1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
/ X / Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 1998 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 North 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:
Class Outstanding at June 30, 1998
---------------------------- ----------------------------
Common Stock, $.01 par value 9,877,103
2
SIMULA, INC.
INDEX
PART I - FINANCIAL INFORMATION
PAGE
----
Item 1 - Financial Statements
Consolidated Balance Sheets
June 30, 1998 and December 31, 1997 ............................ 2
Consolidated Statements of Operations
Three and Six Months Ended June 30, 1998 and 1997 .............. 3
Consolidated Statement of Shareholders' Equity
Six Months Ended June 30, 1998 ................................. 4
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1998 and 1997 ........................ 5
Notes to Interim Consolidated Financial Statements ................ 6 - 7
Item 2 - Management's Discussion and Analysis of
Results of Operations and Financial Condition .................. 8 - 12
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders ............ 13
Item 5 - Other - Discontinued Operations ................................ 13
Item 6 - Exhibits and Reports ........................................... 14
SIGNATURES .............................................................. 15
1
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
SIMULA, INC.
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
1998 1997
------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,289,127 $ 9,367,031
Contract and trade receivables - Net 26,577,922 22,897,091
Inventories 27,663,055 23,772,430
Deferred income taxes 4,750,000 3,763,000
Prepaid expenses and other 1,778,838 1,335,366
Net current assets of discontinued operations 9,511,606 12,274,200
------------- -------------
Total current assets 76,570,548 73,409,118
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS - Net 19,974,381 18,666,140
DEFERRED INCOME TAXES 7,559,000 4,477,000
DEFERRED FINANCING COSTS 2,827,517 3,136,898
INTANGIBLES - Net 3,534,336 3,701,494
OTHER ASSETS 332,134 497,823
NET LONG-TERM ASSETS OF DISCONTINUED OPERATIONS 6,868,382 13,470,801
------------- -------------
TOTAL $ 117,666,298 $ 117,359,274
============= =============
LIABILITIES & SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving line of credit $ 7,050,000
Trade accounts payable 7,877,746 $ 9,832,206
Other accrued liabilities 6,706,622 5,662,816
Advances on contracts 1,935,659 1,163,109
Current portion of long-term debt 7,975,539 8,096,207
------------- -------------
Total current liabilities 31,545,566 24,754,338
LONG-TERM DEBT - Less current portion 46,102,467 46,962,530
------------- -------------
Total liabilities 77,648,033 71,716,868
------------- -------------
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 9,877,103 and 9,850,832 98,771 98,508
Additional paid-in capital 51,449,142 51,109,830
Accumulated deficit (11,610,555) (5,505,822)
Currency translation adjustment 80,907 (60,110)
------------- -------------
Total shareholders' equity 40,018,265 45,642,406
------------- -------------
TOTAL $ 117,666,298 $ 117,359,274
============= =============
See notes to interim consolidated financial statements.
2
4
SIMULA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
- -------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------- -----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
Revenue $ 25,739,419 $ 13,006,130 $ 48,281,597 $ 24,317,606
Cost of revenue 19,067,593 8,284,746 35,683,586 16,164,703
------------ ------------ ------------ ------------
Gross margin 6,671,826 4,721,384 12,598,011 8,152,903
Administrative expenses 4,690,539 4,114,239 9,087,781 8,207,766
------------ ------------ ------------ ------------
Operating income (loss) 1,981,287 607,145 3,510,230 (54,863)
Interest expense (1,194,824) (1,210,503) (2,403,650) (2,000,683)
Interest income 52,513 173,327 115,075 173,327
------------ ------------ ------------ ------------
Earnings (loss) before taxes and discontinued operations 838,976 (430,031) 1,221,655 (1,882,219)
Income tax (expense) benefit (336,000) 186,000 (490,000) 768,000
------------ ------------ ------------ ------------
Earnings (loss) from continuing operations 502,976 (244,031) 731,655 (1,114,219)
Discontinued operations:
(Loss) earnings from discontinued operations, net of tax (1,932,410) 262,332 (2,156,388) 566,383
Estimated loss on disposal, net of tax (4,680,000) (4,680,000)
------------ ------------ ------------ ------------
Net (loss) earnings $ (6,109,434) $ 18,301 $ (6,104,733) $ (547,836)
============ ============ ============ ============
(Loss) earnings per common share - basic:
Earnings (loss) from continuing operations $ 0.05 $ (0.03) $ 0.07 $ (0.12)
Discontinued operations:
(Loss) earnings from discontinued operations, net of tax (0.20) 0.03 (0.22) 0.06
Estimated loss on disposal, net of tax (0.47) (0.47)
------------ ------------ ------------ ------------
Net (loss) earnings $ (0.62) $ -- $ (0.62) $ (0.06)
============ ============ ============ ============
(Loss) earnings per common share - assuming dilution:
Earnings (loss) from continuing operations $ 0.05 $ (0.03) $ 0.07
Discontinued operations:
(Loss) earnings from discontinued operations, net of tax (0.19) 0.03 (0.21)
Estimated loss on disposal, net of tax (0.46) (0.46)
------------ ------------ ------------
Net (loss) earnings $ (0.60) $ -- $ (0.60)
============ ============ ============
See notes to interim consolidated financial statements.
3
5
SIMULA, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1998
- --------------------------------------------------------------------------------
Common Stock Additional Currency Total
----------------------- Paid-in Accumulated Translation Shareholders'
Shares Amount Capital Deficit Adjustment Equity
--------- ------- ----------- ------------ --------- ------------
BALANCE, January 1, 1998 9,850,832 $98,508 $51,109,830 $ (5,505,822) $ (60,110) $ 45,642,406
Net loss (6,104,733) (6,104,733)
Issuance of common shares 26,271 263 339,312 339,575
Currency translation adjustment 141,017 141,017
--------- ------- ----------- ------------ --------- ------------
BALANCE, June 30, 1998 9,877,103 $98,771 $51,449,142 $(11,610,555) $ 80,907 $ 40,018,265
========= ======= =========== ============ ========= ============
See notes to interim consolidated financial statements.
4
6
SIMULA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------
SIX MONTHS ENDED
--------------------------------
JUNE 30, 1998 JUNE 30, 1997
------------- -------------
Cash flows used for operating activities:
Net loss $ (6,104,733) $ (547,836)
Adjustment to reconcile net loss to net cash used by operating activities:
Estimated loss on disposal of discontinued operations 7,800,000
Depreciation and amortization 2,937,719 2,060,680
Deferred income taxes (4,069,000) (365,000)
Currency translation adjustment 141,017 5,294
Changes in net assets and liabilities:
Contract and trade receivables - net of advances (1,026,546) (3,183,319)
Inventories (4,538,861) (8,059,538)
Prepaid expenses and other (73,064) 930,601
Other assets (375,259) (487,180)
Trade accounts payable (1,743,117) 447,318
Other accrued liabilities 1,059,126 1,565,464
------------ ------------
Net cash used by operating activities (5,992,718) (7,633,516)
------------ ------------
Cash flows used by investing activities:
Purchase of property and equipment (3,403,054) (4,502,062)
Costs incurred to obtain intangibles (77,283) (144,396)
------------ ------------
Net cash used in investing activities (3,480,337) (4,646,458)
------------ ------------
Cash flows from financing activities:
Net borrowings (repayments) under line of credit 7,050,000 (6,900,000)
Issuance of 8% Notes - net of expenses 31,186,126
Principal payments under other debt arrangements (994,424) (934,107)
Issuance of common shares 339,575 744,458
------------ ------------
Net cash provided by financing activities 6,395,151 24,096,477
------------ ------------
Net (decrease) increase in cash and cash equivalents (3,077,904) 11,816,503
Cash and cash equivalents at beginning of period 9,367,031 1,298,741
------------ ------------
Cash and cash equivalents at end of period $ 6,289,127 $ 13,115,244
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 2,535,614 $ 1,702,788
============ ============
Taxes paid $ -- $ 110,900
============ ============
See notes to interim consolidated financial statements.
5
7
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
six months ended June 30, 1998 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1998.
NOTE 2 - INVENTORIES:
At June 30, 1998 and December 31, 1997, inventories consisted of the
following.
JUNE 30, DECEMBER 31,
1998 1997
----------- -----------
Raw materials $14,139,816 $12,205,813
Work in process 12,327,932 10,652,149
Finished goods 1,195,307 914,468
----------- -----------
Total inventories $27,663,055 $23,772,430
=========== ===========
Inventories included in net current assets of discontinued operations
at June 30, 1998 and December 31, 1997 were $4,371,087 and $3,733,664,
respectively, and consisted mainly of raw materials.
NOTE 3 - COMPREHENSIVE INCOME:
The Company adopted Financial Accounting Standards No. 130, Reporting
Comprehensive Income, on January 1, 1998. Comprehensive income includes
adjustments made for foreign currency translation. Comprehensive (loss)
income was ($6,130,704) and $53,567 for the three months ended June 30,
1998 and 1997, respectively, and ($6,020,123) and ($544,658) for the
six months ended June 30, 1998 and 1997, respectively.
NOTE 4 - DISCONTINUED OPERATIONS
In 1998, the Company's board of directors adopted a plan to dispose of
its rail and mass transit operations. Accordingly, the operating
results of these rail and mass transit operations, including a
provision for estimated loss upon disposition, have been segregated
from continuing operations and are reported as discontinued operations.
Interest expense has been allocated to discontinued operations based on
the ratio of the discontinued operations' net assets to consolidated
net assets. General corporate administrative expenses are not allocated
to discontinued operations. Due to the subjective nature of estimated
future operations and incremental costs of disposal, it is reasonably
possible that these estimates may change in the future. Future changes
in estimates will be included in the consolidated statement of
operations in the reporting period determined. Revenues for the rail
and mass transit operations were $3,271,808 and $7,059,234, for the
three months ended June 30, 1998 and 1997, respectively, and $8,733,332
and $13,573,581 for the six months ended June 30, 1998 and 1997,
respectively.
6
8
SIMULA, INC.
NOTE 5 - EARNINGS PER SHARE:
The following is a reconciliation of the numerators and denominators of
basic and diluted per share computations. For the three and six month
periods ended June 30, 1998, the effects of 2,245,812 total shares to
be issued upon the conversion of the Company's 8% Senior Subordinated
Notes (the "8% Notes") and the Series C 10% Senior Subordinated
Convertible Notes (the "10% Notes") were not used for computing
dilutive earnings per share because the result would be anti-dilutive.
For the three months ended June 30, 1997, the effects of 2,925,445
total shares to be issued upon the conversion of the 8% Notes and the
10% Notes were not used for computing dilutive earnings per share
because the result would be anti-dilutive. Earnings per share amounts
for the six months ended June 30, 1997, is calculated using only
weighted average outstanding shares of 9,020,105. For the six month
period ended June 30, 1997, the effects of 3,158,153 total shares
related to options to purchase common stock and shares to be issued
upon conversion of the 8% Notes and the 10% Notes were not used for
computing dilutive earnings per share because the result would be
anti-dilutive.
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------- --------------------------------
1998 1997 1998 1997
-------------- ------------ -------------- ------------
Earnings (loss) from continuing operations $ 502,976 $ (244,031) $ 731,655 $ (1,114,219)
Discontinued operations:
(Loss) earnings from discontinued
operations, net of tax (1,932,410) 262,332 (2,156,388) 566,383
Estimated loss on disposal, net of tax (4,680,000) (4,680,000)
-------------- ------------ -------------- ------------
Net (loss) earnings $ (6,109,434) $ 18,301 $ (6,104,733) $ (547,836)
============== ============ ============== ============
Basic weighted average shares outstanding 9,873,668 9,044,186 9,862,449 9,020,105
============
Effect of dilutive securities 402,970 379,100 356,504
-------------- ------------ --------------
Diluted weighted average shares outstanding 10,276,638 9,423,286 10,218,953
============== ============ ==============
Basic per share amounts:
Earnings (loss) from continuing operations $ 0.05 $ (0.03) $ 0.07 $ (0.12)
Discontinued operations:
(Loss) earnings from discontinued
operations, net of tax (0.20) 0.03 (0.22) 0.06
Estimated loss on disposal, net of tax (0.47) (0.47)
-------------- ------------ -------------- ------------
Net (loss) earnings $ (0.62) $ -- $ (0.62) $ (0.06)
============== ============ ============== ============
Diluted per share amounts:
Earnings (loss) from continuing operations $ 0.05 $ (0.03) $ 0.07
Discontinued operations:
(Loss) earnings from discontinued
operations, net of tax (0.19) 0.03 (0.21)
Estimated loss on disposal, net of tax (0.46) (0.46)
-------------- ------------ --------------
Net (loss) earnings $ (0.60) $ -- $ (0.60)
============== ============ ==============
7
9
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 six month periods ended June 30, 1998 compared to the same
periods in 1997. 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 contained below should be read as being
applicable to all related forward-looking statements wherever they appear. See
"Forward Looking Information and Risks of the Business."
OVERVIEW
The Company designs and manufactures occupant safety systems and devices
engineered to safeguard human life in a wide range of air, ground, and sea
transportation vehicles. Utilizing its substantial proprietary technology in
energy-absorbing seating, inflatable restraints, and composite materials, the
Company focuses on reducing injury and increasing survivability in vehicle and
aircraft crashes.
Since its founding in 1975, the Company's historic business has been as a
government and defense contractor. Additionally, commencing with acquisitions
and commercial products development since 1993, 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 and inflatable restraints for automobiles. Utilizing
its proprietary safety technology, the Company has introduced crashworthy
systems for a variety of vehicles and aircraft including its 16g commercial
airliner passenger seat ("16g Seat") and various inflatable restraint systems
for automobiles including the Inflatable Tubular Structure ("ITS") (TM).
In 1994, the Company made a strategic decision to enter the inflatable
restraint market for automobiles utilizing its proprietary technology, the ITS.
Through 1996, the Company completed its development of this technology and
start-up of its manufacturing facilities. In 1997, the Company began
manufacturing the ITS for sale to BMW, a major European automobile manufacturer,
which began including it in certain models of its automobiles in 1997.
In 1993, the Company 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"). 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. These operations provided the
Company with the substantial large-scale manufacturing capacity and business
volume that were needed to establish the Company as a viable supplier of
commercial airliner seating systems.
To continue its strategic plan, in 1998, the Company adopted a plan to
sell its rail and mass transit seating operations at Coach and Car and Artcraft.
Because the Company's commercial airliner seating operation moved into a new
significantly larger facility in July 1998 and has established an annual run
rate of approximately $40 million per year, the rail operations are no longer
required to demonstrate the Company's production capabilities to current and
potential airliner seating customers. The Company believes the sale of these
businesses will provide a significant amount of cash that will be used to repay
outstanding indebtedness and reinvest in its other businesses that have higher
current and projected growth rates and financial returns. In addition, the sale
will allow senior Company management to focus on these other businesses. The
Company has initiated an active marketing plan and anticipates it will sell
these operations as ongoing businesses within twelve months. These companies
will continue their marketing, sales and manufacturing activities as the Company
prepares them for sale. The Company's rail operations are reported as
discontinued operations.
8
10
SIMULA, INC.
The Company is a holding company for wholly owned subsidiaries, which
operate in three primary business segments. The Commercial Airline Seating
segment includes operations which primarily manufacture and refurbish seating
systems for domestic and foreign passenger airlines. The Government and Defense
segment includes operations that design and manufacture crash resistant
components, energy absorbing devices, ballistic armor and composites principally
for sale to branches of the United States armed forces. The Automobile Safety
Systems segment includes operations encompassing inflatable restraints,
principally the ITS, and related technology for automobiles. In addition, the
Company maintains general corporate operations. The Company's rail seating
operations are reported as discontinued operations.
The Company's revenue has historically been derived principally from sales
of Company manufactured products. A substantial portion of its current revenue
is generated from long-term production contracts, which are 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.
RESULTS FROM CONTINUING OPERATIONS - Three and six Months Ended June 30, 1998
Compared to 1997:
Revenue for the three months ended June 30, 1998 increased 98% to $25.7
million from $13.0 million for the comparable period in 1997. Revenue for the
six months ended June 30, 1998 increased 99% to $48.3 million from $24.3 million
for the comparable period in 1997. These increases are due to increased sales of
16g Seats and the ITS.
Gross margin for the three months ended June 30, 1998 increased 41% to
$6.7 million from $4.7 million for the comparable period in 1997. For the six
months ended June 30, 1998, gross margin increased 55% to $12.6 million from
$8.2 million for the comparable period in 1997. The increase in gross margin was
due to the increase in revenue noted above. As a percent of sales, gross margin
for the three months ended June 30, 1998 decreased to 26% from 36%. For the six
months ended June 30, 1998, gross margins as a percent of sales decreased to 26%
from 34%, for the comparable period in 1997. The decrease in gross margin
percentage is principally due to the transition from airline refurbishment to
high volume manufacturing of the Company's new 16g Seat. Airline refurbishment,
which has historically achieved higher gross margin percentages at relatively
low volumes, constituted a greater proportion of the Company's business in the
three and six months ended June 30, 1997. Gross margin percentages were also
negatively impacted by certain Government and Defense developmental programs
initiated in the first six months of 1998. These negative impacts were partially
offset by significant improvement in the gross margin percentage for the ITS.
The Company did not recognize significant revenue from the ITS in the first six
months of 1997 while incurring pre-contract costs related to the final
pre-production development of the ITS and start-up costs related to its
manufacturing facilities in Arizona and the United Kingdom.
Administrative expenses for the three months ended June 30, 1998 increased
14% to $4.7 million from $4.1 million for the comparable period in 1997.
Administrative expenses for the six months ended June 30, 1998 increased 11% to
$9.1 million from $8.2 million for the comparable period in 1997. These
increases were primarily attributable to the expansion of the corporate and
sales infrastructure related to the commercial introduction of the ITS,
including resources being utilized for sales and administration versus
pre-contract activities, research and development related to the expansion of
ITS technologies and legal expenses.
Interest expense was $1.2 million for the three months ended June 30, 1998
and 1997. Interest expense for the six months ended June 30, 1998 increased 20%
to $2.4 million from $2.0 million for the comparable period in 1997. This
increase was principally due to the issuance of $34.5 million of the 8% Senior
Subordinated Convertible Notes (the "8% Notes") in April 1997. These borrowings
were made to fund the Company's growth in working capital and fixed assets
necessary to support the anticipated growth in revenues for 1997 and subsequent
years. The increase in interest expense due to the 8% Notes was partially offset
by lower net borrowings on the Company's line of credit and the conversion
during the third quarter of 1997 of $9.6 million of the Series C 10% Senior
Subordinated Convertible Notes (the "10% Notes") into common stock of the
Company.
9
11
SIMULA, INC.
Interest income for the three and six months ended June 30, 1998
represents income from the investment by the Company of available cash in high
quality government and short-term investment grade, interest bearing securities.
The effective income tax rate for the three and six month periods ended
June 30, 1998 and 1997 approximated the Company's combined statutory rate of
40%.
DISCONTINUED OPERATIONS
The net loss from discontinued operations was ($6.6) million during the
second quarter of 1998. Included in this amount is a net loss from operations of
the discontinued segment of ($1.9) million primarily resulting from unabsorbed
overhead costs principally due to production delays. The remainder of the loss
from discontinued operations of ($4.7) million represents the write-down of the
remaining net assets of these businesses to their net realizable value based
upon an independent valuation. This write-down was principally comprised of the
write-off of intangible assets and represents a non-cash charge. Estimated costs
of disposal and projected operating results have been included in determining
the net realizable value of these businesses. Therefore, the Company does not
anticipate that these operations will have any significant impact on future
results of operations during the period prior to their sale. Due to the
subjective nature of estimated future operations and incremental costs of
disposal, it is reasonably possible that these estimates may change in the
future. Future changes in estimates will be included in the consolidated
statement of operations in the reporting period determined.
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 $1.0 million for the six months ended June 30, 1998 due
principally to the throughput on certain Government and Defense contracts and
increased receivables from 16g Seat sales.
Operating activities required the use of $6.0 million of cash during the
six months ended June 30, 1998, compared to the use of $7.6 million of cash
during the same period in 1997. Cash used by operating activities in the 1998
period was primarily used to increase inventories $4.5 million and reduce
accounts payable by $1.7 million. The increase in inventories was primarily due
to an increase in 16g Seat inventory necessary to support anticipated future
deliveries. The reduction in accounts payable was principally made in connection
with price negotiations with suppliers of components for the Company's 16g Seat.
The Company negotiated certain material price reductions with these vendors in
exchange for reduced terms and increased volumes.
Investing activities required the use of $3.5 million of cash during the
six months ended June 30, 1998 primarily for the purchase of property and
equipment. These purchases included manufacturing equipment for the ITS located
at the Company's facilities in Arizona and the United Kingdom, certain
improvements to these facilities and equipment and improvements for the new 16g
Seat facility in San Diego.
Financing activities provided $6.4 million of cash during the six months
ended June 30, 1998 principally from $7.1 million in net borrowings under the
Company's $20 million revolving line of credit offset by principal payments
under other debt arrangements for scheduled maturities.
Included in current portion of long-term debt are the 12% Senior
Subordinated Notes (the "12% Notes"), which total $5.7 million and are due in
November 1998. The Company is currently evaluating various alternatives to repay
or refinance these notes on a long-term basis prior to their maturity.
10
12
SIMULA, INC
The Company believes it has sufficient manufacturing capacity in place at
June 30, 1998 to meet its foreseeable delivery requirements. The Company
anticipates cash on hand, cash provided by operating activities once 16g Seat
and ITS production stabilize, cash to be generated from the sale of its rail and
mass transit operations 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 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
The Company does not believe that it is currently significantly impacted
by seasonal factors.
YEAR 2000 MATTERS
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define an applicable year. The Company's computer
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
In 1996, the Company initiated a plan for the conversion from existing
accounting software to new state of the art manufacturing and accounting systems
at each of its companies. The costs of this conversion are being expensed as
incurred and have not been and are not anticipated to be material to its
financial position or results of operations. As of June 30, 1998, the Company
has three subsidiaries using systems affected by the Year 2000 Issue. The new
systems are anticipated to be in place at these three subsidiaries in 1998 which
is prior to any anticipated impact on its operating systems. Management of the
Company believes that the Year 2000 Issue will not pose significant operational
problems for its computer systems.
The Company is cognizant of the U. S. Securities and Exchange Commission's
policy with respect to Year 2000 disclosure issues as outlined in SEC Release
Nos. 33-7558 and 34-40277 effective August 4, 1998. Accordingly, the Company
will continue to monitor its Year 2000 issues and update its disclosure, if
necessary, in subsequent filings.
FORWARD LOOKING INFORMATION AND RISKS OF THE BUSINESS
Commencing in fiscal 1997, the Company entered large scale production of
the ITS and 16g Seat. Significant investments to transition to high volume
manufacturing for these products were also made in 1997, which affected
earnings. The Company began to realize significant revenues from the
introduction of these products in 1997 which has continued in 1998 and is
anticipated to continue in 1999. 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, and this
focus should result in a positive impact on earnings.
11
13
SIMULA, INC.
In 1997 and the first half of 1998, the Company experienced some parts and
raw materials shortages, vendor delays and quality problems that caused delays
in production and deliveries. The Company has addressed these issues and
believes that it has established an adequate multiple source supplier base that
is industry standard. However, certain components of the Company's products are
proprietary or highly regulated, including certain types of foam, hydrolocks and
woven materials, and shortages of these components could cause disruptions of
production from time to time. In 1998, the Company continues to focus on further
broadening it vendor base and reliability.
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. Factors and risks
that may affect results include those described in the Company's registration
statements and periodic reports filed with the U.S. Securities and Exchange
Commission. In addition, other factors include, but are not limited to, the
ultimate realizable value of assets held for sale, manufacturing capacity and
yield; costs of labor, raw materials, supplies, and equipment; reliability of
vendor base; contract mix and shifting production and delivery schedules; 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 industries and 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.
12
14
SIMULA, INC.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company's Annual Meeting of Shareholders was held on June 10, 1998.
Proxies were solicited for votes on matters proposed at such meeting pursuant to
Section 14 of the Securities Exchange Act of 1934. The Company's Proxy Statement
for the Annual Meeting was filed with the Securities and Exchange Commission on
May 14, 1998. April 11, 1998 was fixed as the record date for voting on matters
presented at the Annual Meeting. As of such date, 9,873,270 shares of Common
Stock were outstanding and eligible to be voted on all matters and 4,936,636
shares constituted a quorum for voting purposes.
The first matter submitted for vote was the ratification of the selection
of Deloitte & Touche, LLP as the independent public accountants for the
Company's fiscal year 1998. Shares voted on the matter were 8,766,940 and votes
tabulated were 8,719,770 for, 19,692 against, and 27,478 abstaining.
The second matter submitted for Shareholder vote was the election of
directors. Shares voted on the matter were 8,766,940 and votes for individual
directors were tabulated as follows:
Name Votes For Votes Withheld
---- --------- --------------
Stanley P. Desjardins 8,689,200 77,740
Donald W. Townsend 8,689,701 77,239
Bradley P. Forst 8,689,701 77,239
Sean K. Nolen 8,689,401 77,539
James C. Withers 8,689,701 77,239
Robert D. Olliver 8,689,701 77,239
Scott E. Miller 8,689,676 77,264
John M. Leinonen 8,689,401 77,539
James F. Smith 8,689,701 77,239
No other matters were voted upon at the meeting.
ITEM 5. OTHER - DISCONTINUED OPERATIONS:
In 1998, the Company's board of directors adopted a plan to dispose of its
rail and mass transit operations. Because the Company's commercial airliner
seating operation moved into a new significantly larger facility in July 1998
and has established an annual run rate of approximately $40 million per year,
the rail operations are no longer required to demonstrate the Company's
production capabilities to current and potential airliner seating customers. The
Company believes the sale of these businesses will provide a significant amount
of cash that will be used to repay outstanding indebtedness and reinvest in its
other businesses that have higher current and projected growth rates and
financial returns. In addition, the sale will allow senior Company management to
focus on these other businesses. The Company has initiated an active marketing
plan and anticipates it will sell these operations as ongoing businesses within
twelve months. These companies will continue their marketing, sales and
manufacturing activities as the Company prepares them for sale. Accordingly, the
operating results of these rail and mass transit operations, including a
provision for estimated loss upon disposition, have been segregated from
continuing operations and are reported as discontinued operations. Estimated
costs of disposal and projected operating results have been included in
determining the net realizable value of these businesses. Therefore, the Company
does not anticipate that these operations will have any significant impact on
future results of operations during the period prior to their sale. Due to the
subjective nature of estimated future operations and incremental costs of
disposal, it is reasonably possible that these estimates may change in the
future. Future changes in estimates will be included in the consolidated
statement of operations in the reporting period determined.
13
15
SIMULA, INC.
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.......................... (4)
3.2 Bylaws of Simula, Inc., as amended and restated............................................. (1)
4.2 Indenture dated December 17, 1993, as amended............................................... (2)
4.5 Supplemental Indenture No. 2 dated September 12, 1996, entered into in connection with the
the Company's issuance of Series C 10% Senior Subordinated Convertible Notes................ (6)
4.6 Supplemental Indenture No.3, effective March 14, 1997, amending the Indenture of
Simula, Inc. dated December 17, 1993........................................................ (7)
4.7 Indenture dated April 1, 1997, in connection with the Company's issuance of the 8% Senior
Subordinated Convertible Notes due May 1, 2004.............................................. (7)
*10.11 1992 Stock Option Plan, as amended
10.12 1992 Restricted Stock Plan.................................................................. (1)
*10.21 1994 Stock Option Plan, as amended
*10.24 Loan Agreement with Wells Fargo Bank, N.A. dated June 30, 1998
10.26 Simula, Inc. Employee Stock Purchase Plan................................................... (4)
10.29 Form of Change of Control Agreements, as amended and restated, between the Company and
Donald W. Townsend, Bradley P. Forst, Sean K. Nolen, James A. Saunders, Donald Rutter, and
Randall L. Taylor .......................................................................... (9)
10.30 Form of Employment Agreements between the Company and Donald W. Townsend, Bradley P. Forst,
Sean K. Nolen, James A. Saunders, and Randall L. Taylor..................................... (8)
18. Preference Letter re: change in accounting principles....................................... (5)
24. Powers of Attorney - Directors.............................................................. (8)
*27. Financial Data Schedule
- ----------
* Filed herewith.
(1) Filed with Registration Statement on Form S-18, No. 33-46152-LA,
under the Securities Act of 1933, effective April 13, 1992.
(2) Filed with Registration Statement on Form SB-2, No. 33-61028 under
the Securities Act of 1933, effective December 10, 1993.
(3) Filed with Registration Statement on Form SB-2, No. 33-87582, under
the Securities Act of 1933, effective December 28, 1994.
(4) Filed with Definitive Proxy on May 14, 1996, for the Company's
Annual Meeting of Shareholders held on June 20, 1996.
(5) Filed with Report on Form 10-Q/A for the quarter ended June 30,
1996.
(6) Filed with Report on Form 10-K for the year ended December 31, 1996.
(7) Filed with Registration Statement on Form S-3, No. 333-13499, under
the Securities Act of 1993, effective April 24, 1997.
(8) Filed with Report on Form 10-K for the year ended December 31, 1997.
(9) Filed with Report on Form 10-Q for the quarter ended March 31, 1998.
(b) No reports on Form 8-K have been filed during the reporting period.
14
16
SIMULA, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report on Form 10-Q for the quarter ended June
30, 1998 to be signed on its behalf by the undersigned thereunto duly
authorized.
SIMULA, INC.
DATE: August 14, 1998 /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
15