ITEM 1. BUSINESS
With the exception of historical information, the matters discussed in this report on Form 10-K may be estimates or constitute forward-looking statements that describe matters that involve risks and uncertainties which could cause the Company's actual results to differ materially from those discussed herein. See, "Management's Discussion and Analysis and Financial Condition and Results of Operations" - "Forward Looking Information" and "Risks and Uncertainties in the Business."
THE COMPANY
Simula, Inc. is an acknowledged world leader in providing crash resistant and energy absorption technologies that safeguard human lives. In its role as a safety technology company, Simula invents, manufactures, and markets advanced occupant seating and restraint systems installed in air, ground, and sea transport vehicles for the military, aircraft, and automotive industries. Simula, Inc. conducts its business through eight wholly-owned operating units. As used herein, the terms "Company" or "Simula" refer collectively to Simula, Inc. and its consolidated subsidiaries.
SEGMENTS AND MARKETS OVERVIEW
During 1999 Simula was a holding company for operating units in two business segments. The Commercial Transportation Products segment includes technology development, manufacturing and assembly operations for seating systems for airliners and products and safety systems for automobiles and trucks. The Company's Government and Defense segment includes technology development and manufacturing operations for military aircraft seating, armor, and crew safety systems sold principally to U.S. and foreign armed forces. Financial information about the Company and its segments is found in Item 6, 7, and 8 of this report.
1999 Recapitalization and Business Realignment
During the period 1999 through early 2000, the Company completed major steps in recapitalizing the Company to provide additional working capital and focus the Company on its profitable core businesses. In August, 1999, the Company completed the sale of its rail seating operation which was reported as a discontinued operation. On December 31, 1999, the Company obtained a new credit facility with an asset based lender to replace its existing bank line and issued $20 million in secured senior notes in a transaction with a private investor. In December, 1999 the Company entered into an agreement for the sale of the assets of its operating unit engaged in the commercial airline seating business, for cash and the assumption of liabilities. This transaction was completed in January 2000. "See Management's Discussion and Analysis of Financial Results."
Following this recapitalization the remaining operations of the Company are in the automotive safety and government and defense businesses. Although the recapitalization and operating results of its rail and airline seating units resulted in substantial charges on disposition and an operating loss in the fourth quarter, on a stand-alone basis, the automotive safety and government and defense businesses were profitable in each quarter of 1999. The Company believes that the recapitalization will allow Simula to continue to achieve these results through its focus on these profitable core businesses.
Strategic Repositioning
As part of the changes in 1999, the Company began implementing its strategic repositioning plan. The first element of this three part plan is to focus the Company on its core competencies, that is those businesses which historically have proven capable of operating on a profitable basis and financial performance. The Company has instituted economic value added performance metrics to better align its operating results with shareholder value.
The second element of the plan is the reduction of costs, particularly fixed expenses, to ensure positive cash flow. The last element of the repositioning plan is improving its technology and product development process for new projects and technologies. This process will systematically introduce new technologies and shorten technology development and product introduction timelines.
CORE PRODUCTS AND TECHNOLOGIES
Through its operating divisions and subsidiaries, Simula develops, manufactures, licenses, and sells products and technologies in six major categories. The products and technologies are typically developed into a number of different applications which are provided across a range of markets to different types of customers:
- Inflatable Restraints - Simula has numerous patented inflatable restraint devices, embodying technologies and designs that are significantly different than the conventional airbag, which are used to protect occupants in automobiles and aircraft. The products and technologies are used in both military and commercial markets.
- Seating Systems - The Company has expertise in crash resistant, energy absorbing, technologies used in protective seating systems for aircraft pilots and crews. The systems are used principally in military aircraft but also have commercial applications and customers.
- Sensors - The Company has developed and patented a variety of sensors including one used to detect rollover incidents for land vehicles and another used to detect crash incidents in aircraft. The sensors trigger the deployment of safety devices, including inflatable restraints and airbags. The sensors have application in both commercial and military markets.
- Armor - In connection with its military seating systems, Simula developed extensive technology and an array of armor products. Armor in numerous designs is used in military aircraft and land vehicles. Products are also sold and licensed in the civilian market, including for vehicles and "body armor" for law enforcement and similar personnel.
- Polymer Products - Simula sells and licenses a family of proprietary polymer materials. The materials are transparent, high impact, and have high optical properties. The materials are suited for a variety of applications in both military and commercial markets, including ophthalmic lenses, protective eyewear, and armor systems.
- Protective Equipment and Parachutes - The Company has patented designs for state-of-the-art parachutes with numerous competitive advantages. Parachutes are marketed for pilots in military branches around the world. Simula also has military customers for a related set of crew and pilot protective equipment including inflatable life vests utilizing the Company's inflatable restraint technology.
COMMERCIAL TRANSPORTATION PRODUCTS SEGMENT
In 1999, the Commercial Transportation Segment included five operating units in automotive safety, airline seating and airline soft goods, and polymer materials businesses.
AUTOMOBILE SAFETY SYSTEMS
Overview
The Company designs and manufactures advanced occupant restraint systems for automobiles and trucks. In 1994, the Company made a strategic decision to enter the inflatable restraint market for automobiles utilizing its proprietary technology, the Inflatable Tubular Structure ("ITS(R)"). The Company completed its development of this technology and substantially completed the start-up of its manufacturing facilities in 1996. The ITS(R) began in product delivery production in April 1997. The Company's automotive safety product line has been one of its most
profitable businesses. In 1999, this business benefited significantly from increased production volumes, manufacturing efficiencies, cost downs and quality standards and certifications.
Over the past several years, the demand for vehicle safety systems has increased dramatically due to consumer demand for increased safety and changes in government regulations mandating more effective safety components in vehicles. After frontal collisions, side-impact collisions are the second leading cause of injuries in vehicle crashes and account for approximately 25 percent of all injuries and 34 percent of all fatalities. A significant portion of side-impact injuries are to the head and neck. Rollover crashes are the third leading cause of injuries, and the second leading cause of fatalities in crashes. The ITS(R) was the first product designed specifically to protect vehicle occupants' heads and necks in side-impact collisions, and provides significant protection for vehicle occupants in the event of secondary collisions or rollovers.
Since its introduction in BMW automobiles in 1997, the ITS(R) has proven to be an effective countermeasure against the grave effects of numerous categories of crashes. In several cases reported to the National Highway Traffic and Safety Administration (NHTSA), the ITS(R) has demonstrated its lifesaving qualities in protecting vehicle occupants from severe injury or death.
In 1998, NHTSA amended a federal motor vehicle safety standard that governs the level of side-impact protection that vehicles are required to have. As a part of the new mandate, U.S. auto manufacturers may now replace some interior padding with a side-impact head protection system mounted on a vehicle's roof rail, such as the ITS(R). The new regulation underscores the increasing trend towards making side-impact safety a necessary component of every vehicle's safety system, and should create the impetus for automobile manufacturers to install these systems on an accelerated basis.
The worldwide market for frontal and side-impact airbags in all vehicle positions (front and rear) is growing rapidly. In anticipation of such increased demand, the Company has developed several strategic partnerships with first-tier automotive suppliers resulting in 19 platform awards from 5 OEM's.
Current Products and Technologies
Inflatable Tubular Structure - The ITS(R) provides protection beyond that provided by conventional airbags currently utilized in automobiles. Unlike a conventional airbag, which must be backed by a structure such as a steering wheel, dashboard, or door, the ITS(R) is attached to and supported by the structure of the vehicle frame and door pillars. During a side-impact crash, a tube located above the door inflates and becomes shorter in length, which causes it to drop out of its molding and form a tight diagonal structure across the side window. It deploys as a tubular or curtain-like structure. As a result the ITS(R) provides protection despite the window being open or breaking upon impact. A conventional airbag would not have adequate support in these situations. Therefore, the ITS(R) is able to substantially reduce head rotation to the side and prevent contact with vehicle components. Additionally, the diagonal arrangement of the activated ITS(R) offers protection for occupants of different sizes and seating positions, and in different types of side-impact collisions, as well as in rollover, secondary impact, and ejection situations. The ITS(R) is not an "aggressive" airbag and thus does not pose some of the threats to smaller, or out of position vehicle occupants, as do conventional frontal airbags. It also has an extended inflation time, enabling the unit to offer protection in the event of secondary impacts or rollovers.
The Company is currently manufacturing the ITS(R) for sale to BMW, a major European automobile manufacturer and recognized safety leader in the automotive industry. The Company has achieved adoptions for the ITS(R) for nineteen platforms for various automakers, that will be delivered for series production during upcoming model years through 2003. The Company is consistently engaged in ongoing sales and marketing efforts for ITS(R) adoption by automakers in their routine planning and production cycles.
In 1998, the Company entered into license and manufacturing agreements with TRW Inc. and Delphi Automotive Systems, Inc., major first tier automotive component suppliers, for the marketing, development and production of ITS(R) for automotive platforms. The Company entered into a similar agreement with Indiana Mills & Manufacturing Inc. for the marketing, development and production of ITS(R) for truck platforms. The Company enters into such strategic alliances with first tier component suppliers to leverage off the size and industry strength
of such large manufacturers, and to benefit from their market access to OEMs. The Company believes it will continue to achieve product adoptions and increased volumes in the coming years. Customary industry price reductions for products are expected as volumes grow.
The Company has been involved in a dispute regarding its 1995 distributor agreement with Autoliv, Inc. The Company has alleged that Autoliv violated fair competition laws and misappropriated some of its proprietary technology. The Company is also disputing Autoliv's position regarding second sourcing and the supply and manufacturing rights of the Company. See, "Litigation." See also, "Forward Looking Information" and "Trends and Uncertainties in the Business."
Inflatable Tubular Torso Restraint ("ITTR") - The Company has developed various additional applications for its ITS(R)-related technology. To date, the most notable among them is the Inflatable Tubular Torso Restraint. The ITTR is a patented seat belt device that incorporates an inflatable tube into the torso portion of the belt. The ITTR has generated significant interest in the automotive market both for its innovative design and its potential to offer greatly enhanced occupant protection.
In addition to the ITS(R) agreement described above, in 1998 the Company entered into a license and supply agreement with TRW for the marketing of the ITTR. TRW is one of the largest suppliers of restraint systems in the world and the ITTR is the only such system in its product portfolio. Numerous automakers are in discussions with TRW and this product is in an accelerated market position as compared to the ITS at a similar time in its development cycle.
Rollover Sensors, Inflators, and Integrated Systems - The Company is completing development and testing of an innovative rollover sensor and airbag inflator device, both of which are subject to patents. Both of these technologies have been introduced to automakers and have the potential to become a major component of the Company's automobile safety product offerings. Additional products such as these that are complementary to currently manufactured inflatable restraint systems, may position the Company for more direct access as a supplier to automakers, and could increase market share for the Company as an integrated systems supplier.
COMMERCIAL AIRCRAFT SYSTEMS
Seating
In 1993, the Company made a strategic decision to enter the commercial airliner seating market to bring its proprietary energy-absorbing technologies, established in connection with the Company's government and defense contracting business, to a new industry and take advantage of industry growth. To implement its decision, the Company acquired Airline Interiors, Inc. ("Airline Interiors"), which then was primarily involved with the refurbishment, re-upholstery, reconditioning, and reconfiguring of existing passenger seats. This acquisition provided certain FAA certifications, enhanced the Company's management team and customer base, and provided assembly capacity.
Through Airline Interiors, the Company entered the commercial airliner new seating business in 1996. In 1997, 1998, and 1999 the Company made a substantial investment in ramping up this business. The Company's efforts resulted in Airline Interiors becoming the first successful entrant into the airline seating market in 25 years, achieving an estimated 6% worldwide market share by December 31, 1999. However, the Company never achieved profitable operations in this business and completed the sale of this operating unit to a major competitor in January 2000 under an agreement dated December 24, 1999.
Airline Soft Goods
The Company retains its operation which repairs, refurbishes, and retrofits existing commercial aircraft seats. Services include the supply of seat components, including upholstery, cushioning, and fire blocking.
ADVANCED POLYMER MATERIALS
Simula has developed and tested a number of advanced polymers and polyurethanes possessing a wide variety of potential product applications, and has introduced these materials to a variety of customers in numerous markets. These patented and proprietary transparent plastic materials are high-strength, impact resistant, lightweight, dye compatible, and withstand extreme temperatures and chemical abrasion. Potential uses for such materials include transparent armor, laser protective devices, aircraft canopies, high performance windows for aircraft and automobiles, industrial and protective lenses and visors, and sun, sport, and ophthalmic lenses. The Company has obtained numerous research and product development contracts for these materials and is negotiating supply contracts with commercial customers in various markets. In 1999, the Company's newest operating unit actively pursued commercialization of the polymer technology and product manufacturing. In 1999 this unit successfully aligned with two strategic partners who licensed the material for their markets. The Company intends to leverage this license portfolio to move up the distribution channel and manufacture products for other applications.
GOVERNMENT AND DEFENSE SEGMENT
In 1999, the Government and Defense Segment included four operating units in seating systems, airbag, parachute, sensor, and protective devices businesses.
Overview
The Company manufactures a number of safety systems for military and other government customers. Simula is the world's leading supplier of energy-absorbing seating systems for military helicopters, and a manufacturer of advanced armor systems, inflatable restraints for aircraft, state of the art vacuum-packed parachutes, and related safety systems and products.
Despite dynamic market and governmental policy changes in recent years, the market for government and defense contracts remains healthy but very competitive. There are two significant trends in the business. First, although there have been recent indications of increased military and defense funding, military procurement budgets have been shrinking in recent years. This has generally been the trend regardless of the number of trouble spots in the world or regardless of the political party in power. Accordingly, businesses have been competing for fewer defense dollars. The second significant trend is the consolidation in the defense industry. As a result of mergers and acquisitions in the last several years, there remain only six U.S. Government mega-contractors. This consolidation also has caused a consolidation and shake-up at the subcontractor and component supplier levels. Defense contractors are bringing increasingly significant pressure on margins and profitability of subcontractors while reducing the number of suppliers.
The size of the military procurement market is difficult to predict beyond an analysis of currently funded programs, and is based on specific programs that are subject to needs assessments and funding issues by the Government.
Current Products and Technologies
Military Aircraft Seating Systems - The Company has been a major supplier of energy-absorbing seating systems for military helicopters and other military aircraft to various branches of the United States armed forces and their prime defense contractors, and foreign customers for over 20 years. This market is estimated to be $20 million annually. The military aircraft seating systems focus on reducing injury and increasing survivability in aircraft crashes. These crashworthy seating systems contain proprietary energy-absorbing devices that activate upon crash impact to absorb shock that otherwise would be absorbed by the seat occupant.
Based on internal market surveys and data, the Company believes that it is the leading provider of energy-absorbing helicopter seats purchased by the United States and foreign armed forces. Aircraft for which the
Company has designed and manufactured seat assemblies for pilots, flight crews, troops, or SONAR operators include the AH-64A Apache attack helicopter; UH-60A Blackhawk transport and cargo helicopter; SH-60B Sea Hawk reconnaissance helicopter; SH-3 Sea King utility helicopter; CH-53 Sea Stallion transport and cargo helicopter; V-22 Osprey tilt-rotar aircraft; India's Hindustan Aeronautics, Ltd. ALH utility helicopter; and C-17 fixed wing utility aircraft. Aircraft manufacturers in the Company's military aircraft customer base include Boeing, Sikorsky Aircraft Corporation, Bell Helicopters Textron, Inc., and GKN Westland Helicopters Ltd.
Armor Systems - As an outgrowth of its military aircraft seating systems the Company has developed an expertise in armor, which makes up a significant portion of both materials in, and costs of, such seating systems. In addition, the Company has developed a variety of other armor and composite materials for integration in its existing and proposed products and for sale as base materials to customers. Advanced composites materials with which the Company has expertise include fiber reinforcements of Kevlar, carbon, Spectra, S-glass, E-glass, and hybrid weaves matched with boron carbide, aluminum oxide, and other ceramics. The Company also has the capability to process thermoset resins including epoxies, polyesters, and vinyl esters.
The Company's high-strength, lightweight armor systems have been incorporated into a variety of United States armed forces vehicles. The size of this total market is approximately $30 million annually, and the Company is a principal supplier of such lightweight armor systems in the United States. The Company develops and manufactures armor systems for seats as well as for structural and other components of military aircraft. Aircraft components incorporating armors developed or produced by the Company include V-22 Osprey crew seats; C-17 cockpit components; AH-64A Apache crew seats; Blackhawk crew seats and floor armor; CH-53 Sea Stallion crew seats; United States Navy landing craft air cushion pilot station armor; and high-mobility, multi-wheeled vehicles ("HMMWV") and transport vehicles ("HEMTT").
The Company's armor business, including new "body armor" products for personnel, has grown significantly and the Company anticipates it will devote continuing and additional efforts to increase its market share in both defense and civilian markets.
Aircraft Inflatable Restraint Systems - The Company has completed development of various inflatable restraint systems for military and commercial aircraft. These systems include the Cockpit Airbag System ("CABS") for the protection of the flight crew in military aircraft. The Company developed CABS under a contract with the United States Army. CABS incorporates airbags in a configuration surrounding the aviator that inflate following sensor detection of crash impact from a variety of directions. CABS then deflates following deployment and thereby protects against mishaps caused by accidental deployment during the normal operations of the aircraft. Development and qualification was completed in 1998. The Company has been awarded contracts and will commence production of CABS in 2000.
Parachutes - Under contract with the United States Navy, the Company has applied its technologies and overall knowledge of materials and structures to develop a parachute that solves numerous functional problems attendant to traditional military parachutes. The Company's parachute, unlike many parachutes traditionally used by the military is small, lightweight, unisex, capable of being worn during flight, and vacuum-packed so that it maintains a long-term shelf life without repacking. The Company is the sole source on this Navy contract.
Information About Government Contracting
As a contractor and subcontractor to the United States government, the Company is subject to various laws and regulations that are more restrictive than those applicable to non-government contractors, and many of the Company's products are governed by rules favoring the government's contractual position. As a consequence, such contracts may be subject to protest or challenge by unsuccessful bidders or to termination, reduction, or modification in the event of changes in government requirements, reductions of federal spending, or other factors. The Company's government-related revenue has resulted almost exclusively from firm, fixed-price contracts. Fixed-price contracts involve certain inherent risks to the Company, including under estimating costs, problems with new technologies, and economic and other changes that may occur over the contract period. The accuracy and appropriateness of certain costs and expenses used to substantiate direct and indirect costs of the Company for the United States government under both cost-plus and fixed-price contracts are subject to extensive regulation and
audit by the Defense Contract Audit Agency ("DCAA") arm of the United States Department of Defense. The DCAA has the right to challenge the Company's cost estimates or allocations with respect to such contract.
TECHNOLOGY DEVELOPMENT
The Company supports a large design, development, research, testing, and engineering capability for the modification and improvement of existing products and invention and development of new technologies and products. The Company regards it research and development capabilities as a superior competitive strength and intends to continue to devote substantial resources to support this part of its business. The Company employs an interdisciplinary team of biomedical experts, crash safety analysts, chemists, and physicists. The Company has a state of the art testing facility for a variety of functions including ballistics and crash dynamics. The Company's research and testing facilities support intracompany projects and also generate revenue from external services contracting.
The Company retains proprietary rights in the products and services it develops, including those initially financed under government contracts. As an integral component of its strategy, the Company seeks to transfer all of its technology to product applications. The Company's costs for research and development in 1999, 1998, and 1997 were approximately $12.0 million, $13.5 million, and $11.8 million, respectively. These amounts include government-funded, other customer-funded, and Company-funded research and development contracts.
Since much of its research and development generates proprietary technology, the Company has patent protection on certain products. The Company's ability to compete effectively depends, in part, on its ability to maintain the proprietary nature of its technologies. The Company also relies on unpatented proprietary information and know-how, typically protecting such information as trade secrets.
The Company holds 23 patents. In addition, the Company has 16 patent applications pending for various technologies. United States patents protect inventions for a period of 20 years after the application is first filed. The Company does not presently own or maintain any trademarks that are material to its business.
PRODUCTION AND MANUFACTURING
The Company's production and manufacturing consists principally of the machining, bending and welding of metals, molding of composite materials, processing, sewing, upholstery, component fabrication, and final assembly. After assembly, products are functionally tested on a sample basis as required by applicable contracts. The Company's manufacturing capability features computer-integrated manufacturing programs which, among other things, schedule and track production, update inventories, and issue work orders to the manufacturing floor. All products manufactured must meet rigorous standards and specifications for workmanship, process, raw materials, procedures, and testing, and in some cases regulatory requirements. Customers, and in some cases the United States government as the end user, perform periodic quality audits of the manufacturing process. Certain customers, including the United States government, periodically send representatives to the Company's facilities to monitor quality assurance. A total of four of the Company's operating units are ISO certified.
The Company conducts manufacturing operations principally in metro-Phoenix, Arizona. The Company also has manufacturing operations in Atlanta, Georgia and Asheville, North Carolina. Simula Automotive Safety Devices, Inc. operates two new state of the art manufacturing facilities including a high volume, just in time provider, in the United Kingdom to support customers located in Europe. See, "Item 2.
ITEM 2. PROPERTIES
The Company's corporate headquarters are located in Phoenix, Arizona. The Company conducts operations in three U.S. states and in the United Kingdom. Manufacturing facilities are located in Tempe, Arizona; Atlanta, Georgia; Asheville, North Carolina; and Ashington, England. In addition, the Company maintains extensive research and development labs and testing facilities in Phoenix. The Company leases most of its facilities.
ITEM 3.
ITEM 3. 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. 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. In late 1999, the Delaware court similarly stayed the proceedings pending arbitration. In 1999, the Company commenced an international arbitration proceeding under the rules of the International Chamber of Commerce. The arbitration includes the same legal claims as made in the U.S. litigation. The forum is in Zurich, Switzerland. This arbitration is pending.
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.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of fiscal 1999 to a vote of security holders, through the solicitation of proxies, or otherwise.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is listed on the New York Stock Exchange under the symbol "SMU." The following table sets forth the high and low closing prices of the Company's Common Stock for each calendar quarter of the year indicated.
The number of holders of the Common Stock of the Company, including beneficial holders of shares held in street name, as of the close of business on March 29, 2000, is estimated to be greater than 2,000. On March 28, 2000, the closing price of the Common Stock was $4.19 Per share.
ITEM 6.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The Selected Consolidated Financial Data presented below has been derived from historical audited consolidated financial statements of the Company for each of the five years in the period ended December 31, 1999. The following data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's Consolidated Financial Statements and the Notes thereto.
(1) 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 operations including a provision for estimated loss upon disposition, have been segregated from continuing operations and are reported as discontinued operations. In August 1999, the Company completed the sale of the rail and mass transit operations resulting in an additional loss upon disposal.
(2) During 1996, the Company adopted a new method of accounting for pre-contract costs. These costs were previously deferred and recovered over the revenue streams from the Company's customers. Effective January 1, 1996, these costs have been expensed. Pro forma amounts for 1995 assume the new accounting method is applied retroactively.
(3) In 1997, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards No. 128, Earnings Per Share. SFAS No. 128 requires the dual presentation of basic and diluted earnings per share on the face of the income statement and the disclosure of the reconciliation between the numerators and denominators of basic and diluted earnings per share calculations. Earnings per share amounts for the years ended December 31, 1999, 1998 and 1997 are calculated using only weighted average outstanding shares of 10,230,720, 9,880,283 and 9,288,416, respectively. Options to purchase common stock and shares to be issued upon conversion of the Preferred Stock, 8% Notes and 10% Notes totaling 6,119,039 for the year ended December 31, 1999 were not used for computing diluted earnings per share because the result would be anti-dilutive. Options to purchase common stock and shares to be issued upon conversion of the 8% Notes and 10% Notes totaling 4,546,065 and 3,896,966 for the years ended December 31, 1998 and 1997, respectively were not used for computing diluted earnings per share because the result would be anti-dilutive. Basic earnings per share for the year ended December 31, 1995 is calculated using weighted average shares outstanding of 8,175,300 and earnings per share assuming dilution is calculated including 401,517 additional shares for stock options and warrants.
(4) The Company has not paid any cash dividends on common stock since its April 1992 initial public offering.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
GENERAL
The following discussion and analysis provides information that the Company's management believes is relevant to an assessment and understanding of the Company's results of operations and financial condition for the three years ended December 31, 1999 compared to the same periods of the prior years. This discussion should be read in conjunction with the Consolidated Financial Statements and the Notes thereto included elsewhere in this Form 10-K. Except for the historical information contained herein, this discussion contains forward looking statements (including statements in the future tense and statements using the terms "believe," "anticipate," "except," "intend," or similar terms) which are made pursuant to safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward looking statements involve risks and uncertainties that could cause the Company's actual results to differ materially from those discussed herein. 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 core business has been as a government and defense contractor. Additionally, commencing with acquisitions and commercial product developments since 1993, the Company became supplier of seating systems for rail and other mass transit vehicles and a new entrant in the manufacture of new commercial airliner seating. Utilizing its proprietary safety technology, the Company has introduced crashworthy systems for a variety of vehicles and aircraft and various inflatable restraint systems for automobiles including the Inflatable Tubular Structure ("ITS").
In 1993 and 1994, the Company pursued an acquisition strategy designed to enable the Company to exploit its energy absorption technology within the commercial airline seating business. In 1993, it acquired an airline passenger seat reupholstery and refurbishing business, which provided certain FAA certifications and seat assembly capacity. In 1994, it acquired two competing companies in the rail and mass transit seating business, which provided large scale manufacturing capacity synergistic with the airline seating business. In 1996, the Company the commercial airline seating market. In 1998, the Company decided to discontinue its rail and mass transit businesses when its commercial airline seating business no longer needed the manufacturing capacity supplied by these operations, and it sold these businesses in 1999. In late 1999 the Company decided to sell its commercial airline seating business in 1999 to concentrate on more profitable businesses.
In 1994, the Company made a strategic decision to enter the inflatable restraint market for automobiles utilizing its proprietary ITS technology. 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.
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 yields the percentage of gross margin estimated for each contract. Overall gross margin percentages can increase or decrease based upon changes in estimated gross margin percentages over the lives of individual contracts. Note 18 of the Notes to Consolidated Financial Statements provides a break down of revenues for each significant segment of the Company.
Note 16 of the Notes to Consolidated Financial Statements provides the revenues and related costs associated with contract research and development for third parties.
The Company is a holding company for wholly owned subsidiaries which operate in two primary 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company defines liquidity as the ability to access cash to meet operating and capital needs. The Company's primary source of cash in the 1999 period was from financing activities.
The Company's ability to fund working capital requirements and debt service during the next year will be dependent upon improved cash flow from the remaining operating units. Following the 1999 restructuring, the remaining operations have a recent history of profitability and positive cash flow. The Company has significantly reduced it's working capital needs and believes that existing availability under its RLC is adequate to fund its operations. The Company is continuing to work with it's investment banker to address the September 1999 maturity of the $5.0 million Term Note. The alternatives currently being considered include repayment of the note through a combination of cash flow and availability under the RLC, refinance the note through an expansion of a banking facility or a new note, work with the note holder to extend the note beyond the current due date until one of the above is accomplished or strategic asset sales or technology licensing.
Company believes it has sufficient manufacturing capacity, at December 31, 1999, to meet its anticipated future delivery requirements.
The Company may, however, seek to obtain additional capital should demand for it's products exceed current capacity. The raising of capital in public markets will be primarily dependent upon prevailing market conditions and the demand for the Company's products and technologies.
During the fourth quarter of 1999, the Company undertook a restructuring plan which included the refinancing of its then outstanding bank debt and certain term notes payable which were maturing. On December 30, 1999 the company executed a Financing Agreement (the "Financing Agreement") with an asset based lender which provided a $17.0 million Revolving Line of Credit (the "RLC") and a $5.0 million term note. The proceeds from this financing, together with the proceeds from the Senior Secured Notes discussed below, were used to retire the then existing Senior Credit Agreement and two term notes payable to a bank and to retire $4.3 million of the Company's Senior Subordinated Convertible Notes. The Company's availability under the RLC is dependent upon the relative balances of accounts receivable and inventories and each of their relative advance percentages. The RLC accrues interest payable monthly at the Chase Manhattan prime rate or LIBOR plus 2.4% based upon the rate selected by the Company. The RLC matures on December 30, 2003 and renews automatically unless terminated by either party with 60 days notice prior to each anniversary date of the agreement. If the Financing Agreement is terminated at any other time, an early termination fee based upon the outstanding principal under the revolving line of credit of 1 1/2% during the first year and 3/4% after the first anniversary and before the second anniversary shall be assessed. At December 31, 1999, the Company had available and outstanding borrowings of $17.0 million and $12.8 million, respectively.
The Financing Agreement contains covenants that require the maintenance of certain defined financial ratios and income and limits additional borrowings and capital expenditures. The Financing Agreement is secured by the assets of the Company. The $5.0 million term note was retired on February 2, 2000 with proceeds received from the sale of the Company's airline new seat manufacturing operation. At December 31, 1999 the Company was in compliance with all covenants relating to the Financing Agreement.
On December 30, 1999, the Company executed an agreement with an accredited investor for two Senior Secured Notes in the amounts of $5,000,000 (the "Term Note A") and $15,000,000 (the "Term Note B") (together the "Term Notes") and a warrant to purchase 850,000 shares of common stock at $5.00 per share. The warrant is immediately exercisable and expires in 7 years. The Term Note A matures on September 30, 2000, accrues interest payable monthly at 15% and provides for an additional monthly bridge fee of $25,000. The Term Note A may be redeemed with a 30 day notice at any time without penalty. The Term Note B matures on June 30, 2003 and provides for cash interest to be paid monthly at 12.25% and interest which is to be capitalized into the note principal balance at 3% per month. The Term Note B may be redeemed with a 30 day notice at certain specified redemption prices plus accrued interest payable to the redemption date.
The Term Notes contain covenants that require the maintenance of certain defined financial ratios and income and limits additional borrowings and capital expenditures. The Term Notes are secured by the assets of the Company. At December 31, 1999 the Company was in compliance with all covenants relating to the Term Notes.
In October and December 1999 the Company entered into two separate $1 million Promissory Notes with it's Chairman of the Board of Directors. The notes bear interest at 12%, and each note provides for a placement fee of $20,000 to be paid upon maturity or any accelerated repayment of the note. One note was paid with the proceeds from the Term Notes and the remaining note matures on December 31, 2003. Voluntary prepayment of the note is prohibited, however, the note is subject to mandatory prepayment at the option of the holder if all of the following conditions have been satisfied: (1) The $5,000,000 Senior Secured Note to the asset based lender has been paid in full; (2) The $5,000,000 Senior Secured Note to the outside accredited investor has been paid in full; (3) after giving effect to the mandatory prepayment to be made hereunder, the availability under the Company's revolving line of credit is not less the $2,000,000.
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"). The Series A bears a coupon 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 was initially set at $8.60 per share and was subject to an interim adjustment. On August 1, 1999 the Conversion Cap was adjusted to $8.04. In addition, the Conversion Cap is subject to an annual adjustment to the lesser of the then existing Conversion Cap or 130% of the average of the closing bid price for 20 consecutive trading days immediately proceeding 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. The Series A is subject to mandatory redemption at May 1, 2004. The proceeds from this offering were used to pay down the then existing revolving line of credit. During 1999 $5.25 million of the Series A plus accrued dividends of $.175 million were exchanged for 1,077,074 shares of the Company's common stock. In 1999, dividends totaling $279,536 were paid on the Series A. At December 31, 1999 $2.25 million of the series A remain outstanding.
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. With regard to operating units retained by the company, contract receivables, net of contract advances, increased $3.8 million for the year ended December 31, 1999 principally due to the timing of work performed and the billing provisions of the related contracts. In addition, trade receivables in the Commercial Transportation Products segment decreased $1.1 million for the year ended December 31, 1999 due to the timely collection of amounts due.
Operating activities required the use of $9.0 million of cash during the year ended December 31, 1999, compared to the use of $19.2 million of cash during the same period in 1998. Cash used for operating activities in 1999 was primarily used to fund operating losses and working capital needs of businesses disposed of during the year. With regard to operating units retained by the company, cash was utilized to fund contract and trade receivables noted above, total inventories remained constant and accounts payable and accrued liabilities increased by $11.0 million
Investing activities required the use of $3.7 million of cash during the year ended December 31, 1999. Approximately $2.8 million was used for capital improvements and the amounts were equally split between the two operating segments. In the second quarter of 1999, the Company sold real property in a sale and leaseback transaction. The sale generated net cash proceeds of $2.4 million that was used to pay down the revolving line of credit at that time.
Financing activities provided $17.0 million of cash during the year ended December 31, 1999 with $7.5 million coming from placement of the Series A Preferred Stock offset partially by $0.1 million in dividends paid thereon, $0.5 million for issuance of common shares, and the balance, $9.1 million coming from net borrowing after reduction of the revolving line of credit by $4.1 million.
1999 Compared to 1998
Revenue for the year ended December 31, 1999 increased 31% to $131.4 million from $100.6 million for the comparable period in 1998. Commercial Transportation Products revenue increased 29% or $18.8 million principally as a result of increased deliveries of ITS, new commercial airliner seats and growth in the airliner seat refurbishing business. Government and Defense revenue increased 33% or $11.7 million due to a general increase in ongoing government contracts.
For the year ended December 31, 1999, gross margin increased 90% to $28.4 million from $14.9 million for the comparable period in 1998. As a percent of sales, gross margins increased to 22% from 15%. Gross margins for Commercial Transportation Products increased 257% or $10.6 million and the gross margin percentage increased to 18% in 1999 from 6% in 1998. Profitability of the new airliner seating business was seriously impacted in the last six months of 1999 by the Company's efforts to sell the
assets of the business. Despite the disruption, gross margin associated with the production of new airliner seating improved from a negative margin of ($9.9) million in 1998 to a negative margin of ($2.9) million in 1999. This change resulted from improved manufacturing efficiency, fewer pre-contract and start-up costs and fewer new seat design certifications as the business concentrated on producing to its existing backlog and repeat orders. Gross margins associated with the Company's airliner seat refurbishing business improved primarily due to a more experienced work force and efficiencies from higher volumes. The increased gross margin as a percentage of sales associated with airline seating products was partially offset by a 2% decline in the gross margin as a percentage of sales associated with the Company's automotive products. Although gross margin as a percentage of sales declined in automotive products as the result of customer sales volume discounts gross margin dollars increased $1.4 million in 1999 due to the realization of increased customer sales. Gross margin percentages for Government and Defense decreased to 28% in 1999 from 30% for the comparable 1998 period. The decrease in gross margin percentages at Government and Defense was primarily due to less external funding on research and development contracts.
Administrative expenses for the year ended December 31, 1999 increased 34% to $27.3 million from $20.4 million for the comparable period in 1998. As a percent of sales, administrative expenses increased to 21% from 20% for the comparable 1998 period. Commercial Transportation Products administrative expenses increased $4.9 million or 50% and as a percentage of sales increased to 18% from 15% primarily due to sales growth in these businesses. Government and Defense administrative expenses increased $1.1 million or 12% and is related to the 29% increase in internally funded research and development expenses to $4.4 million from $3.4 million in the comparable 1998 period. Government and Defense administrative expenses as a percentage of sales decreased to 22% from 26% and is attributable to increased sales. Corporate operating expenses increased $880,000 or 65% as compared to the comparable period in 1998. This increase is primarily related to approximately $600,000 in non-cash compensation recognized in relation to certain stock option exercises and an increase in legal expenses principally related to the Company's claim of patent infringement on its ITS(R).
In December 1999, management of the Company, with the approval of the board of directors, committed itself to a plan of restructuring and recorded a charge to income of $18.3 million. The plan of restructuring included a refinancing of its outstanding bank line of credit and certain term notes and the divestiture of the Company's new airline seat manufacturing operation. The Company completed the sale of substantially all the assets of the airline seat manufacturing operation in January 2000 and closed the operating facility at that time terminating approximately 300 management and production employees. Total proceeds from the sale was approximately $21.9 million and included the assumption of liabilities of approximately $11.6 million and resulted in a loss on sale of $10.3 million. The remaining restructuring charge is comprised of severance costs of $1.6 million, $2.5 million related to the abandonment of leased operating facilities and equipment, $2.3 million related to the write down to net realizable value for inventory and fixed assets and $1.6 million in recognition of additional liabilities related primarily to outstanding purchase order commitments which were non-cancelable. The Company expects cash flow savings as a result of not having to fund continued operating losses to offset the cash required in implementing the restructuring plan within the first year. The airline seat manufacturing operation had sales of $41.9 million, $32.0 million and $ 27.7 million and operating losses of $25.4 million, $14.5 million and $3.3 million during the years ended 1999, 1998 and 1997, respectively.
Interest expense for the year ended December 31, 1999 increased 42% to $7.2 million from $5.1 million for the comparable period in 1998. This increase was due to increased borrowings on the Company's bank credit facilities and monthly penalty charges assessed by the Company's previous lender. These increased borrowings were made to fund increased working capital needs and acquire fixed assets necessary to support the growth in revenues.
The effective income tax rate for the year ended December 31, 1999 and 1998 approximated 35%.
1998 Compared to 1997
Revenue for the year ended December 31, 1998 increased 49% to $100.6 million from $67.4 million for the comparable period in 1997. Commercial Transportation Products revenue increased 75% or $27.8 million principally as a result of increased deliveries of ITS and new commercial airliner seats. Government and Defense revenue increased 18% or $5.5 million due to a general increase in ongoing government contracts.
For the year ended December 31, 1998, gross margin decreased 4% to $14.9 million from $15.6 million for the comparable period in 1997. As a percent of sales, gross margins decreased to 15% from 23%. Gross margins for Commercial Transportation Products decreased 13% or $0.6 million and the gross margin percentage decreased to 6% from 13% in 1997. The decrease in gross margins resulted primarily from increased pre-contract and start-up costs and production cost inefficiencies from the penetration of additional sales channels in the airliner seating market, a $2.0 million write down of certain inventory used in the refurbishment of airliner seating which is no longer a significant component of operations, and costs incurred related to the move of the airliner seating operations to a new facility which provided for additional capacity. The effect of the above results in the airliner seat business was partially offset by increased gross margins on the ITS as a result of increased volume and a complete year of operations. Gross margin percentages of Government and Defense decreased to 30% from 36%. The decrease in gross margin percentages at Government and Defense was primarily due to higher funding on research and development contracts.
Administrative expenses for the year ended December 31, 1998 increased 9% to $20.4 million from $18.7 million for the comparable period in 1997. As a percent of sales, administrative expenses decreased to 20% from 28% due to the increase in revenue noted above. Commercial Transportation Products administrative expenses increased $2.6 million or 37% and as a percentage of sales decreased to 15% from 19% primarily due to increased sales volume. Government and Defense administrative expenses decreased $0.9 million or 9% and is related to the 23% decrease to $3.4 million from $4.4 million of internally funded research and development expenses. The decreased research and development expenses were partially attributable to an increase in certain Government and Defense production contracts, which resulted in greater production resources being assigned to contract programs. As a percent of sales, Government and Defense administrative expenses decreased to 26% from 33% attributable to increased sales and lower expense levels as noted above.
Interest expense for the year ended December 31, 1998 increased 22% to $5.1 million from $4.2 million for the comparable period in 1997. These increases were due to increased borrowings on the Company's bank credit facilities. These borrowings were made to fund operations and acquire fixed assets necessary to support the growth in revenues for 1998 and subsequent years.
The effective income tax rate for the year ended December 31, 1998 approximated 35% as compared to 40% for the comparable period in 1997. The decrease in the Company's 1998 effective tax rate is attributable to the expiration of certain foreign tax credits and the recognition of a valuation allowance for certain state net operation loss and foreign tax credit carry forwards.
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.
The Company executed the sale of its rail and mass transit seating operation on August 31, 1999 under an Asset Purchase and Sale Agreement dated June 30, 1999, as amended and restated August 31, 1999 and subsequently on October 21. 1999, a Note Refinancing Agreement was executed. A former director of the Company wholly owned the acquiring company. Consideration received consisted of $100,000 cash, assumptions of approximately $4,700,000 in liabilities and a promissory note for $9,996,000 which matured on October 15, 1999. On October 21, 1999, the parties entered into the Note Refinancing Agreement which refinanced the note as two separate notes in the amount of $1,996,000 and $8,118,008 and reflects the capitalization of $118,008 of interest related to the original note into principal outstanding. The notes each carry an interest rate of 8 1/2% and mature on October 15, 2004. Interest is required to be paid quarterly beginning April 2000 on the $1,996,000 promissory note and semi-annually beginning April 2001 on the $8,118,008 promissory note. The negotiated interest rate on the notes did not properly reflect the risk and current market conditions. Therefore, the company has computed the net present value of the notes using a discount rate of 23%, which is the Company's determination of the market rate of interest and market value of the notes. Management believes this more properly reflects the risk related to the notes due to their subordinated nature. This resulted in a net present value discount of $6,750,000 assuming principal only payment at the end of the term.
The notes are secured by the underlying assets and a Pledge and Proxy Security Agreement in the stock of the underlying company and stock of Beacon Industries, Inc. which is owned under common control of the acquirer and subordinated to short-term capital financing received subsequent to its disposal. Although a legal transfer of assets occurred at August 31, 1999, the sale could not be recognized as a divestiture for accounting purposes at that time because there was an absence of a significant investment in the business by the buyer. As a result of losses by the rail and mass transit seating operation since the sale date and the uncertainty of the ultimate recovery of the entire principal and interest on a timely basis in accordance with the terms of the contract, a valuation allowance for the remaining balance has been recorded. This uncertainty is based on the operating losses sustained by the business subsequent to disposal, its inability to acquire adequate long-term financing for repayment of the notes under the terms of the contract, or obtain additional equity investment. While the contract between the parties remains fully enforceable, and the Company believes some recovery may occur, the company can not accurately predict the precise timing and amount of the collection of principal and interest, accordingly the carrying value of the notes is zero. Any future payments of principal received will be accounted for under the cost recovery method of accounting as a component of discontinued operations.
Under the Asset Purchase and Sale Agreement the Company has retained the liability for claims incurred through August 31, 1999 under its self funded health insurance plan and has agreed to indemnify the acquiring company for any customary warranty and litigation claims. An additional charge upon the final disposal of the rail and mass transit discontinued operation of $7,238,109, net of tax benefit of $3,898,000, was recorded in the year ended December 31, 1999.
Revenues for the rail and mass transit operations were $8,247,294 for the eight months ended August 31, 1999, and $15,781,983 and $23,059,525 for the years ended 1998 and 1997, 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.
INFLATION
The Company does not believe that it is significantly impacted by inflation.
RESEARCH AND DEVELOPMENT
The Company's research and development occurs primarily under fixed-price, government-funded contracts as well as Company-sponsored efforts. The revenue received under government-funded contracts is recorded under the percentage completion method of accounting, and the costs of independent research and development efforts are expensed as incurred.
Historically, research and development efforts have fluctuated based upon available government-funded contracts. The Company anticipates that future fluctuations may also occur and that absent government funded research, the Company will directly fund research and development efforts to expand its inflatable restraint, commercial airliner seating, and other technologies. As noted in Note 16 to the Consolidated Financial Statements, the Company's costs for research and development to advance its technologies were $12.0 million in 1999, of which $4.4 million was internally funded.
SEASONALITY
The Company does not believe that it is currently significantly impacted by seasonal factors.
FORWARD LOOKING INFORMATION AND FINANCIAL TARGETS
The Company believes that in 1999 and early 2000 it successfully addressed the manufacturing inefficiencies, operating losses, cash flow and liquidity problems that Simula experienced in recent years. The Company believes that it has significant competitive advantages based on its current and developing technologies and products, and that Simula will continue to benefit from its worldwide recognition as a premier safety technology company. Management believes the Company is positioned for consistent revenue and earnings growth during the next five years.
Management estimates that revenues should exceed $100 million in 2000, earnings should be in the range of $2.5-3.0 million, and EBITDA should exceed $17.0 million. It is estimated that revenues, earnings, and EBITDA should exceed $130 million, $6.0 million, and $20 million, respectively, in 2002. By 2004, management anticipates that the Company's business will have grown substantially and targets revenues, earnings, and EBITDA in excess of $200 million, $20 million, and $35 million, respectively.
This forward looking information is subject to, and qualified by, the trends and uncertainties in the Company's business described below and elsewhere in this Report.
RISKS AND UNCERTAINTIES IN THE BUSINESS
Projected operating results 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 cash flow from operations, availability of funds under its credit agreement, and extensions or refinancings of certain indebtedness or, potentially, proceeds from asset sales or licensing. Other factors pertinent to the Company's ability to meet its current and five year financial projections include its leveraged status and the level and cost of debt; success in efforts to reduce fixed expenses and improve cash flows; ability to maintain margins or grow volumes in its automotive segment; success in building strategic alliances with large prime contractors and first tier suppliers to OEMs; competition and competitive pressures on pricing including from first tier supplier partners; customer order patterns and seasonally; the cyclical nature of the automobile industry and other markets addressed by the Company's products; the level and makeup of military expenditures; the costs of legal proceedings; contract mix and shifting production and delivery schedules among the Company's two business segments; amount of resources committed to independent research and development from time to time; proof of concept and production validation of certain of the Company's new technologies and proposed products; technological changes; the level of orders which are received and can be shipped and invoiced in a quarter; manufacturing capacity and yield; costs of labor, raw materials, supplies, and equipment; reliability of vendor base, and economic conditions in the United States and worldwide markets.
As used throughout this report, the words "estimate," "anticipate," "expect," "should," "intend," "project," "target," or other expressions that indicate future events identify forward looking statements which are made pursuant to safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results and trends may differ materially. Risks include those described herein and in the Company's registration statements and periodic reports filed with the U.S. Securities and Exchange Commission.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company has short-term borrowings supported by a long-term revolving Financing Agreement which subjects the Company to the risk of loss associated with movements in market interest rates.
At December 31, 1999, the Company had $12.8 million in short-term borrowings outstanding and $68.0 million in long-term debt outstanding after giving effect to the $2.3 million original issue discount. Of the long-term debt outstanding, $60.7 million is fixed-rate debt and, accordingly, does not expose the Company to risk of earnings loss due to changes in market interest rates (see Note 7 to the Company's Consolidated Financial Statements). While the remaining $5 million of long-term debt was at a variable rate, it's retirement in February 2000 eliminated any significant exposure to the Company to interest rate risk. The short-term borrowings of $12.8 million are variable rate obligations.
If the variable rates were to change by 10% from December 31, 1999, annual interest expense associated with the variable-rate debt would change by approximately $108,000, pretax.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data are set forth in this report on Form 10-K commencing on page.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
In accordance with Instruction G (3) to Form 10-K, Items 10, 11, 12 and 13 of Form 10-K are incorporated herein by reference from the Company's definitive proxy statement to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
a. Financial Statements. Financial Statements appear beginning at page.
b. Reports on Form 8-K. The Company reported the disposition of its rail and mass transit seating business, through the sale of its wholly-owned subsidiary, Coach and Car Equipment Corporation, with its report on Form 8-K filed effective October 25, 1999. No financial statements were filed with the report.
c. Exhibits. The following Exhibits are included pursuant to Item 601 of Regulation S-K.
- ---------- * Filed herewith.
+ Power of Attorney of S. Thomas Emerson filed herewith. All other Powers of Attorney filed as noted.
(1) Filed with Registration Statement on Form S-18, No. 33-46152-LA, under the Securities Act of 1933, effective April 13, 1992.
(2) Filed with Definitive Proxy on May 15, 1996, for the Company's Annual Meeting of Shareholders held on June 20, 1996.
(3) Filed with report on Form 10-Q/A for the quarter ended June 30, 1996.
(4) Filed with Registration Statement on Form S-3/A, No. 333-13499, under the Securities Act of 1933, effective April 21, 1997.
(5) Filed with report on Form 10-K for the year ended December 31, 1997.
(6) Filed with report on Form 10-Q for the quarter ended March 31, 1998. The Change of Control Agreements for Messrs. Townsend, Forst and Saunders are substantially identical and differ materially only in that Mr. Townsend is entitled to an amount equal to five (5) years base salary and benefits upon a change of control while Messrs. Forst and Saunders are entitled to an amount equal to four (4) years base salary and benefits upon a change of control.
(7) Filed with report on Form 10-Q for the quarter ended March 31, 1998. The Employment Agreements for Messrs. Townsend, Forst and Saunders are substantially identical and differ materially only in the following two respects: (i) the initial term of the agreement with Mr. Townsend is five (5) years while the initial term of the agreement with Messrs. Forst and Saunders is three (3) years; and (ii) the post-termination non-compete period with Mr. Townsend is thirty (30) months while it is eighteen (18) months with Messrs. Forst and Saunders.
(8) Filed with report on Form 10-Q for the quarter ended September 30, 1998.
(9) Filed with report on Form 10-K for the year ended December 31, 1998.
(10) Filed with report on Form 10-Q for the quarter ended March 31, 1999.
(11) Filed as Appendix A with Definitive Proxy on May 14, 1999, for the Company's Annual Meeting of Shareholders held on June 17, 1999.
(12) Filed with report on Form 8-K, under the Securities Act of 1933, effective October 25, 1999.
(13) Filed with report on Form 10-Q for the quarter ended September 30, 1999.
(14) Filed with Schedule 13D, under the Securities Exchange Act of 1934, on January 10, 2000 effective December 31, 1999 by Levine Leichtman Capital Partners II, L.P. SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) the Securities Exchange Act of 1934, as amended, the registrant has duly caused this Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Phoenix, State of Arizona, on April 14, 2000.
SIMULA, INC.
By /s/ Donald W. Townsend ---------------------- Donald W. Townsend, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this Form 10-K has been signed by the following persons in the capacities and on the dates indicated.
SIMULA, INC.
INDEPENDENT AUDITORS' REPORT
Directors and Shareholders Simula, Inc. and Subsidiaries Phoenix, Arizona
We have audited the accompanying consolidated balance sheets of Simula, Inc. and subsidiaries (the "Company") as of December 31, 1999 and 1998, and the related consolidated statements of operations, shareholders' equity and comprehensive income, and of cash flows for each of the three years in the period ended December 31, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Simula, Inc. and subsidiaries at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
March 29, 2000 Phoenix, Arizona
SIMULA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1999 AND 1998
See notes to consolidated financial statements
SIMULA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS THREE YEARS ENDED DECEMBER 31, 1999
SIMULA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME THREE YEARS ENDED DECEMBER 31, 1999
See notes to consolidated financial statements
SIMULA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS THREE YEARS ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
SIMULA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) THREE YEARS ENDED DECEMBER 31, 1999 - --------------------------------------------------------------------------------
SIMULA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THREE YEARS ENDED DECEMBER 31, 1999
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION -- The consolidated financial statements include the accounts of Simula, Inc. ("Simula") and its subsidiaries (collectively the "Company"). All of the subsidiaries are wholly owned. All intercompany transactions are eliminated in consolidation.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Described below are those generally accepted accounting principles particularly significant to the Company, including those selected from acceptable alternatives.
a. Use of Estimates -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
b. Revenue related to government contracts results principally from long-term fixed price contracts and is recognized on the percentage-of-completion method calculated utilizing the cost-to-cost approach. The percent deemed to be complete is calculated by comparing the costs incurred to date to estimated total costs for each contract. This method is used because management considers costs incurred to be the best available measure of progress on these contracts. Adjustments to this measurement are made however, when management believes that costs incurred materially exceed effort expended. Contract costs include all direct material and labor costs, along with certain overhead costs related to contract production. Provisions for any estimated total contract losses on uncompleted contracts are recorded in the period in which it is concluded that such losses will occur.
Revenue derived from sales of airline and automotive commercial products is recognized at contractual amounts when the product is shipped.
c. Inventories include raw materials not yet applied to contracts and raw materials, work-in-process and finished goods applicable to commercial products. Inventories are recorded at cost and are carried at the lower of cost or net realizable value. Amounts are removed from inventory using the first-in first-out method.
d. Property, equipment and leasehold improvements are stated at cost. Amortization of capital leases and leasehold improvements is calculated on a straight-line basis over the life of the asset or term of the lease, whichever is shorter. Depreciation on equipment is calculated on a straight-line basis over estimated useful lives of three to twelve years and buildings are depreciated on a straight-line basis over estimated useful lives of thirty years.
e. Deferred financing costs are amortized over the life of the related debt using the effective interest method.
f. Intangibles are recorded at cost. The Company acquires intangible assets in the normal course of business. The Company periodically reviews for changes in circumstances to determine whether there are conditions that indicate that the carrying amount of such assets may not be recoverable. If such conditions are deemed to exist, the Company will determine whether estimated future undiscounted cash flows are less than the carrying amount of such assets, in which case the
Company will calculate an impairment loss. Impairment losses, if any, will be recorded as a component of operating earnings. Intangibles are amortized on a straight-line basis over 7 to 20 years.
g. Foreign currency assets and liabilities are translated into United States dollars using the exchange rates in effect at the balance sheet date. The effects of exchange rate fluctuations on translation of assets and liabilities are reported as a separate component of shareholders' equity.
h. Statements of Cash Flows - Cash and cash equivalents presented in the statements of cash flows consist of cash on hand and highly liquid investments with an original maturity of three months or less.
i. (Loss) earnings per common share - In 1997, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards No. 128, Earnings Per Share. SFAS No. 128 requires the dual presentation of basic and diluted earnings per share on the face of the income statement and the disclosure of the reconciliation between the numerators and denominators of basic and diluted earnings per share calculations. Earnings per share amounts for the years ended December 31, 1999, 1998 and 1997 are calculated using only weighted average outstanding shares of 10,230,720, 9,880,283 and 9,288,416, respectively. Options to purchase common stock and shares to be issued upon conversion of the Preferred Stock, 8% Notes and 10% Notes totaling 6,119,039 for the year ended December 31, 1999 were not used for computing diluted earnings per share because the result would be anti-dilutive. Options to purchase common stock and shares to be issued upon conversion of the 8% Notes and 10% Notes totaling 4,546,065 and 3,896,966 for the years ended December 31, 1998 and 1997, respectively were not used for computing diluted earnings per share because the result would be anti-dilutive.
j. New accounting pronouncements - In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133, requires that entities record all derivatives as assets or liabilities, measured at fair value, with the change in fair value recognized in earning or in other comprehensive income, depending on the use of the derivative and whether it qualifies for hedge accounting. SFAS No. 133 (as amended) is effective for the fiscal year ending 2001. The Company has not completed evaluating the effects this statement will have on its financial position or results of operations.
2. RECEIVABLES
Costs and estimated earnings in excess of billings on uncompleted contracts represent revenue recognized on long-term contracts in excess of billings because amounts were not billable at the balance sheet date. Amounts receivable from the United States Government or receivable under United States Government related subcontracts will generally be billed in the following month or when the contract and all options thereunder are completed. Amounts due on other contracts are generally billed as shipments are made, subject to retainages. It is estimated that substantially all of such amounts will be billed and collected within one year, although contract extensions may delay certain collections beyond one year.
At December 31, receivables include the following:
3. INVENTORIES
At December 31, inventories consisted of the following:
4. PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
At December 31, property, equipment and leasehold improvements consisted of the following:
5. INTANGIBLES
At December 31 intangibles consisted of the following:
6. REVOLVING LINE OF CREDIT
On December 30, 1999, the Company executed a Financing Agreement with an asset based-lender which provided for a $17,000,000 revolving line of credit and a $5,000,000 Senior Secured term note payable. The proceeds received from this financing together with the proceeds received from the Senior Secured Notes discussed below, were utilized primarily to replace the Company's then revolving line of credit and two term notes payable with a bank and retire $4,250,000 of the Company's 10% Senior Subordinated Convertible Notes (the "10% Notes").
The Company's availability under the revolving line of credit is dependent upon the relative balances of accounts receivable and inventories and each of their relative advance percentages. The revolving line of credit accrues interest at the Chase Manhattan prime rate or LIBOR plus 2.4% based upon the rate selected by the Company and matures December 30, 2003 and renews automatically unless terminated by either party with proper notice. The outstanding balance under this line of credit was $12,751,595 and the average interest rate was 8.5% at December 31, 1999.
The Financing Agreement contains covenants that require the maintenance of certain defined financial ratios and income and limits additional borrowings and capital expenditures. The Company was in compliance with all of these covenants at December 31, 1999. The Financing Agreement may be terminated with 60 days notice prior to each anniversary date of the agreement at no additional cost. If the Financing Agreement is terminated at any other time, an early termination fee based upon the outstanding principal under the revolving line of credit of 1 1/2% during the first year and 3/4% after the first anniversary and before the second anniversary shall be assessed. The Financing Agreement is secured by the assets of the Company.
7. LONG-TERM DEBT
Long-term debt at December 31 consisted of the following:
On December 30, 1999, the Company executed agreements with an asset based lender for a $17,000,000 revolving line of credit (Note 6) and a $5,000,000 Senior Secured Note, and with an accredited investor for two Senior Secured Notes totaling $20,000,000. Net proceeds under these agreements was $34,831,949 and were used to replace the Company's then outstanding revolving line of credit and two term notes payable with a bank totaling $29,333,334, retire $4,250,000 the Company's 10% Senior Subordinated Convertible Notes and repay one note payable to the Chairman of the Board in the amount of $1,000,000. As a result of the above refinancing, a pre-tax extraordinary charge on early retirement of debt was recorded for the year ended 1999 related to the write-off of deferred financing fees of $232,295.
The $5,000,000 Senior Secured term note payable with the asset based lender was retired on February 2, 2000 with proceeds received from the sale of the Company's airline new seat manufacturing operation. Two Senior Secured Notes in the amounts of $5,000,000 (the "Term Note A") and $15,000,000 (the "Term Note B") (together the "Term Notes") were issued with a warrant to purchase 850,000 shares of common stock at $5.00 per share. The warrant is immediately exercisable and will expire in 7 years. The Company has recorded an original issue discount related to the stock warrant of $2,300,000 and shall be amortized over the term of the underlying notes using the effective interest method. The Term Note A matures on September 30, 2000, accrues interest payable monthly at 15% and provides for an additional monthly bridge fee of $25,000. The Term Note A may be redeemed with a 30 day notice at any time without penalty. The Term Note B matures on June 30, 2003 and provides for cash interest to be paid monthly at 12.25% and interest which is to be capitalized into the note principal balance at 3% per month. The Term Note B may be redeemed with a 30 day notice at certain specified redemption prices plus accrued interest payable to the redemption date.
The Term Notes contain covenants that require the maintenance of certain defined financial ratios and income and limits additional borrowings and capital expenditures. The Company was in compliance with all of these covenants at December 31, 1999. The Term Notes are secured by the assets of the Company.
On October 15, 1999, the Company entered into a $1,000,000 Promissory Note with it's Chairman of the Board of Directors. The note bears interest at 12%, matures on October 15, 2000, and provides for a placement fee of $20,000 to be paid upon maturity or any accelerated repayment of the note. In addition, the note provides for an accelerated maturity in the event the Company completes a senior credit banking agreement, or a public or private offering of debt or equity securities for proceeds of $10,000,000 or more.
'The Company repaid the October 15, 1999 note in full on January 6, 2000 from the proceeds received from the Senior Secured Notes issued on December 30, 1999 discussed above.
On December 14, 1999, the Company entered into a second $1,000,000 Promissory Note with it's Chairman of the Board of Directors. The note is unsecured and subordinated to the Company's Senior Secured Notes. The note bears interest at 12%, matures on December 31, 2003, and provides for a placement fee of $20,000 to be paid upon maturity. Voluntary prepayment of the note is prohibited, however, the note is subject to mandatory prepayment at the option of the holder if all of the following conditions have been satisfied: (1) The $5,000,000 Senior Secured Note to the asset based lender has been paid in full; (2) The $5,000,000 Senior Secured Note to an outside accredited investor has been paid in full; (3) after giving effect to the mandatory prepayment to be made hereunder, the availability under the Company's revolving line of credit is not less the $2,000,000.
In November 1998, the Company completed a private placement to accredited investors of $3,238,000 of it 9 1/2% Senior Subordinated Notes (the "9 1/2% Notes") and received proceeds of $1,025,000 and exchanged $2,213,000 of its 12% Notes. The 9 1/2% Notes are due on September 30, 2003 and bear interest at 9 1/2% per annum, payable semi-annually. The 9 1/2% Notes may be redeemed at the Company's option, upon at least 30 days' notice, in whole or in part on a pro rata basis, on and after April 30, 1999, at 102% of par value plus accrued interest payable to the redemption date. The net proceeds received under the 9 1/2% Notes were utilized in the retirement of the 12% Notes upon maturity.
During 1997, the Company completed the public offering of $34.5 million of its 8% Senior Subordinated Convertible Notes (the "8% Notes"). The 8% Notes are due May 1, 2004 and bear interest at 8% per annum, payable semi-annually. The 8% Notes are convertible into shares of the Company's common stock at a price of $17.55 per share of common stock. The 8% Notes may be redeemed at the Company's option in whole or in part on a pro rata basis, on and after May 1, 1999, at certain specified redemption prices plus accrued interest payable to the redemption date. However, on or after May 1, 1999 and prior to April 30, 2000, the 8% Notes will not be redeemable unless the closing price of the Company's common stock has equaled or exceeded $23.625 for 20 trading days within a period of 30 consecutive trading days.
The indenture relating to the 9 1/2% Notes and the 8% Notes contains certain covenants including limitations on additional indebtedness, the sale of assets, liens securing indebtedness other than senior indebtedness, payment restrictions affecting subsidiaries, transactions with affiliates, future senior subordinated indebtedness and mergers and consolidations. In accordance with the indenture, the Company may incur indebtedness under senior credit facilities up to $50 million and may incur other indebtedness based upon a specified ratio of cash flow, as defined, to interest expense. The Company was in compliance with all of the covenants of this indenture at December 31, 1999.
The aggregate principal payments required after amortization of the original issue discount for the five years subsequent to December 31, 1999 are:
Interest expense for the years ended December 31 is comprised of the following:
Interest expense allocated to discontinued operations for the years ended 1999, 1998 and 1997 was $448,262, $937,499 and $894,589, respectively.
Based on borrowing rates currently available to the Company and the quoted market prices for the 8% Notes, the fair value of long-term debt at December 31, 1999 is approximately $53,653,480.
8. 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 market value at any time at 101% of the average closing price of any 15 out of 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 proceeding the annual adjustment anniversary date. In addition, the first year Conversion Cap was subject to an interim adjustment on August 1, 1999 and was adjusted on that date to $8.04 per share. 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.
During the year ended December 31, 1999, $5,250,000 of Series A Preferred Stock plus accrued dividends of $175,234 were exchanged for 1,077,074 shares of the Company's common stock.
9. STOCK OPTIONS AND STOCK PLANS
In 1992, the Company adopted the 1992 Stock Option Plan which provided for the issuance of up to 360,000 shares of common stock. All options available under the 1992 Plan have been granted. In August 1994, the Company adopted the 1994 Stock Option Plan which reserves up to 2,500,000 shares of common stock for issuance under the Plan. In June 1999, the Company adopted the 1999 Stock Option Plan which
reserves up to 2,000,000 shares of common stock for issuance under the Plan. Options granted under the 1994 and 1999 Plans as of December 31, 1999 were 3,060,488. Information with respect to the Plans is as follows:
Options are generally exercisable one year from the date of grant for up to ten years at a price equal to 100% of the fair market value at the date of grant or 85% of fair market value in the case of non-statutory options. As of December 31, 1999, 1998, and 1997, exercisable options were 2,622,345, 1,976,854, and 1,127,304, respectively. The Company resinded certain 1999 stock option exercises subsequent to their original exercise and accordingly, these exercises are not reflected in the above table.
On December 1, 1998, 584,392 options that had been previously granted to the Company's non-executive management employees were repriced at $7.00 per share which represents the fair market value at the date of repricing. These options retain the same characteristics as their original grant.
The following information, aggregated by option price ranges, is applicable to options outstanding at December 31, 1999:
The estimated fair value of options granted during 1999 was $2.75 Per share. The Company applies Accounting Principles Board Opinion No. 25 and related Interpretations in accounting for its stock option plans. Accordingly, no compensation cost has been recognized for its fixed stock option plans. Had compensation cost for the Company's stock option plans been recognized based on the fair value at the grant dates for awards under those plans consistent with the method of Statement of Financial Accounting Standards No. 123, the Company's net (loss) earnings and net (loss) earnings per share for the three years ended December 31, 1999 would have been reduced to the pro forma amounts indicated below:
The fair value of each option grant is estimated on the date of grant using the Black-Scholes options pricing model. For the year ended December 31, 1999 the assumptions used for grants were no dividend yield, and expected volatility of 61%, a risk free interest rate of 5% and expected lives of 3.5 years. For the year ended December 31, 1998, the assumptions used for grants were no dividend yield, an expected volatility of 53%, a risk-free interest rate of 4.5% and expected lives of 3 years. For the years ended December 31, 1997, the assumptions used for grants were no dividend yield, an expected volatility of 46%, a risk-free interest rate of 5.5% and expected lives of 3 years.
RESTRICTED STOCK PLAN - In 1992, the Company adopted the 1992 Restricted Stock Plan authorizing the Company to grant to key employees of the Company the right to purchase up to an aggregate of 19,500 shares of common stock at $.01 per share. The Company has reserved 19,500 shares of common stock for issuance pursuant to the Restricted Stock Plan, of which 4,623 shares have been awarded.
EMPLOYEE STOCK PURCHASE PLAN - On June 20, 1996, the Company adopted the Employee Stock Purchase Plan (the "ESPP") to allow eligible employees of the Company to acquire shares of the Company's common stock at periodic intervals, paid for with accumulated payroll deductions over a six month offering period. A total of 400,000 shares of the Company's common stock have been reserved for issuance under the ESPP. The first offering period under the ESPP began October 1, 1996.
10. BENEFIT PLANS
The Company has a noncontributory defined benefit pension plan (the "Plan") for employees. To be eligible to participate, employees must have completed six months of continuous employment and have attained the age of 21. Benefits are based on length of service and the employee's final pay (averaged over the five highest consecutive years of the last ten years of participation). The Company makes contributions to the Plan based upon actuarially determined amounts. Effective July 1, 1999, the Company froze the Plan for new participants.
The Plan's funded status and amounts recognized in the Company's balance sheet at December 31 are as follows:
Reconciliation of the Plan benefit obligation is as follows:
Reconciliation of the fair value of plan assets is as follows:
Net periodic pension cost includes the following:
Assumptions at December 31 used in the accounting for the Plan were as follows:
The Plan's assets consist of money market accounts and investments in common stocks, bonds and mutual funds.
In addition, the Company has a 401(k) plan for substantially all employees. Company contributions to the 401(k) plan were $79,474, $48,597 and $38,355 for the years ended December 31, 1999, 1998 and 1997, respectively.
11. OTHER INCOME
Other income for the year ended December 31, 1997 represents the net gain on real estate transactions.
12. INCOME TAXES
The income tax (benefit) provision for the years ended December 31 are as follows:
The provision for deferred income taxes consists of the following:
The significant tax effected temporary differences comprising deferred taxes at December 31 are as follows:
The company increased its deferred tax valuation allowance $110,000 in 1999 and $285,000 in 1998 because certain tax credits and operating loss carry forwards are unlikely to be utilized. At December 31, 1999, the Company had approximately $82,700,000 of net operating loss carry forwards which expire through 2018.
13. COMMITMENTS AND CONTINGENCIES
The Company leases certain equipment under capital lease agreements and certain facilities under noncancellable operating leases with various renewal options. Leased assets of $1,078,384 and $2,030,635 (net of accumulated depreciation of $772,236 and $1,144,166) are included in property and equipment as of December 31, 1999 and 1998, respectively.
The following is a schedule of minimum rental payments due under the leases described above and for other operating leases for the years ending December 31:
Rent expense was $3,370,505, $2,530,932 and $1,889,660 for the years ended December 31, 1999, 1998 and 1997, respectively.
14. 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.
The Company executed the sale of its rail and mass transit seating operation on August 31, 1999 under an Asset Purchase and Sale Agreement dated June 30, 1999, as amended and restated August 31, 1999 and subsequently on October 21, 1999, a Note Refinancing Agreement was executed. A former director of the Company wholly owned the acquiring company. Consideration received consisted of $100,000, assumption of approximately $4,700,000 in liabilities cash and a promissory note for $9,996,000 which matured on October 15, 1999. On October 21, 1999, the parties entered into the Note Refinancing Agreement which refinanced the note as two separate notes in the amount of $1,996,000 and $8,118,008 and reflects the capitalization of $118,008 of interest related to the original note into principal outstanding. The notes each carry an interest rate of 8 1/2% and mature on October 15, 2004. Interest is required to be paid quarterly beginning April 2000 on the $1,996,000 promissory note and semi-annually beginning April 2001 on the $8,118,008 promissory note. The negotiated interest rate on the notes did not properly reflect the risk and current market conditions. Therefore, the company has computed the net present value of the notes using a discount rate of 23%, which is the Company's determination of the market rate of interest and market value of the notes. Management believes this more properly reflects the risk related to the notes due to their subordinated nature. This resulted in a net present value discount of $6,750,000 assuming principal only payment at the end of the term. The notes are secured by the underlying assets and a Pledge and Proxy Security Agreement in the stock of the underlying company and stock of another company which is owned under common control of the acquirer and subordinated to short-term capital financing received subsequent to its disposal. Although a legal transfer of assets occurred at August 31, 1999, the sale could not be recognized as a divestiture for accounting purposes at the time because there was an absence of a significant investment in business by the buyer. As a result of losses by the rail and mass transit seating operation since the sale date and the uncertainty of the ultimate recovery of the entire principal and interest on a timely basis in accordance with the terms of the contract, a valuation allowance for the remaining balance has been recorded. This uncertainty is based on the operating losses sustained by the business subsequent to disposal, its inability to acquire adequate long-term financing for repayment of the notes under the terms of the contract, or obtain additional equity investment. While the contract between the parties remains fully enforceable, and the Company believes some recovery may occur, the Company can not accurately predict the precise timing and amount of the collection of principal and interest, accordingly the carrying value of the notes is zero. Any future payments of principal received will be accounted for under the cost recovery method of accounting as a component of discontinued operations.
Under the Asset Purchase and Sale Agreement the Company has retained the liability for claims incurred through August 31, 1999 under its self funded health insurance plan and has agreed to indemnify the acquiring company for any customary warranty and litigation claims. An additional charge upon the final disposal of the rail and mass transit discontinued operation of $7,238,109, net of tax benefit of $3,898,000, was recorded in the year ended December 31, 1999.
Revenues for the rail and mass transit operations were $8,247,294 for the eight months ended August 31, 1999, and $15,781,983 and $23,059,525 for the years ended 1998 and 1997, 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.
15. RESTRUCTURING
In December 1999, management of the Company, with the approval of the board of directors, committed itself to a plan of restructuring and recorded a charge to income of $18.3 million. The plan of restructuring included a refinancing of its outstanding bank line of credit and certain term notes (Note 7) and the divestiture of the Company's new airline seat manufacturing operation. The Company entered into an agreement to sell substantially all the assets of the airline seat manufacturing operation in December 1999 and completed the transaction in January 2000. The operating facility closed at that time terminating approximately 300 management and production employees. Total proceeds from the sale was approximately $12 million resulting in a loss on sale of $10.3 million. The remaining restructuring charge is comprised of severance costs of $1.6 million, $2.5 million related to the abandonment of leased operating facilities and equipment, $2.3 million related to the write down to net realizable value for inventory and fixed assets and $1.6 million in recognition of additional liabilities related primarily to outstanding purchase order commitments which were non-cancelable. The Company expects cash flow savings as a result of not having to fund continued operating losses to offset the cash required in implementing the restructuring plan within the first year. The airline seat manufacturing operation had sales of $41.9 million, $32.0 million and $ 27.7 million and operating losses of $25.4 million, $14.5 million and $3.3 million during the years ended 1999, 1998 and 1997, respectively.
16. OTHER
The Company's research and development efforts arise from funded development contracts and proprietary research and development. Amounts arising from such efforts for the years ended December 31, were as follows:
17. EXPORT SALES
Export sales for the years ended December 31 were as follows:
18. SEGMENT REPORTING
The Company is a holding company for wholly owned subsidiaries which operate in two primary 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 deliver 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 years ended December 31, 1999, 1998 and 1997, inter-segment sales were insignificant and total intercompany sales of $4,736,052, $10,643,702 and $10,085,025, respectively, have been eliminated.
Revenue from three major customers accounted for approximately 42% of total revenue for the year ended December 31, 1999. Contract and trade receivables from these customers accounted for approximately 31% of the total contract and trade receivables at December 31, 1999. The Commercial Transportation Products segment recognized revenue from Autoliv and Boeing Aircraft that accounted for approximately 23% and 9%, respectively, of total revenue. The Government and Defense segment recognized revenue from all branches of the United States armed forces that accounted for approximately 10% of total revenue for the year ended December 31, 1999.
The Company anticipates that total sales to Autoliv may increase in the future, however, as a percentage of revenue may decrease as shipments to additional first-tier suppliers begin as new vehicle platforms begin in production. The Company does not expect to have significant sales to Boeing in the future because of the sale of its new airline seat manufacturing operation in January 2000 (Note 15). The Company has performed work for the United States armed forces since 1975 and has no reason to believe that there will be any change in these customer relationships.
The Company's external sales based upon the customers country of origin and investment in long-lived assets by geographic area is as follows:
Revenue from three major customers accounted for approximately 27% of total revenue for the year ended December 31, 1998. Contract and trade receivables from these customers accounted for approximately 44% of the total contract and trade receivables at December 31, 1998. The Government and Defense segment recognized revenue from all branches of the United States armed forces which accounted for approximately 12% of total revenue for the year ended December 31, 1998.
The Company's external sales based upon the customers country of origin and investment in long-lived assets by geographic area is as follows:
Revenue from three major customers accounted for approximately 55% of total revenue for the year ended December 31, 1997. Contract and trade receivables from these customers accounted for approximately 33% of the total contract and trade receivables at December 31, 1997. The Government and Defense segment recognized revenue from all branches of the United States armed forces which accounted for approximately 13% of total revenue for the year ended December 31, 1997. The Commercial Transportation Products segment recognized revenue from Continental Airlines that accounted for approximately 12% of total revenue for the year ended December 31, 1997.
The Company anticipates that it will fulfill current delivery requirements to Continental Airlines in early 1999 and it will not represent as significant of a customer in 1998 and following years. The Company believes that in the ordinary course of its airline seating business, the programs with Continental Airlines will be replaced by programs with other customers.
The Company's external sales based upon the customers country of origin and investment in long-lived assets by geographic area is as follows:
19. UNAUDITED QUARTERLY FINANCIAL INFORMATION
EXHIBIT INDEX
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* Filed herewith.
+ Power of Attorney of S. Thomas Emerson filed herewith. All other Powers of Attorney filed as noted. (1) Filed with Registration Statement on Form S-18, No. 33-46152-LA, under the Securities Act of 1933, effective April 13, 1992.
(2) Filed with Definitive Proxy on May 15, 1996, for the Company's Annual Meeting of Shareholders held on June 20, 1996.
(3) Filed with report on Form 10-Q/A for the quarter ended June 30, 1996.
(4) Filed with Registration Statement on Form S-3/A, No. 333-13499, under the Securities Act of 1933, effective April 21, 1997.
(5) Filed with report on Form 10-K for the year ended December 31, 1997.
(6) Filed with report on Form 10-Q for the quarter ended March 31, 1998. The Change of Control Agreements for Messrs. Townsend, Forst and Saunders are substantially identical and differ materially only in that Mr. Townsend is entitled to an amount equal to five (5) years base salary and benefits upon a change of control while Messrs. Forst and Saunders are entitled to an amount equal to four (4) years base salary and benefits upon a change of control.
(7) Filed with report on Form 10-Q for the quarter ended March 31, 1998. The Employment Agreements for Messrs. Townsend, Forst and Saunders are substantially identical and differ materially only in the following two respects: (i) the initial term of the agreement with Mr. Townsend is five (5) years while the initial term of the agreement with Messrs. Forst and Saunders is three (3) years; and (ii) the post-termination non-compete period with Mr. Townsend is thirty (30) months while it is eighteen (18) months with Messrs. Forst and Saunders.
(8) Filed with report on Form 10-Q for the quarter ended September 30, 1998.
(9) Filed with report on Form 10-K for the year ended December 31, 1998.
(10) Filed with report on Form 10-Q for the quarter ended March 31, 1999.
(11) Filed as Appendix A with Definitive Proxy on May 14, 1999, for the Company's Annual Meeting of Shareholders held on June 17, 1999.
(12) Filed with report on Form 8-K, under the Securities Act of 1933, effective October 25, 1999.
(13) Filed with report on Form 10-Q for the quarter ended September 30, 1999.
(14) Filed with Schedule 13D, under the Securities Exchange Act of 1934, on January 10, 2000 effective December 31, 1999 by Levine Leichtman Capital Partners II, L.P.