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 MARCH 31, 1999 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 March 31, 1999
Common Stock, $.01 par value 9,967,752
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SIMULA, INC.
INDEX
PART I - FINANCIAL INFORMATION
PAGE
Item 1 - Financial Statements
Consolidated Balance Sheets
March 31, 1999 and December 31, 1998..................................2
Consolidated Statements of Operations
Three Months Ended March 31, 1999 and 1998.......................3
Consolidated Statement of Shareholders' Equity
Three Months Ended March 31, 1999................................4
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1999 and 1998.......................5
Notes to Interim Consolidated Financial Statements ...............6 - 8
Item 2 - Management's Discussion and Analysis of
Results of Operations and Financial Condition...............9 - 14
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports.................................................15
SIGNATURES....................................................................16
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
SIMULA, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
1999 1998
------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,741,158 $ 933,462
Contract and trade receivables - Net 31,109,651 27,113,757
Inventories 27,468,796 26,021,433
Deferred income taxes 3,173,000 3,173,000
Prepaid expenses and other 769,351 601,614
Net current assets of discontinued operations 6,628,576 4,580,773
------------- -------------
Total current assets 71,890,532 62,424,039
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS - Net 21,159,705 21,494,535
DEFERRED INCOME TAXES 20,226,000 20,550,000
DEFERRED FINANCING COSTS 2,765,909 2,627,765
INTANGIBLES - Net 3,444,161 3,452,402
OTHER ASSETS 557,564 430,340
------------- -------------
TOTAL $ 120,043,871 $ 110,979,081
============= =============
LIABILITIES & SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving line of credit $ 20,100,000 $ 16,900,000
Trade accounts payable 9,505,540 11,028,062
Other accrued liabilities 7,320,930 7,496,841
Advances on contracts 2,769,644 2,220,737
Current portion of long-term debt 7,146,603 7,530,222
------------- -------------
Total current liabilities 46,842,717 45,175,862
LONG-TERM DEBT - Less current portion 46,924,996 47,233,558
------------- -------------
Total liabilities 93,767,713 92,409,420
------------- -------------
REDEEMABLE CONVERTIBLE 6% SERIES A PREFERRED STOCK,
$.05 par value - issued 7,500 shares 7,500,000
-------------
SHAREHOLDERS' EQUITY
Preferred stock, $.05 par value - authorized
50,000,000 shares; issued 7,500 shares redeemable convertible
6% series A preferred stock
Common stock, $.01 par value - authorized 50,000,000
shares; issued 9,967,752 and 9,915,391 99,678 99,154
Additional paid-in capital 51,980,117 51,742,593
Accumulated deficit (32,968,302) (33,452,571)
Accumulated other comprehensive income (335,335) 180,485
------------- -------------
Total shareholders' equity 18,776,158 18,569,661
------------- -------------
TOTAL $ 120,043,871 $ 110,979,081
============= =============
See notes to consolidated financial statements
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SIMULA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED
MARCH 31,
-----------------------------
1999 1998
------------ ------------
Revenue $ 31,928,262 $ 22,542,178
Cost of revenue 23,414,109 16,615,993
------------ ------------
Gross margin 8,514,153 5,926,185
Administrative expenses 6,049,844 4,397,242
------------ ------------
Operating income 2,464,309 1,528,943
Interest expense (1,667,072) (1,208,826)
Interest income 11,032 62,562
------------ ------------
Income before taxes and discontinued operations 808,269 382,679
Income tax expense (324,000) (154,000)
------------ ------------
Income from continuing operations 484,269 228,679
Discontinued operations:
Loss from discontinued operations, net of tax (223,978)
------------ ------------
Net income $ 484,269 $ 4,701
============ ============
Income (loss) per common share - basic:
Income from continuing operations $ 0.05 $ 0.02
Discontinued operations:
Loss from discontinued operations, net of tax (0.02)
------------ ------------
Net income $ 0.05 $ --
============ ============
Income (loss) per common share - assuming dilution:
Income from continuing operations $ 0.05 $ 0.02
Discontinued operations:
Loss from discontinued operations, net of tax (0.02)
------------ ------------
Net income $ 0.05 $ --
============ ============
See notes to consolidated financial statements
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SIMULA, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 1999
Accumulated
Additional Other Total
Common Stock Paid-in Accumulated Comprehensive Shareholders' Comprehensive
Shares Amount Capital Deficit Income Equity Income
--------- --------- ------------ ------------ ------------ ------------ ------------
BALANCE, January 1, 1999 9,915,391 $ 99,154 $ 51,742,593 $(33,452,571) $ 180,485 $ 18,569,661
Net earnings (loss) 484,269 484,269 $ 484,269
Issuance of common shares 52,361 524 237,524 238,048
Currency translation adjustment (515,820) (515,820) (515,820)
--------- --------- ------------ ------------ ------------ ------------ ------------
BALANCE, March 31, 1999 9,967,752 $ 99,678 $ 51,980,117 $(32,968,302) $ (335,335) $ 18,776,158 $ (31,551)
========= ========= ============ ============ ============ ============ ============
See notes to consolidated financial statements
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SIMULA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
MARCH 31,
-----------------------------
1999 1998
------------ ------------
Cash flows used for operating activities:
Net income $ 484,269 $ 4,701
Adjustment to reconcile net income to net cash used by operating activities:
Depreciation and amortization 1,377,693 1,075,460
Deferred income taxes 324,000 4,000
Currency translation adjustment (515,820) 176,467
Changes in net assets and liabilities:
Contract and trade receivables - net of advances (3,446,987) (443,730)
Inventories (1,447,363) (1,238,899)
Prepaid expenses and other (167,737) 9,159
Other assets (127,224) 155,268
Net assets of discontinued operations (2,047,803) (841,773)
Trade accounts payable (1,522,522) (3,394,148)
Other accrued liabilities (175,911) (201,981)
------------ ------------
Net cash used by operating activities (7,265,405) (4,695,476)
------------ ------------
Cash flows used by investing activities:
Purchase of property and equipment (693,815) (1,265,610)
Costs incurred to obtain intangibles (478,951) (52,499)
------------ ------------
Net cash used in investing activities (1,172,766) (1,318,109)
------------ ------------
Cash flows from financing activities:
Net borrowings under line of credit 3,200,000 3,700,000
Principal payments under other debt arrangements (692,181) (575,964)
Issuance of common shares 238,048 273,551
Issuance of preferred shares 7,500,000
------------ ------------
Net cash provided by financing activities 10,245,867 3,397,587
------------ ------------
Net (decrease) increase in cash and cash equivalents 1,807,696 (2,615,998)
Cash and cash equivalents at beginning of period 933,462 9,367,031
------------ ------------
Cash and cash equivalents at end of period $ 2,741,158 $ 6,751,033
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 2,276,540 $ 1,856,849
============ ============
Taxes paid $ 9,900
============
See notes to 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 months ended March 31, 1999 are
not necessarily indicative of the results that may be expected for the
year ending December 31, 1999.
NOTE 2 - INVENTORIES:
At March 31, 1999 and December 31, 1998, inventories consisted of the
following.
MARCH 31, DECEMBER 31,
1999 1998
----------- -----------
Raw materials $16,124,851 $15,581,952
Work in process 9,574,033 9,077,849
Finished goods 1,769,912 1,361,632
----------- -----------
Total inventories $27,468,796 $26,021,433
=========== ===========
Inventories included in net current assets of discontinued operations at
March 31, 1999 and December 31, 1998 were $6,641,602 and $6,198,387,
respectively, and consisted mainly of raw materials.
NOTE 3 - DEBT:
The Company's Senior Credit Agreement, as amended by the Modification
Agreement executed in February 1999, provided for a revolving line of
credit up to the lesser of $26,000,000 or the Revolving Line of Credit
Borrowing Base (as defined) until July 31, 1999 or the date in which the
outstanding principal balance is reduced below $20,000,000 from proceeds
received from the issuance of junior capital, at which time the revolving
line of credit is adjusted to the lesser of $20,000,000 or the Revolving
Line of Credit Borrowing Base (as defined). In April 1999, the Senior
Credit Agreement was amended to increase the Revolving Line of Credit to
the lesser of $23,000,000 or the Revolving Line of Credit Borrowing Base
(as defined).
NOTE 4 - REDEEMABLE CONVERTIBLE PREFERRED STOCK:
On March 29, 1999, the Company completed a private placement to an
accredited investor of $7.5 million of the Company's Series A Convertible
Preferred Stock (the "Series A"). Under the terms of this offering the
Series A bears a dividend rate of 6% per annum payable quarterly in cash,
or in stock that will be valued at 90% of fair market value at the time of
payment. The Series A may be converted into shares of the Company's Common
Stock at any time at 101% of the average closing price of any 15 out of
the 30 consecutive trading days preceding conversion, up to a specified
maximum conversion price (the "Conversion Cap"). The Conversion Cap for
the first twelve months is $8.60 per share and is subject to an annual
adjustment to the lesser of the then existing Conversion Cap or 130% of
the average of the closing bid prices for 20 consecutive trading days
immediately preceding the annual adjustment anniversary date. Conversion
of the Series A is limited to 10% of the initial amount per month,
accumulating monthly up to a maximum of 30% of the accumulated convertible
amount in any month. The Company may require the conversion of the Series
A if the market price of the Company's Common Stock exceeds the Conversion
Cap by at least 50% for at least 20 consecutive trading days, subject to
the same conversion limitations imposed upon the Series A holders.
Series A Preferred Stock is subject to a mandatory redemption of the
remaining outstanding shares on May 1, 2004 at which time the Company is
required to redeem all such shares at the greater of 130% of the preferred
stock stated value plus accrued and unpaid dividends, or the average of
the closing bid prices on the ten consecutive trading days immediately
preceding the redemption date. The holders of the Company's Series A
Preferred Stock have the option to require the Company to redeem all or a
portion of the Series A Preferred Stock at a redemption price equal to
105% of the preferred stock stated value plus accrued and unpaid dividends
if the Company consolidates or merges with or into another company.
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SIMULA, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - DISCONTINUED OPERATIONS:
In 1998, the Company's board of directors adopted a plan to dispose of its
rail and mass transit seating 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. 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 $3,632,789 and
$5,460,524 for the three months ended March 31, 1999 and 1998,
respectively. 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.
NOTE 6 - SEGMENT REPORTING
The Company is a holding company for wholly owned subsidiaries which
operate in two business segments. The Commercial Transportation Products
segment includes operations which primarily manufacture seating systems
for domestic and foreign passenger airlines and includes operations
encompassing inflatable restraints and related technology for automobiles.
The Government and Defense segment includes operations that design and
manufacture crash resistant components, energy absorbing devices,
ballistic armor and composites principally in connection with branches of
the United States armed forces procurement. The remaining segment,
entitled Other, represents general corporate operations.
For the three month period ended March 31, 1999 and 1998 inter-segment
sales were insignificant and total intercompany sales of $1,570,060 and
$1,042,308, respectively, have been eliminated.
1999
--------------------------------------------------------
Commercial
Transportation Government
Products and Defense Other Total
----------- ----------- ----------- -----------
Revenue:
Contract revenue $11,486,941 $11,486,941
Product sales:
Airline seat systems $12,913,286 12,913,286
Automotive safety systems 7,039,742 7,039,742
Other 317,604 317,604
Technology sales and royalties 170,689 170,689
----------- ----------- ----------- -----------
Total revenue $20,123,717 $11,804,545 $ -- $31,928,262
=========== =========== =========== ===========
Operating (loss) income $ 598,311 $ 2,385,447 $ (519,449) $ 2,464,309
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SIMULA, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1998
--------------------------------------------------------
Commercial
Transportation Government
Products and Defense Other Total
----------- ----------- ----------- -----------
Revenue:
Contract revenue $ 7,933,642 $ 7,933,642
Product sales:
Airline seat systems $ 9,481,159 9,481,159
Automotive safety systems 4,906,964 4,906,964
Other 205,360 $ 15,053 220,413
Technology sales and royalties --
----------- ----------- ----------- -----------
Total revenue $14,388,123 $ 8,139,002 $ 15,053 $22,542,178
=========== =========== =========== ===========
Operating (loss) income $ 1,686,051 $ 146,485 $ (303,593) $ 1,528,943
NOTE 7 - EARNINGS PER SHARE:
The following is a reconciliation of the numerators and denominators of
basic and diluted per share computations. For the three month period ended
March 31, 1999 and 1998, the effects of 2,253,390 total 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 March 31,
-----------------------------
1999 1998
------------ ------------
Income from continuing operations $ 484,269 $ 228,679
Discontinued operations:
Loss from discontinued operations, net of tax (223,978)
------------ ------------
Net income $ 484,269 $ 4,701
============ ============
Basic weighted average shares outstanding 9,919,221 9,851,392
Effect of dilutive securities 108,301 280,071
------------ ------------
Diluted weighted average shares outstanding 10,027,522 10,131,463
============ ============
Basic per share amounts:
Income from continuing operations $ 0.05 $ 0.02
Discontinued operations:
Loss from discontinued operations, net of tax -- (0.02)
------------ ------------
Net income $ 0.05 --
============ ============
Diluted per share amounts:
Income from continuing operations $ 0.05 $ 0.02
Discontinued operations:
Loss from discontinued operations, net of tax -- (0.02)
------------ ------------
Net income $ 0.05 $ --
============ ============
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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 month period ended March 31, 1999 compared to the same periods in
1998. 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).
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 in 1993. 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 provided the Company with substantial large-scale
manufacturing capacity and synergies utilized in the production of its 16g Seat
for airliners.
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.
To continue it's 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 substantial
production, the rail operations are no longer required to demonstrate the
Company's production capabilities to current and potential airliner seating
customers. In addition, the larger airliner seating manufacturing facility
reduced the synergies achieved previously with the mass rail and transit seating
operation. The sale of these businesses will provide cash that will be used to
repay outstanding indebtedness. The company has initiated an active marketing
plan and anticipates it will sell these operations as ongoing businesses. These
companies will continue their marketing, sales and manufacturing activities as
the company prepares them for sale. The company's rail and mass transit seating
operations are reported as discontinued operations.
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 from the government and defense segment 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
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SIMULA, INC.
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 which operate in
two business segments. The Commercial Transportation Products segment
includes operations which primarily manufacture seating systems for domestic and
foreign passenger airlines and operations producing inflatable restraints and
related safety technologies for automobiles. The Government and Defense segment
includes operations that design and manufacture crash resistant seats and
components, energy absorbing devices, and ballistic armor, principally in
connection with United States armed forces procurement. The remaining segment,
entitled Other, represents general corporate operations.
RESULTS FROM CONTINUING OPERATIONS
Three Months Ended March 31, 1999 Compared to 1998:
Revenue for the three months ended March 31, 1999 increased 42% to $31.9
million from $22.5 million for the comparable period in 1998. Commercial
Transportation Products revenue increased 40% to $20.1 million from $14.4
million due to increased deliveries of ITS and 16g Seats. Government and Defense
revenue increased 45% to $11.8 million from $8.1 million primarily due to the
timing of material costs incurred on contracts.
Gross margin for the three months ended March 31, 1999 increased 44% to
$8.5 million from $5.9 million for the comparable period in 1998. Commercial
Transportation Products gross margin increased 39% to $5.2 million from $3.7
million. Government and Defense gross margin increased 52% to $3.3 million from
$2.2 million. The increase in gross margin was due to the increase in revenue
noted above. Gross margin as a percent of sales for the three months ended March
31, 1999 remained consistent with the comparable period in 1998 in each of the
Company's segments.
Administrative expenses for the three months ended March 31, 1999
increased 38% to $6.0 million from $4.4 million for the comparable period in
1998. Commercial Transportation Products administrative expenses increased 38%
to $2.8 million from $2.0 million and is attributable to increased support
structure required to support revenue growth. Administrative expenses as a
percentage of sales was 13.9% for the three month period ended March 31, 1999 as
compared to 14.1% in the comparable 1998 period. Government and Defense
administrative expenses increased 34% to $2.7 million from $2.1 million. This
increase is attributable to parachute pre-production costs and an increase in
internally funded research and development as compared to the comparable period
in 1998. Administrative expenses as a percentage of sales was 23.3% for the
three month period ended March 31, 1999 as compared to 25.2% in the comparable
1998 period.
Interest expense increased 38% to $1.7 million for the three months ended
March 31, 1999 from $1.2 million for the comparable period in 1998. The increase
in interest expense is primarily attributable to increased outstanding
borrowing.
The effective income tax rate for the three month periods ended March 31,
1999 and 1998 approximated the Company's combined statutory rate of 40%.
DISCONTINUED OPERATIONS
In 1998, the Company's board of directors adopted a plan to dispose of its
rail and mass transit seating 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. 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 $3,632,789 and
$5,460,524 for the three months ended March 31, 1999 and 1998, respectively.
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 $3.5 million for the three months ended March 31, 1999 due
principally to the throughput on certain Government and Defense contracts and
increased receivables from 16g Seat and ITS sales.
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SIMULA, INC.
Operating activities required the use of $7.3 million of cash during the
three months ended March 31, 1999, compared to the use of $4.7 million of cash
during the same period in 1998. Cash used by operating activities in the 1999
period was primarily used to increase accounts receivable (discussed above) and
inventories, reduce trade accounts payable and funding of discontinued
operations current operating losses and increase in net assets. The increase in
inventories was primarily due to an increase in 16g Seat inventory necessary to
support anticipated future deliveries.
Investing activities required the use of $1.2 million of cash during
the three months ended March 31, 1998 for the purchase of various production
equipment and the capitalization of financing costs related to the Senior Credit
Agreement.
Financing activities provided $10.2 million of cash during the three
months ended March 31, 1999 from $7.5 million received for the issuance of
redeemable preferred stock and $3.2 million in net borrowings under the
Company's line of credit partially offset by principal payments under other debt
arrangements for scheduled principal reductions.
In April 1999, the Senior Credit Agreement was amended to reduce the
Company's revolving line of credit from the lesser of $26 million or the
Revolving Line of Credit Borrowing Base (as defined) to the lesser of $23
million or the Revolving Line of Credit Borrowing Base (as defined). At March
31, 1999, under the line of credit the Company had available borrowing of $23
million and outstanding borrowing of $20.1 million.
The Company believes it has sufficient manufacturing capacity in place at
March 31, 1999 to meet its foreseeable delivery requirements. The Company's
ability to fund working capital requirements during the next year will be
dependent upon improved cash flow from operating units, the proceeds received
from the sale of its discontinued operations, and a real estate sale and
leaseback transaction to repay indebtedness and increase availability of funds
under its Senior Credit Agreement. The Company may also, 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
other technologies.
SEASONALITY
The Company does not believe that it is currently significantly impacted
by seasonal factors.
YEAR 2000 MATTERS
Background
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define an applicable year. Any computer programs
or equipment that have time-sensitive software or embedded chips 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 in commerce, including
among other things, a temporary inability to process transactions, send
invoices, or engage in similar normal business activities.
The Company employs a number of information technology ("IT") systems in
its operations, including computer networking systems, hardware and software,
financial systems, and other similar systems. The Company also employs a number
of non-IT devices such as building security and safety devices, and other
devices containing embedded electronic circuits. Both IT systems and non-IT
devices are subject to potential failure due to the Year 2000 issue.
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SIMULA, INC.
The Company's Year 2000 Plan
In 1996, the Company initiated a plan for the conversion from existing
accounting software to new state-of-the-art, Year 2000-compliant, manufacturing
and accounting systems at each of its operating companies. That conversion is
part of an overall plan (the "Year 2000 Plan") the Company has developed to
achieve Year 2000 readiness. The Year 2000 Plan is intended to remediate the
Year 2000 issue in all categories of systems and electronic devices in use by
the Company, including IT and non-IT devices, so that the Company may continue
its operations without interruption or with minimal disruption. The Year 2000
Plan also includes communication with critical third parties such as customers,
vendors and other business partners to determine the expected degree of Year
2000 compliance of those parties and to monitor their progress toward Year 2000
readiness. The Year 2000 Plan includes the following phases: 1) assessment, 2)
remediation, 3) testing, and 4) implementation.
The Company is in the assessment phase with regard to its state of
readiness relative to non-IT devices containing embedded circuitry. The Company
is in the process of communicating with the manufacturers of non-IT devices
containing embedded circuitry and to date has fully assessed (confirmed that
such devices are Year 2000 compliant or upgraded the devices as needed)
approximately 40% of such devices.
The Company is also in the assessment phase with regard to third parties
with which the Company has a material relationship. In connection with this
assessment, the Company has been appointing a Year 2000 Program Manager at each
of its subsidiaries, and has made or is making written inquiries of its
customers and suppliers. This process is not yet complete. While the Company has
not been made aware of any problems that would materially impact the Company's
operations, there can be no assurance that one or more material third parties
will not have Year 2000 problems that materially impact the Company's business
in some fashion. Various agencies of the U.S. government and military branches
of the U.S. armed forces are significant customers of the Company. As of the
date of this report, the Company has received conflicting data as to the state
of any of such customers' Year 2000 readiness. Therefore, the Company is unsure
at this time the extent, if any, that any entity of the U.S. government with
whom the Company has a material relationship will have internal Year 2000 issues
which may materially impact the Company's business.
The Company continues to be in the remediation phase with regard to its IT
systems. As of the date of this report, the Company has one subsidiary using
accounting and manufacturing systems significantly affected by the Year 2000
issue. The remediation of these systems is more than 50% complete and the
Company estimates it will complete the conversion to new, Year 2000-compliant,
manufacturing and accounting software by August 1999.
Selection of a remediation tool set for desktop personal computers and
servers was completed in February 1999, and the implementation of such tool is
continuing and is expected to be completed by June 30, 1999.
In addition to the internal assessment and remediation efforts being
conducted by the Company pursuant to the Year 2000 Plan as described above, the
Company has engaged the services of a third party consultant to review Year 2000
matters on a subsidiary-by-subsidiary basis. The consultant commenced work in
January 1999.
Costs
The Company has incurred significant costs in connection with its
conversion, beginning in 1996, to the state-of-the-art manufacturing and
accounting systems discussed above. An incidental benefit of this conversion is
that such systems are Year 2000-compliant.
In addition to the foregoing, the costs associated with the Company's Year
2000 Plan, including the on-going systems conversions described above, are
expensed as incurred and to date have not been, and are not anticipated to be,
material to the Company's financial position or results of operations.
Risks of Year 2000 Failure
The failure on any party's part to correct a material Year 2000 problem
could result in an interruption in, or a failure of, certain normal business
activities or operations. Such failures could materially and adversely affect
the Company's results of operations, liquidity and financial condition. The
Company has not developed a formal written contingency plan for dealing with
potential Year 2000 issues in general. The risks associated with each particular
system not being Year 2000 compliant are analyzed in connection with the
Company's assessment of Year 2000 issues as described above, and contingency
plans will be effected by the Company on a case-by-case basis as the need
arises.
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SIMULA, INC.
Due to the general uncertainty inherent in the Year 2000 issue, resulting
in large part from the uncertainty of the Year 2000 readiness of material third
party suppliers and customers, the Company is unsure at this time the extent, if
any, that it might be materially adversely impacted by Year 2000 issues.
Readers are cautioned that forward-looking statements contained in this
Year 2000 discussion should be read in conjunction with the Company's
disclosures under the heading "Forward Looking Information and Risks of the
Business" below.
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. Growth in the automotive safety business should
result from increased production volumes. However, auto industry customary price
will reduce operating margins. If disputes with first tier suppliers reduce
production levels this business could be impacted. Improved financial
performance in the airline seating business is expected but will be dependent on
improvements in manufacturing efficiencies, materials cost reductions, better
delivery records and customer satisfaction, and continued sales. It is estimated
that the airline seating business should achieve break even results in 1999.
During 1999, the government and defense business of the Company is expected to
show growth in revenues and operating income.
Projected operating results and capital needs will be affected by a wide
variety of factors which could adversely impact revenues, profitability and cash
flows. The Company's liquidity and available working capital will be dependent
upon improved cash flow from operating units, the availability of sales proceeds
from discontinued operations, and a real estate sale and leaseback transaction
to repay indebtedness and increase availability of funds under its bank credit
agreement. 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, 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; increased costs attributable to
changes in government regulations and certifications for transport vehicles;
competition and competitive pressures on pricing; and economic conditions in the
United States and worldwide markets served by the Company.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In February 1998, the Company filed a complaint in United States District
Court for the District of Arizona against Autoliv, Inc., seeking injunctive
relief from alleged anti-competitive acts and practices by Autoliv. The
complaint alleges numerous unlawful actions taken by Autoliv in connection with
a license from the Company to market and distribute the Company's ITS(R). The
legal action asserts that Autoliv has suppressed technology and is unlawfully
interfering with the Company's rights to market the ITS(R) and related products
to other first tier automotive safety equipment suppliers and to automobile
manufacturers. In 1998, the District Court stayed the proceedings and ruled that
the dispute between the parties was a contractual one and was subject to
arbitration pursuant to a contract provision. The Company disagreed and appealed
the order to the United States Court of Appeals for the Ninth Circuit. In April
1999, this Court ruled that the proper jurisdiction for this dispute is
arbitration. The District Court did not rule on the merits of the Company's
claims.
On November 3, 1998, the Company filed a separate complaint against
Autoliv in the United States District Court for the District of Delaware seeking
injunctive relief and damages for patent infringement. The Company's complaint
alleges that Autoliv developed, offered, and sold a side impact head protection
device in the United States that infringes the patent that Simula owns for the
ITS(R). The Company became aware of the potential infringement in early October
1998 as Autoliv introduced this device into production automobiles being offered
for the first time in the United States. This litigation is pending.
13
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SIMULA, INC.
In addition, the Company is involved in other litigation in the ordinary
course of business from time to time. The Company presently is not a party to
any threatened or pending litigation, the negative outcome of which would be
material to the Company.
14
16
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 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)
*4.8 Certificate of Designation, Preferences, Rights and
Privileges of the Company's $7,500,000 Series A Preferred
Stock....................................................
10.11 1992 Stock Option Plan, as amended effective September 15,
1998..................................................... (10)
10.12 1992 Restricted Stock Plan............................... (1)
10.21 1994 Stock Option Plan, as amended effective September 15,
1998..................................................... (10)
10.24 Senior Credit Agreement with Bank One, Arizona, N.A. and
Imperial Bank, Arizona dated November 6, 1998............ (10)
10.25 Modification Agreement with Bank One, Arizona, N.A. and
Imperial Bank, Arizona dated February 12, 1999........... (11)
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 and James A. Saunders................... (9)
10.30 Form of Employment Agreements between the Company and
Donald W. Townsend, Bradley P. Forst and James A.
Saunders................................................. (8)
*10.31 Modification Agreement No. 2 with Bank One, Arizona, N.A.
and Imperial Bank, Arizona dated April 28, 1999..........
*10.32 Form of Employment Agreement between the Company and
James C. Dodd............................................
*10.33 Form of Change of Control Agreement between the Company
and James C. Dodd........................................
18. Preference Letter re: change in accounting principles.... (5)
21. Subsidiaries of the Company.............................. (8)
24. Powers of Attorney - Directors........................... (8)(11)
*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.
(10) Filed with report on Form 10-Q for the quarter ended September 30, 1998.
(11) Filed with report on Form 10-K for the year ended December 31, 1998.
15
17
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 March
31, 1999 to be signed on its behalf by the undersigned thereunto duly
authorized.
SIMULA, INC.
DATE: May 14, 1999 *
--------------------------------
DONALD W. TOWNSEND
President
Chief Executive Officer
/s/ James C. Dodd
--------------------------------
JAMES C. DODD
Executive Vice President
Chief Financial Officer
*By: /s/ Bradley P. Forst
--------------------------------
Bradley P. Forst
Attorney-in-Fact
16
18
EXHIBIT INDEX
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 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)
*4.8 Certificate of Designation, Preferences, Rights and
Priviledges of the $7,500,000 Series A Preferred Stock...
10.11 1992 Stock Option Plan, as amended effective September 15,
1998..................................................... (10)
10.12 1992 Restricted Stock Plan............................... (1)
10.21 1994 Stock Option Plan, as amended effective September 15,
1998..................................................... (10)
10.24 Senior Credit Agreement with Bank One, Arizona, N.A. and
Imperial Bank, Arizona dated November 6, 1998............ (10)
10.25 Modification Agreement with Bank One, Arizona, N.A. and
Imperial Bank, Arizona dated February 12, 1999........... (11)
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, 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, James A. Saunders,
and Randall L. Taylor.................................... (8)
*10.31 Modification Agreement No. 2 with Bank One, Arizona, N.A.
and Imperial Bank, Arizona dated April 28, 1999..........
*10.32 Form of Employment Agreement between the Company and James
C. Dodd..................................................
*10.33 Form of Change of Control Agreement between the Company
and James C. Dodd........................................
18. Preference Letter re: change in accounting principles.... (5)
21. Subsidiaries of the Company.............................. (8)
+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.
(10) Filed with report on Form 10-Q for the quarter ended September 30, 1998.
(11) Filed with report on Form 10-K for the year ended December 31, 1998.