------------ Net (loss) earnings $(10,049,914) $ 2,657,359 $ 2,114,423 ============ ============ ============ Per share amounts: (Loss) earnings before cumulative effect of a change in accounting principle $ (0.76) $ 0.31 $ 0.37 Cumulative effect on prior years (to December 31, 1995) of changing accounting for pre-contract costs (Note 2) (0.36) ------------ ------------ ------------ Net (loss) earnings $ (1.12) $ 0.31 $ 0.37 ============ ============ ============ Weighted Average shares outstanding 8,947,060 8,576,817 5,704,926 ============ ============ ============ See notes to consolidated financial statements. - 3 - 38 SIMULA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY THREE YEARS ENDED DECEMBER 31, 1996 - ---------------------------------------------------------------------------------------------------------------------------- CLASS A COMMON STOCK ADDITIONAL RETAINED CURRENCY -------------------- PAID-IN (DEFICIT) TRANSLATION SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT BALANCE, January 1, 1994 5,073,440 $50,735 $4,100,086 $4,207,178 Net earnings 2,114,423 Conversion of Series B 9% Senior Subordinated Convertible Notes 967,236 9,672 5,721,578 Issuance of common shares for warrants and options 158,525 1,585 610,361 Issuance of common shares in connection with: Acquisition of SOUTHtech 178,582 1,786 44,388 (683,526) Acquisition of Artcraft 67,228 672 464,328 Acquisition of Sedona Scientific, Inc. 23,834 238 285,762 --------- ------- ----------- ----------- ------- BALANCE, December 31, 1994 6,468,845 64,688 11,226,503 5,638,075 Net earnings 2,657,359 Secondary offering of common shares 2,328,750 23,288 25,544,534 Issuance of common shares for warrants and options 173,032 1,730 847,256 Tax benefit from exercise of stock options 363,466 --------- ------- ----------- ----------- ------- BALANCE, December 31, 1995 8,970,627 89,706 37,981,759 8,295,434 Net loss (10,049,914) Issuance of common shares for options 104,471 1,045 953,891 Tax benefit from exercise of stock options 163,000 Currency translation adjustment 32,414 Retirement of treasury stock (82,500) (825) (67,197) (211,816) --------- ------- ----------- ----------- ------- BALANCE, December 31, 1996 8,992,598 $89,926 $39,031,453 $(1,966,296) $32,414 ========= ======= =========== =========== ======= TOTAL TREASURY SHAREHOLDERS' STOCK EQUITY BALANCE, January 1, 1994 $(279,838) $8,078,161 Net earnings 2,114,423 Conversion of Series B 9% Senior Subordinated Convertible Notes 5,731,250 Issuance of common shares for warrants and options 611,946 Issuance of common shares in connection with: Acquisition of SOUTHtech (637,352) Acquisition of Artcraft 465,000 Acquisition of Sedona Scientific, Inc. 286,000 -------- ----------- BALANCE, December 31, 1994 (279,838) 16,649,428 Net earnings 2,657,359 Secondary offering of common shares 25,567,822 Issuance of common shares for warrants and options 848,986 Tax benefit from exercise of stock options 363,466 -------- ----------- BALANCE, December 31, 1995 (279,838) 46,087,061 Net loss (10,049,914) Issuance of common shares for options 954,936 Tax benefit from exercise of stock options 163,000 Currency translation adjustment 32,414 Retirement of treasury stock 279,838 -------- ----------- BALANCE, December 31, 1996 $ $37,187,497 ======== =========== See notes to consolidated financial statements. - 4 - 39 SIMULA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS THREE YEARS ENDED DECEMBER 31, 1996 - ------------------------------------------------------------------------------------------------------------- 1996 1995 1994 OPERATING ACTIVITIES: Net (loss) earnings $(10,049,914) $ 2,657,359 $ 2,114,423 Adjustments to reconcile net (loss) earnings to net cash used by operating activities: Depreciation and amortization 3,278,433 3,064,833 1,651,118 Deferred income taxes (4,578,000) (1,126,000) 256,000 Currency translation adjustment 32,414 Cumulative effect of change in accounting 5,399,948 Changes in net assets and liabilities - net of effects from acquisitions: Contract and trade receivables, net of advances (4,121,935) (12,859,956) (1,358,328) Inventories (7,042,562) (1,372,151) (2,681,370) Income taxes receivable (1,089,564) Prepaid expenses and other (287,379) (363,817) 94,635 Deferred costs (5,572,295) (1,083,476) Other assets 168,598 (1,089,933) 40,035 Trade accounts payable 1,316,073 1,769,254 (146,991) Other accrued liabilities 1,411,685 378,526 (1,538,783) ------------ ------------ ------------ Net cash used by operating activities (15,562,203) (14,514,180) (2,652,737) ------------ ------------ ------------ INVESTING ACTIVITIES: Purchase of property and equipment (8,770,586) (3,843,133) (1,256,852) Proceeds from sale of property and equipment 743,671 Costs incurred to obtain intangibles (522,909) (342,528) (271,212) Cash paid to acquire Coach & Car (5,352,982) Cash paid to acquire SOUTHtech (4,606) Cash paid to acquire Artcraft - net of cash acquired (628,948) Cash paid to acquire Sedona Scientific, Inc. -- -- (93,000) ------------ ------------ ------------ Net cash used in investing activities (9,293,495) (3,441,990) (7,607,600) ------------ ------------ ------------ FINANCING ACTIVITIES: Net borrowings (repayments) under short-term debt and line of credit agreement 6,900,000 (3,050,000) 2,000,000 Borrowings under other debt arrangements 3,153,296 4,407,628 10,799,940 Principal payments under other debt arrangements (1,685,465) (7,694,271) (3,611,047) Issuance of Series C Notes - net of expenses 13,656,500 Issuance of common shares - net of expenses 954,936 26,416,808 611,946 ------------ ------------ ------------ Net cash provided by financing activities 22,979,267 20,080,165 9,800,839 ------------ ------------ ------------ NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,876,431) 2,123,995 (459,498) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 3,175,172 1,051,177 1,510,675 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,298,741 $ 3,175,172 $ 1,051,177 ============ ============ ============ See notes to consolidated financial statements. - 5 - 40 SIMULA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS THREE YEARS ENDED DECEMBER 31, 1996 - ----------------------------------------------------------------------------------------------------------------------- 1996 1995 1994 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid $ 1,657,995 $1,691,712 $ 1,515,844 ============ ========== ==-======== Taxes paid $ 352,575 $1,365,826 $ 441,700 ============ ========== =========== SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Property and equipment acquired under capital leases $ 836,634 $ 924,324 ============ ========== Tax benefits from exercise of stock options $ 163,000 $ 363,466 ============ ========== Purchase accounting adjustments related to the acquisitions of Coach & Car: Additional liabilities offset against seller note payable $1,438,000 ========== Conversion of notes: Conversion of $6,475,000 Series B 9% Senior Subordinated Convertible Notes and accrued interest of $136,600 less deferred note issuance costs of $880,350 for 967,236 shares $ 5,731,250 =========== Coach & Car acquisition: Fair value of assets acquired $11,422,148 Liabilities assumed (7,069,166) Seller note payable (1,500,000) Covenants not to compete 2,500,000 ----------- Cash paid to acquire Coach & Car $ 5,352,982 =========== SOUTHtech acquisition: Fair value of assets acquired $ 378,014 Liabilities assumed (1,010,760) Common stock issued 637,352 ----------- Cash paid to acquire SOUTHtech $ 4,606 =========== Aircraft acquisition: Fair value of assets acquired $ 4,103,924 Liabilities assumed (2,988,924) Common stock issued (465,000) Cash acquired (21,052) ----------- Cash paid to acquire Artcraft - net of cash acquired $ 628,948 =========== Sedona Scientific, Inc. acquisition: Fair value of assets acquired $ 471,277 Liabilities assumed (92,277) Common stock issued (286,000) ----------- Cash paid to acquire Sedona Scientific, Inc. $ 93,000 =========== See notes to consolidated financial statements. - 6 - 41 SIMULA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THREE YEARS ENDED DECEMBER 31, 1996 - -------------------------------------------------------------------------------- 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION - The consolidated financial statements include the accounts of Simula, Inc. ("Simula") and its subsidiaries (collectively the "Company"). All of the subsidiaries are wholly owned. All intercompany transactions are eliminated in consolidation. The Company announced a 3 for 2 split of its common stock to shareholders of record as of September 15, 1995; which shares were issued on September 28, 1995. As a result, all shares and related references have been restated for all prior periods and transactions. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - These consolidated financial statements are prepared in accordance with generally accepted accounting principles. Described below are those accounting principles particularly significant to the Company, including those selected from acceptable alternatives. a) Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. b) Revenue related to government contracts and most commercial contracts results principally from long-term fixed price contracts and is recognized on the percentage-of-completion method calculated utilizing the cost-to-cost approach. The percent deemed to be complete is calculated by comparing the costs incurred to date to estimated total costs for each contract. This method is used because management considers costs incurred to be the best available measure of progress on these contracts. However, adjustments to this measurement are made when management believes that costs incurred materially exceed effort expended. Contract costs include all direct material and labor costs, along with certain overhead costs related to contract production. Provisions for any estimated total contract losses on uncompleted contracts are recorded in the period in which it is concluded that such losses will occur. Changes in estimated total contract costs will result in revisions to contract revenue. These revisions are recognized when determined. Revenue derived from sales of some commercial products is recognized at contractual amounts when the product is shipped. c) Inventories include raw materials, work-in-process and finished goods applicable to commercial products. Inventories are recorded at cost and are carried at the lower of cost or net realizable value. Amounts are removed from inventory using the estimated average cost per unit. d) Property, equipment and leasehold improvements are stated at cost. Amortization of capital leases and leasehold improvements is calculated on a straight-line basis over the life of the asset or term of the lease, whichever is shorter. Depreciation on equipment and buildings is calculated on a straight-line basis over the estimated useful lives of three to thirty years. - 7 - 42 e) Intangibles are recorded at cost. The Company acquires intangible assets in the normal course of business and in business combinations. The Company periodically reviews for changes in circumstances to determine whether there are conditions that indicate that the carrying amount of such assets may not be recoverable. If such conditions are deemed to exist, the Company will determine whether estimated future undiscounted cash flows are less than the carrying amount of such assets, in which case the Company will calculate an impairment loss. Impairment losses, if any, will be recorded as a component of operating earnings. Intangibles are amortized on a straight-line basis over the following periods: Goodwill 10 - 25 years Covenants not to compete 10 years Other 7 - 17 years f) Net (loss) earnings per common and equivalent share has been computed using the weighted average number of common shares and common share equivalents outstanding during each period. Stock options and warrants have been included in the computations as common equivalent shares utilizing the treasury stock method only when their effect is dilutive. Weighted average shares used to compute per share amounts for the year ended December 31, 1996 do not include common stock equivalents because their effect would be anti-dilutive. In addition, fully diluted earnings per share reflecting the effect of the convertible notes discussed in Note 9 is not presented because the effect would also be anti-dilutive. g) Foreign currency assets and liabilities are translated into United States dollars using the exchange rates in effect at the balance sheet date. The effects of exchange rate fluctuations on translation of assets and liabilities are reported as a separate component of equity. h) Statements of Cash Flows - Cash and cash equivalents presented in the statements of cash flows consist of cash on hand and highly liquid investments with an original maturity of three months or less. 2. ACCOUNTING CHANGE During the second quarter of 1996, the Company adopted a new method of accounting for pre-contract costs. Pre-contract costs represent amounts applicable to products and technologies which represent adaptations of existing capabilities to the particular requirements of the Company's customers. These costs were previously deferred and recovered over the revenue streams from these customers. The Company will now expense these costs as they are incurred. Due to current industry trends and anticipated accounting changes, the new policy is considered preferable to the previous policy. Both policies are currently in accordance with generally accepted accounting principles. The $3.2 million cumulative effect of the change on prior years (after reduction for income taxes of $2.2 million) is included in operations of the year ended December 31, 1996. The effect of the change on the year ended December 31, 1996 was to decrease earnings before cumulative effect of a change in accounting principle $3.2 million ($.36 per share) and net earnings by $6.4 million ($.72 per share). - 8 - 43 The effect of the change on the first quarter of 1996 was as follows: THREE MONTHS ENDED MARCH 31, 1996 Net income as originally reported $ 685,179 Effect of change in accounting for pre-contract costs (563,247) ---------- Income before cumulative effect of a change in accounting principle 121,932 Cumulative effect on prior years (to December 31, 1995) of changing accounting for pre-contract costs (3,239,948) ----------- Net loss as restated $(3,118,016) =========== Per share amounts: Net income as originally reported $ 0.08 Effect of change in accounting for pre-contract costs (0.07) ----------- Income before cumulative effect of a change in accounting principle 0.01 Cumulative effect on prior years (to December 31, 1995) of changing accounting for pre-contract costs (0.36) ----------- Net loss as restated $ (0.35) =========== The pro forma amounts reflect the effect of retroactive application on pre-contract costs, net of amortization, and the related income tax benefits. Pro forma amounts for the years ended December 31, 1995 and 1994 assuming the change in accounting had been applied retroactively are as follows. Actual net earnings per share amounts are presented for comparative purposes. 1995 1994 Pro forma: Net earnings $193,735 $1,675,722 Net earnings per share $ 0.02 $ 0.29 Actual: Net earnings per share $ 0.31 $ 0.37 3. ACQUISITIONS On June 14, 1994, the Company purchased covenants not to compete and substantially all of the assets of Coach and Car Equipment Corporation ("Coach & Car") for cash, an installment seller carryback note and the assumption of substantially all of the Coach & Car liabilities. Coach & Car is a manufacturer of seats for trains, subways, mass transit and other vehicles which are principally operated by local government authorities. The acquisition of Coach & Car has been accounted for using the - 9 - 44 purchase method of accounting, and the results of operations of Coach & Car have been included in the consolidated financial statements subsequent to the acquisition. The excess of purchase price over the fair value of net assets acquired of $5,281,038 is being amortized over 25 years, and covenants not to compete of $2,500,000 are being amortized over 10 years. Consideration for this transaction consisted of the following: Cash paid $ 3,000,000 Seller note 1,500,000 Liabilities assumed - including $2,352,982 of bank debt paid at closing 9,422,148 ----------- Total $13,922,148 =========== The assets acquired have been recorded as follows: Current assets $ 2,923,585 Intangibles 7,781,038 Property and equipment 3,217,525 ----------- Total $13,922,148 =========== On July 1, 1994, the Company purchased SOUTHtech, Inc. ("SOUTHtech") which was a corporation owned by the Company's Chairman (the "Chairman") (96%), and two unrelated minority shareholders (4%). SOUTHtech is a ceramics manufacturer that provides parts for silicon wafer manufacturing by the semiconductor industry. In determining the acquisition consideration, the Company obtained a valuation opinion from an independent investment banker and the transaction was approved by the disinterested members of the board of directors of the Company. The acquisition consideration consisted of 178,582 shares of the Company's common stock, of which 171,472 shares were issued to the Chairman and 7,110 shares were issued to one of the unrelated minority shareholders, and $4,606 cash, in lieu of stock, to the other unrelated minority shareholder. Because the Company and SOUTHtech were entities under the common control of the Chairman, the shares issued to the Chairman were recorded at the basis of his investment in SOUTHtech and the shares issued to minority shareholders were recorded at fair value. The excess of the Chairman's basis over his proportionate share of SOUTHtech's net assets of $683,526 was recorded as a reduction in retained earnings. The accounts of SOUTHtech have been included in the consolidated financial statements subsequent to the acquisition. Assets acquired and liabilities assumed in connection with the SOUTHtech transaction were as follows: Assets acquired $ 378,014 Liabilities assumed (1,010,760) ----------- Net liabilities assumed $ (632,746) =========== Consideration was recorded as follows: Shares issued to the Chairman $(682,383) Shares issued to minority shareholders 45,031 Cash issued to minority shareholders 4,606 --------- Total $(632,746) ========= - 10 - 45 During 1995, the ceramics technology used in the semiconductor industry and associated assets of SOUTHtech were sold to a third party effective August 31, 1995. As a result, the Company received cash of $1,328,720 and is entitled to guaranteed payments of $1,500,000 and contingent payments up to a maximum of $1,750,000 based upon the future sales of the SOUTHtech ceramic product within the semiconductor industry. The Company retained the ceramics technology and assets associated with government and defense applications, and certain key employees. In connection with this transaction, the Company reported $1,977,000 of technology sales and royalty revenue in 1995. On September 30, 1994, the Company purchased all of the operating assets of Artcraft Industries Corp. ("Artcraft") for 67,228 shares of common stock valued at $465,000 and the assumption of certain liabilities. Artcraft is engaged in the manufacture, assembly and sale of railway and mass transit seating systems. The acquisition has been accounted for using the purchase method of accounting, and results of operations of Artcraft have been included in the consolidated financial statements subsequent to the acquisition. The excess of the purchase price over the fair value of net assets acquired of $734,531 is being amortized over 25 years. Consideration for the transaction consisted of the following: 67,228 shares of common stock $ 465,000 Liabilities assumed - including $650,000 bank debt paid at closing 3,638,924 ---------- Total $4,103,924 ========== The assets acquired have been recorded as follows: Current assets $1,669,393 Intangibles 734,531 Property and equipment 1,700,000 ---------- Total $4,103,924 ========== In addition, the Company acquired another small company for $93,000 in cash and 23,833 shares of common stock. During 1995, the Company completed its identification and quantification of certain preacquisition contingencies related to its acquisition of Coach & Car. As a result, the Company adjusted the original purchase allocation of this acquisition resulting in a net increase in accrued liabilities and advances on contracts and a decrease in debt owed to seller of $1,438,000. The Coach & Car Asset Purchase Agreement ("Agreement") specifically provided to the Company the right to offset against the purchase price any losses resulting from the failure of seller to specifically disclose a liability. The Company has asserted an offset for an undisclosed indemnifiable liability of $2.4 million. The Company has continued to make the required payments pursuant to the terms of the seller carryback note payable into an escrow account. As of December 31, 1996, the payments made into this escrow account were $866,000. This amount is included in other assets because the Company believes that the possibility is remote that the seller will overturn the offset and believes that it is probable the funds will be returned to the Company. The Agreement provides for arbitration to settle disputes. During the fourth quarter of 1996, the seller completed the formal procedures to dispute the Company's offset and seek arbitration, however, the steps necessary to invoke arbitration proceedings have not been taken. - 11- 46 The following summarizes unaudited pro forma operating results for the Company for the year ended December 31, 1994, assuming the acquisitions had occurred on January 1, 1994. 1994 Revenues $55,512,000 =========== Net earnings $ 2,362,000 =========== Net earnings per share $ .37 =========== 4. RECEIVABLES At December 31, receivables include the following: 1996 1995 United States Government: Billed receivables $ 1,627,288 $ 2,926,891 Costs and estimated earnings in excess of billings 3,448,055 4,541,878 ----------- ----------- Total United States Government 5,075,343 7,468,769 ----------- ----------- Other contracts: Billed receivables 5,405,940 2,942,647 Costs and estimated earnings in excess of billings 11,732,859 10,244,769 ----------- ----------- Total other contracts 17,138,799 13,187,416 Other trade receivable 3,113,208 4,301,569 Less allowance for doubtful accounts (163,000) (143,000) ----------- ----------- Contract and trade receivables - net $25,164,350 $24,814,754 =========== =========== Costs and estimated earnings in excess of billings on uncompleted contracts represent revenue recognized on long-term contracts in excess of billings because amounts were not billable at the balance sheet date. Amounts receivable from the United States Government or receivable under United States Government related subcontracts will generally be billed in the following month or when the contract and all options thereunder are completed. Amounts due on other contracts are generally billed as shipments are made, subject to retainages. It is estimated that substantially all of such amounts will be billed and collected within one year, although contract extensions may delay certain collections beyond one year. 5. INVENTORIES At December 31, inventories consisted of the following: 1996 1995 Raw materials $ 4,959,810 $3,319,958 Work-in-process 9,822,859 4,711,256 Finished goods 861,488 72,980 ----------- ---------- Total inventories $15,644,157 $8,104,194 =========== ========== -12 - 47 6. PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS At December 31, property, equipment and leasehold improvements consisted of the following: 1996 1995 Land $ 3,022,819 $ 3,022,819 Buildings and leasehold improvements 5,533,291 4,467,697 Equipment 21,934,491 13,408,041 ------------ ------------ Total 30,490,601 20,898,557 Less accumulated depreciation (7,134,576) (5,119,738) ------------ ------------ Property, equipment and leasehold improvements - net $ 23,356,025 $ 15,778,819 ============ ============ 7. INTANGIBLES AND DEFERRED COSTS At December 31, intangibles consisted of the following: 1996 1995 Covenants not to compete $ 4,989,356 $ 4,989,356 Excess of cost over net assets acquired 7,125,110 7,125,110 Patents and licenses 661,696 518,644 Other 783,963 435,163 ------------ ------------ Total 13,560,125 13,068,273 Less accumulated amortization (2,595,986) (1,613,268) ------------ ------------ Intangibles - net $ 10,964,139 $ 11,455,005 ============ ============ At December 31, deferred costs included the following: 1996 1995 Deferred financing costs - net $ 928,728 $ 487,980 Deferred product and bid costs 5,897,348 ---------- ---------- Total deferred costs $ 928,728 $6,385,328 ========== ========== 8. REVOLVING LINE OF CREDIT The Company has a $20,000,000 unsecured Revolving Line of Credit with a bank, interest at LIBOR plus 2% or prime. There was $6,900,000 outstanding on this line of credit as of December 31, 1996. The loan agreement encompassing this line of credit and the $5,000,000 amortizing term loan (Note 9) contains certain covenants that require the maintenance of a minimum tangible net worth and certain defined financial ratios. The Company was in compliance with all of the covenants of this loan agreement at December 31, 1996. - 13 - 48 9. DEBT Long-term debt at December 31 consisted of the following: 1996 1995 10% Senior Subordinated Convertible Notes $ 14,300,000 12% Senior Subordinated Notes 5,700,000 $ 5,700,000 Mortgage notes payable, interest at 9% and 10.4%, secured by land and buildings with a carrying amount of $6,172,885, due through 2017 2,918,243 2,990,329 Various loans payable, secured by property and equipment 4,951,898 3,020,703 Obligations under capital leases, interest at 10% (Note 13) 1,362,876 917,520 ------------ ------------ Total 29,233,017 12,628,552 Less current portion (4,536,508) (1,367,187) ------------ ------------ Long-term debt $ 24,696,509 $ 11,261,365 ============ ============ In September 1996, the Company issued $14.3 million of Series C 10% Senior Subordinated Convertible Notes (the "10% Notes") in a private placement to accredited investors. The 10% Notes bear interest at 10% payable semi-annually and are due in September 1999. The notes are convertible into common stock of the Company at 103% of the average closing price of the Company's common stock as quoted on the New York Stock Exchange for the 10 consecutive trading days immediately preceding notice by the individual holder fixing the conversion price. Based upon the conversion prices fixed prior to December 31, 1996 and the average market price of the Company's common stock for the 10 days ended December 31, 1996 for the 10% Notes not yet fixed, the 10% Notes would be convertible into approximately 930,000 shares of the Company's common stock. The Company has the right to call the 10% Notes at par plus accrued interest through the date of redemption any time after June 15, 1997 and earlier under certain circumstances. In December 1993, the Company issued $5.7 million of 12% Senior Subordinated Notes ("12% Notes"), due in 1998. The 12% Notes are not subject to redemption prior to maturity. The Indenture relating to the 10% Notes and the 12% Notes contains certain covenants including limitations on incurrence of additional indebtedness, limitation on sale of assets, transactions with affiliates and payment of dividends. In accordance with the Indenture, the Company may incur indebtedness based upon the specified ratio of cash flow, as defined, to interest expense. The Company was in compliance with all of the covenants of the Indenture at December 31, 1996. - 14 - 49 Subsequent to December 31, 1996, the Indenture was amended to eliminate the covenants limiting additional indebtedness and restricted dividend payments. In consideration for the consent of the holders of the 10% Notes, the 10% Notes were amended to change the conversion ratio from 103% to 98% or reduce the conversion price for the 10% Notes previously fixed by $.75 per share. In addition, the Company's optional redemption date was extended from June 15, 1997 to December 15, 1997 and certain fees to be paid to the holders of the 10% Notes were eliminated. Based on the revised terms of the 10% Notes and the average market price for the Company's common stock for the 10 days ended December 31, 1996, the 10% Notes would be convertible into approximately 975,000 shares of the Company's common stock. The Company has a $5,000,000 amortizing term loan under the same loan agreement encompassing the revolving line of credit (Note 8) for the financing of U.S. based equipment with an outstanding balance at December 31, 1996 of $3,682,479. Interest is payable at the LIBOR rate in effect at the time of the drawdown plus 2%. The average interest rate on the outstanding balance at December 31, 1996 is 7.8%. The aggregate principal payments required for the five years subsequent to December 31, 1996 are: 1997 $ 4,536,508 1998 7,368,178 1999 15,506,173 2000 804,617 2001 766,973 Thereafter 250,568 ----------- Total $29,233,017 =========== Interest expense for the years ended December 31 is comprised of the following: 1996 1995 1994 Interest $2,141,963 $1,679,086 $1,651,881 Amortization of deferred financing costs 234,644 350,768 179,624 ---------- ---------- ---------- Interest expense $2,376,607 $2,029,854 $1,831,505 ========== ========== ========== Based on borrowing rates currently available to the Company and the quoted market price for the 12% Notes, the fair value of long-term debt at December 31, 1996 is approximately $29,500,000. 10. INCOME TAXES The income tax (benefit) provision for the years ended December 31 are as follows: 1996 1995 1994 Current $(2,160,000) $ 1,322,000 $1,004,000 Deferred (4,741,000) (1,126,000) 256,000 ----------- ----------- ---------- (Benefit) provision for income taxes $(6,901,000) $ 196,000 $1,260,000 =========== =========== ========== - 15 - 50 The Company's effective income tax rate differs from the federal statutory tax rate at December 31 as follows: 1996 1995 1994 Federal statutory income tax rate 34.0% 34.0% 34.0% State income taxes 5.3 6.0 4.6 Tax credits and other 1.4 0.7 (1.2) Utilization of tax losses 0 (33.8) 0 ---- ---- ---- Effective rate 40.7% 6.9% 37.4% ==== ==== ==== The provision for deferred income taxes consists of the following: 1996 1995 1994 Accruals and reserves $(1,157,000) $ (946,000) $216,000 Depreciation and amortization expense 560,000 268,000 40,000 Net operating loss carryforwards (3,867,000) Minimum tax credit carryforwards (277,000) Change in valuation allowance for tax loss carryforwards (448,000) ----------- ----------- -------- Total $(4,741,000) $(1,126,000) $256,000 =========== =========== ======== The significant tax effected temporary differences comprising deferred taxes at December 31 are as follows: 1996 1995 Current: Net operating loss carryforwards $ 2,970,000 Accrued vacation and self insurance 324,000 $ 177,000 Inventory and warranty reserves 334,000 Other 135,000 (185,000) ----------- --------- Total current deferred tax asset (liability) 3,763,000 (8,000) ----------- --------- Long-term: Excess of tax over book depreciation and amortization (906,000) (346,000) Recognition of contract revenue 970,000 804,000 Net operating loss carryforwards 1,345,000 448,000 Minimum tax credit carryforward 287,000 Deferred start-up costs 352,000 Other (266,000) (94,000) ----------- --------- Total long-term deferred tax asset 1,782,000 812,000 ----------- --------- Net deferred tax asset $ 5,545,000 $ 804,000 =========== ========= - 16 - 51 The valuation allowances associated with tax loss carryforwards as of December 31 are as follows: 1996 1995 Tax asset for loss carryforward $ 4,536,000 $ 669,000 Valuation allowance (221,000) (221,000) ----------- --------- Net deferred tax asset $ 4,315,000 $ 448,000 =========== ========= At December 31, 1996, the Company had approximately $10,600,000 of net operating loss carryforwards including $1,500,000 of net operating loss carryforwards of an acquired subsidiary which expires through 2008. The Company believes based on historical operating results and expectations for the future that taxable income will more likely than not be sufficient to utilize all of its recorded net operating loss carryforwards prior to their expiration. The amount of the deferred tax asset considered realizeable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. The income tax receivable at December 31, 1996 represents estimated refunds of income taxes paid in 1992 through 1995. The Company is in the process of amending prior tax returns for the change in accounting (Note 2) and preparing applications for net operating loss carrybacks. 11. SHAREHOLDERS' EQUITY During 1996, the Company retired 82,500 shares of treasury stock which had been acquired for a cost of $279,838. The Company completed a secondary offering of common stock which closed and was funded the second quarter of 1995. As a result of this offering, 2,328,750 shares were sold by the Company at $12 per share. The net proceeds from the offering totaled $25,567,822. 12. BENEFIT PLANS The Company has a noncontributory defined benefit pension plan (the "Plan") for employees. To be eligible to participate, employees must have completed six months of continuous employment and have attained the age of 21. Benefits are based on length of service and the employee's final pay (averaged over the five highest consecutive years of the last ten years of participation). The Company makes contributions to the Plan based upon actuarially determined amounts. Net periodic pension cost includes the following: 1996 1995 1994 Service cost - benefit earned during the year $ 235,167 $ 169,835 $ 205,195 Interest cost on projected benefit obligation 147,852 116,660 113,496 Actual return on Plan assets (262,676) (257,497) (70,053) Net amortization and deferral 159,328 172,970 15,907 --------- --------- --------- Net periodic pension cost $ 279,671 $ 201,968 $ 264,545 ========= ========= ========= - 17 - 52 The Plan's funded status and amounts recognized in the Company's balance sheet at December 31 are as follows: 1996 1995 Actuarial present value of benefit obligation: Vested benefits $ 1,503,283 $ 1,310,868 Nonvested benefits 243,064 237,163 ----------- ----------- Accumulated benefit obligation 1,746,347 1,548,031 Effect of projected future compensation increases 453,626 364,997 ----------- ----------- Projected benefit obligation 2,199,973 1,913,028 Plan assets at fair value 1,729,919 1,375,252 ----------- ----------- Plan assets less than projected benefit obligation 470,054 537,776 Unrecognized prior service cost 19,811 24,383 Unrecognized loss (185,107) (293,362) Unrecognized transition liability 90,442 96,094 ----------- ----------- Accrued pension cost $ 395,200 $ 364,891 =========== =========== Assumptions at December 31 used in the accounting for the Plan were as follows: 1996 1995 1994 Discount or settlement rate 7.50% 7.25% 8.25% Rate of increase in compensation levels 3.50% 3.50% 4.00% Expected long-term rate of return on Plan assets 8.00% 8.00% 8.00% The Plan's assets consist of money market accounts and investments in common stocks, mutual funds, and corporate bonds. In addition, the Company has 401(k) plans for substantially all employees and one subsidiary has a union sponsored pension plan for union employees to which the Company makes contractual contributions. 13. RELATED PARTY TRANSACTIONS The Company has entered into various transactions with the Chairman. These transactions are further described as follows: a. The Company acquired SOUTHtech from the Chairman in 1994 as described in Note 3. b. The Chairman loaned the Company $1,650,000 in 1996 that was repaid by the Company in 1996 and $2,000,000 in 1994 which was repaid by the Company in 1995. 14. COMMITMENTS AND CONTINGENCIES The Company leases certain equipment under capital lease agreements and certain facilities under noncancellable operating leases with various renewal options. Leased assets totaling $2,274,565 and $1,042,604 (net of accumulated depreciation of $681,283 and $248,683) are included in property and equipment as of December 31, 1996 and 1995, respectively. - 18 - 53 The following is a schedule, by year, of minimum rental payments due under the leases described above and for other operating leases for the years ending December 31: CAPITAL LEASES OPERATING LEASES 1997 $ 633,610 $1,933,506 1998 551,616 1,329,296 1999 362,399 1,287,976 2000 31,947 1,075,645 2001 2,340 862,872 Thereafter 2,786,158 --------- --------- Total minimum lease payments 1,581,912 $9,275,453 ========== Less amounts representing interest (219,036) --------- Present value of net minimum lease payments $1,362,876 ========== Rent expense was $1,966,271, $1,109,402, and $578,079 for the years ended December 31, 1996, 1995 and 1994, respectively. In connection with its decision to establish a facility in the United Kingdom for the production of inflatable restraints for automobiles, the Company negotiated certain grants with local and national authorities in the United Kingdom. The total grant of approximately $3 million is anticipated to be received through January 1999 as certain levels of capital expenditures and the creation of jobs are met. These grants will be recognized as income in accordance with the purpose of the grants in the periods in which such grants are received. 15. STOCK OPTIONS In 1992, the Company adopted the 1992 Stock Option Plan which provided for the issuance of up to 360,000 shares of common stock. All options available under the 1992 Plan have been granted. In August 1994, the Company adopted the 1994 Stock Option Plan which reserves up to 1,545,000 shares of common stock for issuance under the Plan. In accordance with the terms of the 1994 Plan, 876,250 options have been granted. Information with respect to the Plans is as follows: OPTION WEIGHTED AVERAGE SHARES OPTION PRICE ------ ------------ Outstanding at January 1, 1994 245,250 $3.25 Granted 161,250 $7.70 Exercised (24,075) $3.25 Canceled (1,500) $3.25 --------- Outstanding at December 31, 1994 380,925 $5.22 Granted 478,125 $13.62 Exercised (135,500) $4.93 Canceled (6,300) $3.25 --------- Outstanding at December 31, 1995 717,250 $10.85 Granted 360,550 $12.99 Exercised (104,471) $9.14 Canceled (51,400) $12.77 --------- Outstanding at December 31, 1996 921,929 $11.78 ========= - 19 - 54 Options are exercisable after one year from the date of grant for up to ten years at a price equal to 100% of the fair market value at the date of grant or 85% of fair market value in the case of non-statutory options. As of December 31, 1996, 1995,and 1994, exercisable options were 612,179, 239,125, and 219,675, respectively. The following information, aggregated by option price ranges, is applicable to those shares outstanding at December 31, 1996: Range of exercise prices $3.25-$6.92 $12.50-$16.13 Shares outstanding in range 170,354 751,575 Weighted-average exercise price $4.92 $13.34 Weighted-average remaining contractual life 5.7 years 4 years Shares currently exercisable 170,354 441,825 Weighted-average exercise price of shares currently exercisable $4.92 $13.56 The estimated fair value of options granted at during 1996 was $5.27 per share. The Company applies Accounting Principles Board Opinion No. 25 and related Interpretations in accounting for its stock option plans. Accordingly, no compensation cost has been recognized for its fixed stock option plans. Had compensation cost for the Company's stock option plans been recognized been determined based on the fair value at the grant dates for awards under those plans consistent with the method of Statement of Financial Accounting Standards No. 123, the Company's net (loss) earnings and net (loss) earnings per share for the years ended December 31, 1996 and 1995 would have been reduced to the pro forma amounts indicated below: 1996 1995 Net (loss) income - as reported $(10,049,914) $ 2,657,359 ============ ============= Net (loss) income - pro forma $(12,074,645) $ 293,848 ============ ============= (Loss) income per share - as reported $ (1.12) $ .31 ============ ============= (Loss) income per share - pro forma $ (1.35) $ .03 ============ ============= The fair value of each option grant is estimated on the date of grant using the Black-Scholes options pricing model with the following weighted-average assumptions used for grants: no dividend yield; expected volatility of 36%, risk-free interest rate of 7%; and expected lives of five years. In 1992, the Company adopted the 1992 Restricted Stock Plan authorizing the Company to grant to key employees of the Company the right to purchase up to an aggregate of 19,500 shares of common stock at $.01 per share. The Company has reserved 19,500 shares of common stock for issuance pursuant to the Restricted Stock Plan, of which 4,500 shares have been awarded. - 20 - 55 EMPLOYEE STOCK PURCHASE PLAN On June 20, 1996, the Company adopted the Employee Stock Purchase Plan (Purchase Plan) to allow eligible employees of the Company to acquire shares of the Company's common stock at periodic intervals, paid for with accumulated payroll deductions over a six month offering period. A total of 400,000 shares of the Company's common stock have been reserved for issuance under the Purchase Plan. The first offering period under the Purchase Plan began October 1, 1996. 16. MAJOR CUSTOMERS Revenue from four major customers accounted for approximately 48%, 29%, and 66% of total revenue for the years ended December 31, 1996, 1995 and 1994. Contract and trade receivables from these customers accounted for approximately 15%, 29%, and 39% of the total contract and trade receivables at December 31, 1996, 1995 and 1994. The major customers included all branches of the United States armed forces which accounted for 27%, 18% and 24% of total revenue for the years ended December 31, 1996, 1995 and 1994, respectively. The Company has performed work for these customers since 1975 and has no reason to believe that there will be any change in these customer relationships. For the years ended December 31, 1996 and 1995 export sales were $15,826,109 and $6,760,819, respectively. For 1996, the export sales were principally comprised of sales to customers in Canada, the United Kingdom, Japan, and Turkey of $9,124,647, $2,278,212, $1,191,468, and $721,180. For 1995, the export sales were principally comprised of sales to customers in Japan, Canada, the United Kingdom and Korea of $2,522,419, $2,091,965, $1,105,558 and $775,091. For the year ended December 31, 1994, export sales were less than 10% of consolidated revenue. 17. OTHER The Company's research and development efforts arise from funded development contracts and proprietary research and development. Amounts arising from such efforts for the years ended December 31 were as follows: 1996 1995 1994 Research and development expenses classified as general and administrative expenses $ 1,915,649 $ 1,419,340 $ 687,686 =========== =========== =========== Funded contracts: Revenues funded by customers $ 6,518,818 $ 3,901,662 $ 3,290,146 Research and development expenses classified as cost of such revenue (8,587,658) (4,721,858) (3,165,130) ----------- ----------- ----------- Funded contract (deficiency) margin $(2,068,840) $ (820,196) $ 125,016 =========== =========== =========== The above amounts do not include pre-contract costs which the Company began expensing in 1996 (See Note 2). Pre-contract costs expended for the years ended December 31, 1996, 1995 and 1994 were approximately $6,420,000, $4,438,000 and $645,000, respectively. - 21 - 56 18. SEGMENT REPORTING During 1996, 1995 and 1994, the Company operated in three industry segments. The Government and Defense segment, principally comprised of Simula Government Products, Inc., includes the design and manufacture of crash resistant components, energy absorbing devices, ballistics and composites principally in connection with branches of the United States armed forces procurement. The Simula Transportation Equipment Corporation ("SimTec"- formerly known as Intaero) segment includes operations which primarily manufacture seating systems for domestic and foreign passenger airlines, rail other mass transit. The remaining segment, entitled Other, includes general corporate operations and other subsidiaries engaged in technology development and sales. Included in Other is Simula Automotive Safety Devices, Inc. ("Simula ASD"), the entity which conducts substantially all of the Company's operations encompassing inflatable restraints for automobiles. Through 1996, Simula ASD has not had any significant revenue. Segment disclosures are as follows: 1996 ---------------------------------------------------------------- GOVERNMENT AND DEFENSE SIMTEC OTHER TOTAL Revenue: Contract revenue $31,372,051 $ 23,636,852 $ $ 55,008,903 Product sales 685,218 8,965,719 $ 847,467 10,498,404 Technology sales and royalties 254,650 254,650 ----------- ----------- ------------ ------------ Total revenue $32,311,919 $ 32,602,571 $ 847,467 $ 65,761,957 =========== ============ ============ ============ Operating (loss) income $ 1,355,917 $ (6,327,689) $ (4,254,298) $ (9,226,070) Identifiable assets 28,217,854 43,971,150 14,499,452 86,688,456 Depreciation and amortization 909,619 1,967,959 400,855 3,278,433 Capital expenditures 2,916,342 2,470,336 4,220,542 9,607,220 1995 ----------------------------------------------------------- GOVERNMENT AND DEFENSE SIMTEC OTHER TOTAL Revenue: Contract revenue $24,753,600 $23,936,070 $ $48,689,670 Product sales 5,673,264 1,968,879 7,642,143 Technology sales and royalties 779,347 1,977,453 2,756,800 ----------- ----------- ----------- ----------- Total revenue $25,532,947 $29,609,334 $ 3,946,332 $59,088,613 =========== =========== =========== =========== Operating income $ 3,294,791 $ 651,695 $ 496,651 $ 4,443,137 Identifiable assets 26,629,708 36,273,362 10,233,066 73,136,136 Depreciation and amortization 564,842 1,899,899 600,142 3,064,833 Capital expenditures 1,829,664 1,459,651 1,478,142 4,767,457 - 22 - 57 1994 ------------------------------------------------------------------ GOVERNMENT AND DEFENSE SIMTEC OTHER TOTAL Revenue: Contract revenue $21,587,963 $12,126,010 $ $33,713,973 Product sales 5,966,839 1,031,379 6,998,218 Technology sales and royalties 445,603 445,603 ----------- ----------- ------------ ----------- Total revenue $22,033,566 $18,092,849 $ 1,031,379 $41,157,794 =========== =========== ============ =========== Operating income $ 3,037,566 $ 2,168,567 $ (21,813) $ 5,184,320 Identifiable assets 19,761,764 24,654,688 3,274,511 47,690,963 Depreciation and amortization 516,510 763,418 371,190 1,651,118 Capital expenditures 586,178 0 670,674 1,256,852 For the years ended December 31, 1996 and 1995, inter-segment sales were insignificant and total intercompany sales of $7,547,039 and $4,065,201, respectively, have been eliminated. All revenue in 1994 was generated from sales to unaffiliated customers. 19. UNAUDITED QUARTERLY FINANCIAL INFORMATION FIRST SECOND THIRD FOURTH Revenue $ 16,742,512 $ 19,615,830 $ 12,914,643 $ 16,488,972 Cost of revenue 12,316,453 15,478,516 10,765,168 16,679,039 Gross margin 4,426,059 4,137,314 2,149,475 (190,067) (Loss) earnings before cumulative effect of an accounting change 121,932 (305,428) (2,087,492) (4,538,978) Cumulative effect of an accounting change (3,239,948) Net (loss) (3,118,016) (305,428) (2,087,492) (4,538,978) Net (loss) per common and equivalent share $ (.35) $ (.03) $ (.23) $ (.51) 1995 ------------------------------------------------------------------ FIRST SECOND THIRD FOURTH Revenue $13,580,842 $15,030,715 $14,694,204 $15,782,852 Cost of revenue 8,954,807 9,632,276 11,811,431 8,637,957 Gross margin 4,626,035 5,398,439 2,882,773 7,144,895 Net earnings (loss) 616,077 936,995 (305,818) 1,410,105 Net earnings (loss) per common and equivalent share $.09 $.11 $(.04) $.15 - 23 - 58 1994 --------------------------------------------------- FIRST SECOND THIRD FOURTH Revenue $6,900,072 $7,558,741 $12,875,330 $13,823,651 Cost of revenue 4,370,264 4,667,947 9,157,490 9,512,909 Gross margin 2,529,808 2,890,794 3,717,840 4,310,742 Net earnings 334,798 513,707 603,372 662,546 Net earnings per common and equivalent share $.07 $.10 $.10 $.10 * * * * * * - 24 -