1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
/X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended SEPTEMBER 30, 1997 or
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from _________ to ________
Commission file number 1-12410
SIMULA, INC.
(Exact Name of Registrant as Specified in Its Charter)
ARIZONA 86-0320129
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2700 N. CENTRAL AVENUE, SUITE 1000, PHOENIX, ARIZONA 85004
(Address of Principal Executive Offices) (Zip Code)
(602) 631-4005
(Registrant's Telephone Number, Including Area Code)
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant:
(1) has filed all reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports)
Yes /X/ No / /
(2) has been subject to such filing requirements for the past 90 days.
Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Outstanding at
Class September 30, 1997
____________________________ ____________________
Common Stock, $.01 par value 9,849,007
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SIMULA, INC.
INDEX
PART I - FINANCIAL INFORMATION
PAGE
----
Item 1 - Financial Statements
Consolidated Balance Sheets
September 30, 1997 and December 31, 1996 .................. 2
Consolidated Statements of Operations
Three and Nine Months Ended September 30, 1997 and 1996 ... 3
Consolidated Statement of Shareholders' Equity
Nine Months Ended September 30, 1997 ...................... 4
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1997 and 1996 ............. 5 - 6
Notes to Interim Consolidated Financial Statements ............. 7 - 8
Item 2 - Management's Discussion and Analysis of
Results of Operations and Financial Condition ............. 9 - 12
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings .............................................. 13
Item 5 - Other - Recent Events .......................................... 13
Item 6 - Exhibits and Reports ........................................... 14 - 15
SIGNATURE ............................................................... 16
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
SIMULA, INC.
CONSOLIDATED BALANCE SHEETS
- ----------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 7,553,228 $ 1,298,741
Contract and trade receivables - Net 31,391,477 25,016,156
Inventories 26,463,292 15,644,157
Income taxes receivable 153,147 1,089,564
Deferred income taxes 3,763,000 3,763,000
Prepaid expenses and other 1,095,697 1,050,215
------------- ------------
Total current assets 70,419,841 47,861,833
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS - Net 27,120,614 23,356,025
DEFERRED INCOME TAXES 3,738,000 1,782,000
DEFERRED FINANCING COSTS 3,268,780 928,728
INTANGIBLES - Net 10,555,578 10,964,139
OTHER ASSETS 1,657,907 1,647,537
------------- ------------
TOTAL $ 116,760,720 $ 86,540,262
============= ============
LIABILITIES & SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Revolving line of credit $ 6,900,000
Trade accounts payable $ 11,686,179 9,200,214
Other accrued liabilities 5,565,961 4,019,534
Current portion of long-term debt 4,385,131 4,536,508
------------- ------------
Total current liabilities 21,637,271 24,656,256
LONG-TERM DEBT - Less current portion 49,412,149 24,696,509
------------- ------------
Total liabilities 71,049,420 49,352,765
------------- ------------
SHAREHOLDERS' EQUITY
Preferred stock, $.05 par value - authorized
50,000,000 shares; no shares issued or outstanding
Common stock, $.01 par value - authorized 50,000,000
shares; issued 9,849,007 (1997) and 8,992,598 (1996) shares 98,490 89,926
Additional paid-in capital 50,662,353 39,031,453
Retained deficit (4,899,142) (1,966,296)
Currency translation adjustment (150,401) 32,414
------------- ------------
Total shareholders' equity 45,711,300 37,187,497
------------- ------------
TOTAL $ 116,760,720 $ 86,540,262
============= ============
See notes to interim consolidated financial statements.
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SIMULA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
- ------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------- ---------------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
REVENUE $ 23,642,745 $ 12,914,643 $ 61,533,933 $ 49,272,985
COST OF REVENUE 20,255,231 10,765,168 46,683,277 38,560,137
------------ ------------ ------------ ------------
GROSS MARGIN 3,387,514 2,149,475 14,850,656 10,712,848
ADMINISTRATIVE EXPENSES 5,825,363 4,920,884 15,959,322 12,997,502
------------ ------------ ------------ ------------
OPERATING LOSS (2,437,849) (2,771,409) (1,108,666) (2,284,654)
INTEREST EXPENSE (1,640,336) (685,083) (4,055,682) (1,476,334)
INTEREST INCOME 102,175 275,502
------------ ------------ ------------ ------------
LOSS BEFORE TAXES (3,976,010) (3,456,492) (4,888,846) (3,760,988)
INCOME TAX BENEFIT 1,591,000 1,369,000 1,956,000 1,490,000
------------ ------------ ------------ ------------
LOSS BEFORE CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING PRINCIPLE (2,385,010) (2,087,492) (2,932,846) (2,270,988)
CUMULATIVE EFFECT ON PRIOR YEARS (TO
DECEMBER 31, 1995) OF CHANGING
ACCOUNTING FOR PRE-CONTRACT COSTS (3,239,948)
------------ ------------ ------------ ------------
NET LOSS ($ 2,385,010) ($ 2,087,492) ($ 2,932,846) ($ 5,510,936)
============ ============ ============ ============
Per share amounts:
Loss before cumulative effect of a
change in accounting principle ($ 0.26) ($ 0.23) ($ 0.32) ($ 0.26)
Cumulative effect on prior years (to
December 31, 1995) of changing
accounting for pre-contract costs ($ 0.36)
------------ ------------ ------------ ------------
Net loss ($ 0.26) ($ 0.23) ($ 0.32) ($ 0.62)
============ ============ ============ ============
Weighted average shares outstanding 9,265,429 8,972,221 9,099,186 8,935,259
============ ============ ============ ============
See notes to interim consolidated financial statements.
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CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1997
- ----------------------------------------------------------------------------------------------------------------------------------
Common Stock Additional Currency Total
--------------------------- Paid-in Retained Translation Shareholders'
Shares Amount Capital Deficit Adjustment Equity
---------- ----------- ----------- ----------- --------- -----------
BALANCE, JANUARY 1, 1997 8,992,598 $ 89,926 $39,031,453 ($1,966,296) $ 32,414 $37,187,497
Net loss (2,932,846) (2,932,846)
Issuance of common shares 176,776 1,768 2,044,655 2,046,423
Conversion of Series C 10% Senior
Subordinated Convertible Notes 679,633 6,796 9,586,245 9,593,041
Currency translation adjustment (182,815) (182,815)
---------- ----------- ----------- ----------- --------- -----------
BALANCE, SEPTEMBER 30, 1997 9,849,007 $ 98,490 $50,662,353 $(4,899,142) $(150,401) $45,711,300
========== =========== =========== =========== ========= ===========
See notes to interim consolidated financial statements.
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SIMULA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------
1997 1996
------------ ------------
OPERATING ACTIVITIES:
Net loss ($ 2,932,846) ($ 5,510,936)
Adjustment to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization 3,355,699 2,232,454
Deferred income taxes (1,956,000)
Currency translation adjustment (182,815)
Cumulative effect of change in accounting 5,399,948
Changes in net assets and liabilities:
Contract and trade receivables - net (6,375,321) (2,489,119)
Inventories (10,819,135) (7,742,511)
Income taxes receivable 936,417 (4,056,440)
Prepaid expenses and other (45,482) (35,582)
Other assets (10,370) 222,761
Trade accounts payable 2,485,965 (543,520)
Other accrued liabilities 2,021,975 1,333,737
------------ ------------
Net cash used by operating activities (13,521,913) (11,189,208)
------------ ------------
INVESTING ACTIVITIES:
Purchase of property and equipment (5,909,810) (6,166,684)
Costs incurred to obtain intangibles (255,427) (444,325)
------------ ------------
Net cash used in investing activities (6,165,237) (6,611,009)
------------ ------------
FINANCING ACTIVITIES:
Net (repayments) borrowings under line of credit (6,900,000) 2,350,000
Issuance of 8% Notes - net of expenses 31,186,126
Issuance of 10% Notes - net of expenses 13,656,500
Borrowings under other debt arrangements 1,008,511 2,676,445
Principal payments under other debt arrangements (1,399,423) (1,187,324)
Issuance of common shares 2,046,423 828,139
------------ ------------
Net cash provided by financing activities 25,941,637 18,323,760
------------ ------------
NET INCREASE IN CASH 6,254,487 523,543
CASH, BEGINNING OF PERIOD 1,298,741 3,175,172
------------ ------------
CASH, END OF PERIOD $ 7,553,228 $ 3,698,715
============ ============
See notes to interim consolidated financial statements.
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SIMULA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------
1997 1996
---------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Taxes paid $ 125,900 $287,575
========== ========
Interest paid $2,806,141 $830,267
========== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Conversion of notes:
Conversion of $9,550,000 Series C 10% Senior Subordinated
Convertible Notes and accrued interest of $475,548 less
deferred note issuance costs of
$432,507 for 679,633 shares of common stock $9,593,041
==========
See notes to interim consolidated financial statements.
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SIMULA, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION:
The accompanying interim consolidated financial statements of Simula, Inc.
(the "Company") have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q. Accordingly, they do not include all of the
information and notes required by generally accepted accounting principles
for complete financial statements. In the opinion of Management, all
adjustments and reclassifications considered necessary for a fair and
comparable presentation have been included and are of a normal recurring
nature. Operating results for the three and nine months ended September
30, 1997 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1997.
NOTE 2 - INVENTORIES:
At September 30, 1997 and December 31, 1996, inventories consisted of the
following.
SEPTEMBER 30, DECEMBER 31,
1997 1996
----------- -----------
Raw materials $15,882,633 $ 4,959,810
Work in process 9,696,791 9,822,859
Finished goods 883,868 861,488
----------- -----------
Total inventories $26,463,292 $15,644,157
=========== ===========
NOTE 3 - DEBT:
During the third quarter of 1997, $9,550,000 of the Series C 10% Senior
Subordinated Convertible Notes (the "10% Notes") and $475,548 of accrued
interest were converted into 679,633 shares of the Company's common stock.
As of September 30, 1997, $4,750,000 of the 10% Notes remained
outstanding. These remaining 10% Notes are convertible into approximately
280,000 shares of the Company's common stock.
During the second quarter of 1997, the Company completed the public
offering of $34.5 million of its 8% Senior Subordinated Convertible Notes
(the "8% Notes"). The 8% Notes are due May 1, 2004 and bear interest at 8%
per annum, payable semi-annually. The 8% Notes are convertible into shares
of the Company's common stock at a price of $17.55 per share of common
stock. The 8% Notes may be redeemed at the Company's option in whole or in
part on a pro rata basis, on and after May 1, 1999, at certain specified
redemption prices plus accrued interest payable to the redemption date.
However, on or after May 1, 1999 and prior to April 30, 2000, the 8% Notes
will not be redeemable unless the closing price of the Company's common
stock has equaled or exceeded $23.625 for 20 trading days within a period
of 30 consecutive trading days. The indenture relating to the 8% Notes
contains certain covenants including limitations on the incurrence of
additional indebtedness, the sale of assets, liens securing indebtedness
other than senior indebtedness, payment restrictions affecting
subsidiaries, transactions with affiliates, future senior subordinated
indebtedness and mergers and consolidations. In accordance with the
indenture, the Company may incur indebtedness under senior credit
facilities up to $50 million and may incur other indebtedness based upon a
specified ratio of cash flow, as defined, to interest expense.
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SIMULA, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - ACQUISITIONS - PENDING ARBITRATION:
During 1995, the Company adjusted the original purchase allocation of its
acquisition of Coach and Car resulting in a net increase in accrued
liabilities and advances on contracts and a decrease in debt owed to
seller of $1.4 million. The Coach and Car Asset Purchase Agreement
("Agreement") provided to the Company the right of offset against the
purchase price for any losses resulting from the failure of the seller to
specifically disclose a liability. The Company has asserted an offset for
an undisclosed indemnifiable liability up to the limit allowed under the
Agreement. The Company has continued to make all required payments
pursuant to the terms of the seller carryback note payable into an escrow
account or to the seller as required by the Agreement. As of September 30,
1997, these payments made totaled approximately $1.2 million. 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 binding arbitration to settle disputes. The
formal arbitration hearing was completed on November 12, 1997 and the
Company anticipates a final ruling by the arbitration panel in December
1997.
NOTE 5 - SHAREHOLDERS' EQUITY:
Weighted average shares used to compute per share amounts for the three
and the nine month periods ended September 30, 1997 and 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 8% Notes and the 10% Notes is not presented because the
effect would also be anti-dilutive.
Assuming the conversion of the $9,550,000 of the 10% Notes occurred at the
beginning of the respective 1997 periods presented, supplementary loss per
share amounts would be ($.23) and ($.25) for the three and nine month
periods ended September 30, 1997, respectively.
NOTE 6 - ACCOUNTING CHANGE:
During 1996, the Company adopted a new method of accounting for
pre-contract costs. These costs were previously deferred and recovered
over the revenue streams from these customers. Beginning January 1, 1996,
the Company expenses these costs as they are incurred.
NOTE 7 - NEW ACCOUNTING STANDARDS:
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings Per
Share," which is effective for both interim and annual periods ending
after December 15, 1997. The Company does not believe the adoption of this
standard will have a significant effect on previously reported per share
data.
The FASB also recently issued SFAS No. 130 on "Reporting Comprehensive
Income" and SFAS No. 131 on "Disclosures about Segments of an Enterprise
and Related Information." The "Reporting Comprehensive Income" standard is
effective for fiscal years beginning after December 15, 1997. This
standard changes the reporting of certain items currently reported in the
equity section of the balance sheet. The "Disclosure about Segments of an
Enterprise and Related Information" standard is also effective for fiscal
years beginning after December 15, 1997. This standard requires public
companies to report certain information about operating segments in their
financial statements. It also establishes related disclosures about
products and services, geographical areas and major customers. The Company
is currently evaluating what impact these two standards will have on its
financial statements.
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SIMULA, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
GENERAL
The following discussion and analysis provides information that management
of Simula, Inc. (the "Company") believes is relevant to an assessment and
understanding of the Company's results of operations and financial condition for
the three and nine month periods ended September 30, 1997 compared to the same
periods of the prior year. This discussion should be read in conjunction with
the Interim Consolidated Financial Statements and the Notes thereto included
elsewhere in this Form 10-Q. This Form 10-Q contains certain forward-looking
statements and information. The cautionary statements should be read as being
applicable to all related forward-looking statements wherever they appear. See
"Forward Looking Information and Risks of the Business."
OVERVIEW
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 and 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. Coach and Car and
Artcraft's 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 are being utilized in
the production of its 16g seat (the "16g Seat") for commercial airliners.
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.
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, Simula Transportation Equipment Corporation
("SimTec" - formerly known as Intaero), an entity conducting the Company's
commercial seating businesses, and Simula Automotive Safety Devices, Inc.
("Simula ASD") which conducts substantially all of the Company's operations
encompassing inflatable restraints for automobiles including the Inflatable
Tubular Structure (the "ITS"). In addition, the Company maintains general
corporate operations and subsidiaries engaged in technology development.
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SIMULA, INC.
RESULTS OF OPERATIONS
Three and Nine Months Ended September 30, 1997 Compared to 1996
Revenue for the three months ended September 30, 1997 increased 83% to
$23.6 million from $12.9 million for the comparable period in 1996. Revenue for
the nine months ended September 30, 1997 increased 25% to $61.5 million from
$49.3 million for the comparable period in 1996. These increases are due to
increased sales of the 16g Seat and the ITS. Revenue for the nine month period
ended September 30, 1996 included approximately $4.6 million in incremental
revenue from a government armor contract which represented non-recurring
business. Excluding this contract from the nine month period ended September 30,
1996, revenues increased 38% for the 1997 period versus the 1996 period.
Gross margin for the three months ended September 30, 1997 increased 58%
to $3.4 million from $2.1 million for the comparable period in 1996. For the
nine months ended September 30, 1997, gross margin increased 39% to $14.9
million from $10.7 million. The increases in gross margin were due to the
increase in revenue noted above. As a percent of sales, gross margin for the
three months ended September 30, 1997 decreased to 14% from 17% for the
comparable period in 1996. For the nine months ended September 30, 1997, gross
margin as a percent of sales increased to 24% from 22% for the comparable period
in 1996. Gross margins in 1997 were negatively impacted by cost inefficiencies
resulting from the significant increase in 16g Seat deliveries. Production
bottlenecks caused by parts shortages, overtime costs, learning costs related to
adding a second production shift and other production related expenses for the
Company's tourist class commercial airliner seats resulted in a reduction of
gross margins. In addition, the initial production costs of the larger than
expected volume for Company's new first class seat were higher than anticipated.
Gross margins were also negatively impacted by an unanticipated delay in the
commencement of higher margin production contracts for the government business.
As a result of this delay, available production resources were shifted to
development contracts which typically have low gross margins and precontract
costs which are expensed.
Administrative expenses for the three months ended September 30, 1997
increased 18% to $5.8 million from $4.9 million for the comparable period in
1996. Administrative expenses for the nine months ended September 30, 1997
increased 23% to $16.0 million from $13.0 million for the comparable period in
1996. These increases were primarily attributable to the expansion of the
corporate and sales infrastructure related to the commercial introduction of the
Company's technologies, principally the 16g Seat and certain commercial
helicopter seat programs, and increased Government and Defense and new
technology research, development, bid and proposal costs. The increased research
and development expenses partially resulted from the delay in production
contracts noted above as these production resources were assigned to available
work.
Interest expense for the three months ended September 30, 1997 increased
139% to $1.6 million from approximately $685,000 for the comparable period in
1996. Interest expense for the nine months ended September 30, 1997 increased
175% to $4.1 million from approximately $1.5 million for the comparable period
in 1996. These increases were due to increased borrowings on the Company's bank
credit facilities, the issuance of $34.5 million of the 8% Senior Subordinated
Convertible Notes (the "8% Notes") in April 1997 and the issuance of $14.3
million of the Series C 10% Senior Subordinated Convertible Notes (the "10%
Notes) in September 1996. These borrowings were made to fund its growth in
working capital and fixed assets necessary to support the anticipated growth in
revenues for 1997 and subsequent years. During the third quarter of 1997,
$9,550,000 of the 10% Notes and $475,548 of accrued interest were converted into
679,633 shares of the Company's common stock. Annual interest expense on the 10%
Notes converted was approximately $1.1 million.
Interest income for the three and nine months ended September 30, 1997,
was approximately $102,000 and $276,000, respectively. This income results from
the investment by the Company of the excess proceeds received upon the issuance
of the 8% Notes. These excess proceeds have been invested in high quality
government and short-term investment grade, interest bearing securities.
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The effective income tax rate for the three and nine month periods ended
September 30, 1997 and 1996 approximated the Company's combined statutory rate
of 40%.
SIMULA, INC.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity is greatly impacted by the nature of the billing
provisions under its contracts. Generally, in the early period of contracts,
cash expenditures and accrued profits are greater than allowed billings while
contract completion results in billing previously unbilled costs and profits.
Contract and trade receivables, net of advances on contracts, increased
approximately $6.4 million for the nine months ended September 30, 1997, due to
trade receivables from 16g Seat and ITS customers and certain rail programs
initiated in the first nine months of 1997.
Operating activities required the use of $13.5 million of cash during the
nine months ended September 30, 1997, compared to the use of $11.2 million of
cash during the same period in 1996. Cash used by operating activities in 1997
was primarily used to fund an increase in inventories of $10.8 million and the
increase in contract and trade receivables noted above. The increase in
inventories was primarily related to the 16g Seat and ITS and represents the
buildup necessary to support anticipated future deliveries. This buildup
includes increases in purchased components to be used in the assembly process,
raw materials to be used in the manufacture of 16g Seat components by Coach and
Car and composite seat backs produced by the Company's subsidiary, Viatech.
Investing activities required the use of $6.2 million of cash during the
nine months ended September 30, 1997 primarily for the purchase of manufacturing
equipment for the ITS located at the Company's operation in the United Kingdom.
In addition, the Company acquired computer hardware and software for system
upgrades throughout all of its subsidiaries and tooling fixtures for future rail
programs and certain enhancements to its 16g Seat machining cell at Coach and
Car.
Financing activities provided $25.9 million of cash during the nine months
ended September 30, 1997 principally from approximately $31.2 million in net
proceeds received from the issuance of the 8% Notes and $2.0 million in proceeds
from the issuance of common stock for option exercises offset by the net
repayment of $6.9 million under the Company's revolving line of credit. The
Company's $20 million revolving line of credit has no outstanding balance at
September 30, 1997.
During the third quarter of 1997, $9,550,000 of the 10% Notes and $475,548
of accrued interest were converted into 679,633 shares of the Company's common
stock. As of September 30, 1997, $4,750,000 of the 10% Notes remained
outstanding. These remaining 10% Notes are convertible into approximately
280,000 shares of the Company's common stock.
During the second quarter of 1997, the Company completed the public
offering of $34.5 million of the 8% Notes. The 8% Notes are due May 1, 2004 and
bear interest at 8% per annum, payable semi-annually. The 8% Notes are
convertible into shares of the Company's common stock at a price of $17.55 per
share of common stock. The 8% Notes may be redeemed at the Company's option in
whole or in part on a pro rata basis, on and after May 1, 1999, at certain
specified redemption prices plus accrued interest payable to the redemption
date. However, on or after May 1, 1999 and prior to April 30, 2000, the 8% Notes
will not be redeemable unless the closing price of the Company's common stock
has equaled or exceeded $23.625 for 20 trading days within a period of 30
consecutive trading days. The indenture relating to the 8% Notes contains
certain covenants including limitations on the incurrence of additional
indebtedness, the sale of assets, liens securing indebtedness other than senior
indebtedness, payment restrictions affecting subsidiaries, transactions with
affiliates, future senior subordinated indebtedness and mergers and
consolidations. In accordance with the indenture, the Company may incur
indebtedness under senior credit facilities up to $50 million and may incur
other indebtedness based upon a specified ratio of cash flow, as defined, to
interest expense.
Included in current portion of long-term debt is a mortgage of $2.5
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.
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SIMULA, INC.
The Company believes it has sufficient manufacturing capacity in place at
September 30, 1997 to meet its foreseeable delivery requirements. The Company
anticipates cash on hand, cash provided by operating activities once the 16g
Seat and ITS reach full scale production and the availability under its bank
credit facilities will be sufficient to meet its current and foreseeable working
capital requirements. The Company may, however, seek to obtain additional
capital should demand for its products exceed current capacity. 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.
INFLATION
The Company does not believe that it is significantly impacted by
inflation.
RESEARCH AND DEVELOPMENT
The Company's research and development occurs under fixed-price,
government-funded contracts and Company-sponsored efforts. Historically,
research and development efforts have fluctuated based upon available
government-funded contracts and available Company funding. The Company
anticipates that future fluctuations may also occur as a result of efforts to
expand its inflatable restraint, commercial airliner and helicopter seating, and
rail seating technologies.
SEASONALITY
As the Company has diversified its operations into new commercial
products, the impact of seasonal variations in deliveries by suppliers which
have historically resulted in higher revenue in the fourth quarter and lower
revenue in the first quarter has diminished. The Company does not believe that
it is currently significantly impacted by seasonal factors.
FORWARD LOOKING INFORMATION AND RISKS OF THE BUSINESS
Commencing in fiscal 1997, the Company entered large scale production of
the ITS and 16g Seat. The Company began to realize significant revenues from the
introduction of these products in 1997 and anticipates continued growth in 1998.
During this period, the other core businesses of the Company are expected to
remain at current revenue levels. The Company's current focus is on controlling
costs and eliminating inefficiencies resulting from the faster than anticipated
rate of growth in its new product lines, principally the 16g Seat.
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
manufacturing capacity and yield; costs of labor, raw materials, supplies, and
equipment; reliability of vendor base; contract mix and shifting production and
delivery schedules among the Company's three business segments; amount of
resources committed to independent research and development from time to time;
success in building strategic alliances with large prime contractors and first
tier suppliers to OEMs; the level of orders which are received and can be
shipped and invoiced in a quarter; customer order patterns and seasonality; 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.
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SIMULA, INC.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
As previously reported, during 1995, the Company adjusted the original
purchase allocation of its acquisition of Coach and Car resulting in a net
increase in accrued liabilities and advances on contracts and a decrease in debt
owed to seller of $1.4 million. The Coach and Car Asset Purchase Agreement
("Agreement") provided to the Company the right of offset against the purchase
price for any losses resulting from the failure of the seller to specifically
disclose a liability. The Company has asserted an offset for an undisclosed
indemnifiable liability up to the limit allowed under the Agreement. The Company
has continued to make all required payments pursuant to the terms of the seller
carryback note payable into an escrow account or to the seller as required by
the Agreement. As of September 30, 1997, these payments made totaled
approximately $1.2 million. 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 binding arbitration to settle disputes. The
formal arbitration hearing was completed on November 12, 1997 and the Company
anticipates a final ruling by the arbitration panel in December 1997.
ITEM 5. OTHER - RECENT OFFERING OF SENIOR SUBORDINATED CONVERTIBLE NOTES.
During the second quarter of 1997, the Company completed the public
offering of $34.5 million of its 8% Senior Subordinated Convertible Notes (the
"8% Notes"). The 8% Notes are due May 1, 2004 and bear interest at 8% per annum,
payable semi-annually. The 8% Notes are convertible into shares of the Company's
common stock at a price of $17.55 per share of common stock. The 8% Notes may be
redeemed at the Company's option in whole or in part on a pro rata basis, on and
after May 1, 1999, at certain specified redemption prices plus accrued interest
payable to the redemption date. However, on or after May 1, 1999 and prior to
April 30, 2000, the 8% Notes will not be redeemable unless the closing price of
the Company's common stock has equaled or exceeded $23.625 for 20 trading days
within a period of 30 consecutive trading days. The indenture relating to the 8%
Notes contains certain covenants including limitations on the incurrence of
additional indebtedness, the sale of assets, liens securing indebtedness other
than senior indebtedness, payment restrictions affecting subsidiaries,
transactions with affiliates, future senior subordinated indebtedness and
mergers and consolidations. In accordance with the indenture, the Company may
incur indebtedness under senior credit facilities up to $50 million and may
incur other indebtedness based upon a specified ratio of cash flow, as defined,
to interest expense.
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ITEM 6. EXHIBITS AND REPORTS.
(a) The following Exhibits are included pursuant to Item 601 of Regulation S-K.
NO. DESCRIPTION REFERENCE
--- ----------- ---------
3.1 Articles of Incorporation of Simula, Inc., as amended and restated.......................... (9)
3.2 Bylaws of Simula, Inc., as amended and restated............................................. (1)
4.2 Indenture dated December 17, 1993 (including cross-reference sheet to Trust Indenture Act),
as amended............................................................................... (3)
4.5 Supplemental Indenture No. 2 dated September 12, 1996, entered into in connection with the
the Registrant's issuance of Series C 10% Senior Subordinated Convertible Notes.......... (12)
4.6 Supplemental Indenture No.3, effective March 14, 1997, amending the Indenture of
Simula, Inc. dated December 17, 1993..................................................... (11)
4.7 Indenture dated April 1, 1997, in connection with the issuance of the 8% Senior Subordinated
Convertible Notes due May 1, 2004 (12)
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)
10.24 Amended Loan Agreement with Wells Fargo Bank, N.A. dated December 20, 1996................. (11)
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..................................................................................... (12)
10.28 Promissory Note representing $1,000,000 loan from Stanley P. Desjardins dated August 14,
1996..................................................................................... (12)
10.29 Form of Change of Control Agreements Between the Company and Key Management
Personnel................................................................................ (11)
*11. Earnings Per Share
18. Preference Letter re: change in accounting principles....................................... (10)
+24. Powers of Attorney - Directors.............................................................. (11)
*27. Financial Data Schedule
* Filed herewith.
+ Power of Attorney for Fred J. Musone, elected to the Company's Board of
Directors for the first time in August 1997, with term commencing October 1997,
is filed herewith; Power of Attorney for John M. Leinonen was filed with the
Company's report on Form 10-Q for the quarter ended June 30, 1997; all other
Powers of Attorney for Directors were filed as referenced.
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SIMULA, INC.
(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 Definitive Proxy on May 14, 1996, for the Company's Annual
Meeting of Shareholders held on June 20, 1996.
(10) Filed with Report on Form 10-Q/A for the quarter ended June 30, 1996.
(11) Filed with Report on Form 10-K for the year ended December 31, 1996.
(12) Filed with Registration Statement on Form S-3, No. 333-13499, under the
Securities Act of 1993, effective April 24, 1997.
(b) No reports on Form 8-K have been filed during the reporting period.
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SIMULA, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report on Form 10-Q for the quarter ended
September 30, 1997 to be signed on its behalf by the undersigned thereunto duly
authorized.
SIMULA, INC.
DATE: November 14, 1997 /s/ Donald W. Townsend
---------------------------- --------------------------------
DONALD W. TOWNSEND
President
Chief Operating Officer
/s/ Sean K. Nolen
--------------------------------
SEAN K. NOLEN
Vice President of Finance
Chief Financial Officer