AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 6, 2003
REGISTRATION NO. 333-109032
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------
ARMOR HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 7381 59-3392443
(State or other jurisdiction (Primary Standard (I.R.S.Employer
of incorporation or Industrial Classification Identification
organization) Code Number) Number)
1400 MARSH LANDING PARKWAY
SUITE 112
JACKSONVILLE, FLORIDA 32250
(904) 741-5400
(Address, including zip code, and telephone number, including
area code, of
registrant's principal executive offices)
WARREN B. KANDERS
CHAIRMAN OF THE BOARD
AND CHIEF EXECUTIVE OFFICER
1400 MARSH LANDING PARKWAY
SUITE 112
JACKSONVILLE, FLORIDA 32250
(904) 741-5400
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
-------------------
COPIES TO:
ROBERT L. LAWRENCE, ESQ. BRADLEY P. FORST JOSEPH P. RICHARDSON, ESQ.
KANE KESSLER, P.C. PRESIDENT AND BRYAN CAVE LLP
1350 AVENUE OF THE AMERICAS CHIEF EXECUTIVE OFFICER TWO NORTH CENTRAL AVENUE,
NEW YORK, NEW YORK 10019 SIMULA, INC. SUITE 2200
(212) 541-6222 7822 SOUTH 46TH STREET PHOENIX, ARIZONA 85004
PHOENIX, ARIZONA 85044 (602) 364-7000
(602) 631-4005
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: as soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
AMOUNT TO BE MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES REGISTERED (1) OFFERING PRICE AGGREGATE REGISTRATION FEE (3)
TO BE REGISTERED PER UNIT OFFERING
PRICE(2)
common stock, par value
$.01 per share 2,229,754 shares N/A $38,526,150.64 $3,150.10
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(1) This Registration Statement relates to common stock, par value $0.01
per share, of Armor Holdings, Inc. issuable to holders of common stock,
par value $0.01 per share, of Simula, Inc. in the proposed merger of
AHI Bulletproof Acquisition Corp., a wholly-owned subsidiary of Armor
Holdings, Inc., with and into Simula, Inc. The amount of Armor
Holdings, Inc. common stock to be registered has been determined by
dividing $35.2 million (the estimated maximum merger consideration
payable in common stock of Armor Holdings, Inc., calculated in
accordance with the terms of the merger agreement assuming the merger
had been consummated on September 17, 2003) by $15.80 (the per share
value which would have been attributable to each share of common stock
of Armor Holdings, Inc. pursuant to the merger agreement had the merger
been consummated on September 17, 2003).
(2) Estimated solely for the purposes of calculating the registration fee
pursuant to Section 6(b) of the Securities Act of 1933, as amended, and
computed pursuant to Rules 457(c) and 457(f)(1) promulgated under the
Securities Act of 1933, as amended, by multiplying (i) $2.84, the
average of the high and low sales prices of a share of Simula, Inc.
common stock quoted on the American Stock Exchange on September 17,
2003, by (ii) the estimated maximum number of outstanding shares of
Simula, Inc. common stock, assuming the exercise of all options to
acquire Simula, Inc. common stock and other rights to purchase common
stock of Simula, Inc. which would have been deemed to be automatically
exercised pursuant to the merger agreement had the merger been
consummated on September 17, 2003.
(3) Paid with the initial filing of this registration statement.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(A), MAY DETERMINE.
PROXY STATEMENT OF SIMULA, INC./PROSPECTUS OF ARMOR HOLDINGS, INC.
SIMULA, INC.
7822 SOUTH 46TH STREET
PHOENIX, ARIZONA 85044-5354
______________, 2003
Dear Shareholder of Simula, Inc.:
I am pleased to deliver the proxy statement/prospectus relating to the
proposed acquisition of Simula, Inc. ("Simula") by Armor Holdings, Inc.
("Armor"). The merger will create a combined company that will offer a diverse
range of specialized products for the security and defense industries.
You are cordially invited to attend a special meeting of the shareholders
of Simula to be held on ___________, 2003, at 9:00 a.m., local time, at Simula's
corporate offices, 7822 South 46th Street, Phoenix, Arizona 85044. At the
special meeting, holders of Simula common stock will be asked to consider and
vote to adopt a merger agreement that Simula has entered into with Armor and AHI
Bulletproof Acquisition Corp., a wholly-owned subsidiary of Armor ("AHI
Bulletproof"), and approve a merger of AHI Bulletproof with and into Simula. In
the merger, Armor will acquire Simula for $110.5 million, subject to adjustment
pursuant to the terms of the merger agreement. The portion of the merger
consideration to be received by Simula's shareholders is payable in cash or, at
the option of Armor, in a combination of cash and shares of Armor common stock.
The combination will be determined at least one business day prior to the
special meeting.
The actual amount of the merger consideration that will be paid by Armor to
Simula's shareholders in connection with the merger will be determined five
business days prior to the closing of the merger, which is anticipated to be no
later than two business days after the date of the special meeting of Simula's
shareholders, and is subject to numerous variables that affect the final
calculation of the total merger consideration. Accordingly, the per share amount
of merger consideration will be determined prior to the special meeting of
Simula's shareholders. Provided that the closing of the merger occurs prior to
December 31, 2003, Simula's management currently estimates that a reasonable
projection of the total merger consideration payable by Armor to Simula's
shareholders will range from approximately $39 million to $44 million, or from
approximately $2.90 per share to $3.25 per share. This projected range is based
on Simula's calculation that as of September 30, 2003 the total merger
consideration would have been $3.27 per share and Simula's estimate that as of
December 1, 2003 the total merger consideration will be $3.13 per share. Please
note, however, that these estimated projections are subject to adjustment and
there is no floor, or minimum, on the merger consideration to be paid by Armor
for each share of Simula common stock under the merger agreement. FOR A
DISCUSSION OF THE NOTIFICATION TO SIMULA SHAREHOLDERS OF THE ESTIMATED AND FINAL
PER SHARE MERGER CONSIDERATION AND THE ABILITY OF SIMULA SHAREHOLDERS TO CHANGE
THEIR VOTES, PLEASE PAY PARTICULAR ATTENTION TO THE SECTIONS ENTITLED "QUESTIONS
AND ANSWERS ABOUT THE MERGER -- HOW MUCH WILL ARMOR PAY SIMULA'S SHAREHOLDERS
FOR EACH SHARE OF COMMON STOCK OF SIMULA?" AND "--WHAT WILL I RECEIVE IN THE
MERGER" AND "--MAY I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY OR
VOTING INSTRUCTION CARD OR VOTED USING THE INTERNET?" BEGINNING ON PAGES iv and
v RESPECTIVELY OF THIS PROXY STATEMENT/PROSPECTUS.
The shares of Armor common stock that may be issued in the merger are
expected to be listed on the New York Stock Exchange upon official notice of
issuance under the trading symbol "AH". On ______________, 2003, the closing
sale price of Armor common stock was $___ per share.
WE ARE EXCITED ABOUT THE OPPORTUNITIES FOR THE COMBINED COMPANY. AFTER
CAREFUL CONSIDERATION, SIMULA'S BOARD OF DIRECTORS HAS UNANIMOUSLY DETERMINED
THAT THE MERGER IS ADVISABLE AND FAIR TO, AND IN THE BEST INTERESTS OF, SIMULA
AND ITS SHAREHOLDERS AND RECOMMENDS THAT YOU VOTE "FOR" APPROVAL AND ADOPTION OF
THE MERGER AGREEMENT AND APPROVAL OF THE MERGER.
The accompanying proxy statement/prospectus provides a detailed description
of the proposed merger and the two companies, Simula and Armor. You are urged to
read the accompanying materials carefully. PLEASE PAY PARTICULAR ATTENTION TO
THE SECTION ENTITLED "RISK FACTORS" BEGINNING ON PAGE 22 FOR A DISCUSSION OF
RISKS RELATED TO ARMOR, SIMULA AND THE MERGER.
Your vote is very important. BECAUSE APPROVAL AND ADOPTION OF THE MERGER
AGREEMENT AND APPROVAL OF THE MERGER REQUIRE THE AFFIRMATIVE VOTE OF HOLDERS OF
AT LEAST A MAJORITY OF THE OUTSTANDING SHARES OF SIMULA COMMON STOCK, A FAILURE
TO VOTE WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE MERGER. WHETHER OR NOT
YOU INTEND TO VOTE IN PERSON AT THE SPECIAL MEETING, PLEASE COMPLETE, SIGN AND
DATE THE ENCLOSED PROXY CARD OR VOTING INSTRUCTION CARD AND RETURN IT IN THE
ENCLOSED ENVELOPE AS SOON AS POSSIBLE. You also may be able to grant your proxy
by the Internet as described on the enclosed proxy card or voting instruction
card. Giving your proxy now will not affect your right to vote in person if you
wish to attend the special meeting and vote at that time.
Very truly yours,
Bradley P. Forst
President and Chief Executive Officer
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THE MERGER DESCRIBED IN THIS PROXY
STATEMENT/PROSPECTUS OR THE SHARES OF ARMOR COMMON STOCK TO BE ISSUED IN
CONNECTION WITH THE MERGER, OR DETERMINED WHETHER THIS PROXY
STATEMENT/PROSPECTUS IS ACCURATE OR ADEQUATE. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
This proxy statement/prospectus is dated ______________, 2003 and, is
expected to first be mailed together with the form of proxy enclosed herewith,
to Simula shareholders on or about ______________, 2003.
SIMULA, INC.
7822 SOUTH 46TH STREET
PHOENIX, ARIZONA 85044-5354
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To the Shareholders of Simula, Inc.:
Notice is hereby given that on _________________, 2003, at 9:00 a.m., local
time, Simula, Inc. ("Simula") will hold a special meeting of its shareholders at
Simula's corporate offices, 7822 South 46th Street, Phoenix, Arizona 85044, for
the following purposes:
1. To consider and vote upon a proposal to approve and adopt the Agreement
and Plan of Merger, dated as of August 29, 2003, among Armor Holdings,
Inc. ("Armor"), AHI Bulletproof Acquisition Corp. ("AHI Bulletproof")
and Simula, and approve Armor's acquisition of Simula through a merger
of AHI Bulletproof, a wholly-owned subsidiary of Armor, with and into
Simula, as contemplated by the Agreement and Plan of Merger.
2. To transact such other business as may properly come before the meeting
or any adjournment or postponement of the meeting.
This proposal is described more fully in the proxy statement/prospectus
attached to this notice. Please give your careful attention to all of the
information in the proxy statement/prospectus.
Only holders of record of Simula common stock at the close of business on
October 17, 2003, the record date, or their proxies can vote at the meeting or
any adjournment or postponement of the meeting. Approval and adoption of the
merger agreement and approval of the merger require the affirmative vote of the
holders of a majority of the shares of Simula's common stock outstanding on the
record date. The list of shareholders entitled to vote at the meeting is
available, upon request, at the principal executive offices of Simula, 7822
South 46th Street, Phoenix, Arizona 85044, for examination by any shareholder.
Please note that under Arizona law, holders of Simula common stock will not
have dissenters' rights in connection with the merger.
YOUR VOTE IS IMPORTANT. WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING IN
PERSON, YOU ARE URGED TO COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD
OR VOTING INSTRUCTION CARD OR VOTE ELECTRONICALLY VIA THE INTERNET AT YOUR
EARLIEST CONVENIENCE. INSTRUCTIONS FOR VOTING YOUR SHARES ARE INCLUDED ON THE
ENCLOSED PROXY CARD OR VOTING INSTRUCTION CARD. IF YOU ARE A RECORD HOLDER AND
YOU SEND IN YOUR PROXY AND THEN DECIDE TO ATTEND THE SPECIAL MEETING TO VOTE
YOUR SHARES, YOU MAY STILL DO SO. YOU MAY REVOKE YOUR PROXY IN THE MANNER
DESCRIBED IN THE PROXY STATEMENT/PROSPECTUS AT ANY TIME BEFORE IT HAS BEEN VOTED
AT THE SPECIAL MEETING.
By Order of the Board of Directors
Very truly yours,
Mari I. Valenzuela
Corporate Secretary
Phoenix, Arizona
___________, 2003
THE INFORMATION IN THIS PROXY STATEMENT/PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. THE SECURITIES OFFERED HEREBY MAY NOT BE SOLD UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROXY STATEMENT/PROSPECTUS IS NOT AN OFFER TO SELL AND IT IS NOT A SOLICITATION
OF AN OFFER TO BUY THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION WHERE
THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED _______, 2003
TABLE OF CONTENTS
QUESTIONS AND ANSWERS ABOUT THE MERGER.......................................iv
SUMMARY.......................................................................1
Comparative Market Prices And Dividends....................................7
Comparative Market Price Data..............................................7
Selected Historical Consolidated Financial Data Of Armor...................9
Selected Historical Consolidated Financial Data Of Simula.................11
Unaudited Pro Forma Consolidated Financial Information....................12
Unaudited Pro Forma Condensed Consolidated Statements of
Continuing Operations (Year Ended December 31, 2002)......................14
Unaudited Pro Forma Condensed Consolidated Statements of
Continuing Operations (Six Months Ended June 30, 2003)....................16
Unaudited Pro Forma Condensed Consolidated Balance Sheets.................18
Cautionary Note Regarding Forward-Looking Statements.........................22
RISK FACTORS.................................................................22
Risks Related To The Merger...............................................22
Risks Related To Armor....................................................25
Risks Related To Simula...................................................32
THE SPECIAL MEETING OF SIMULA SHAREHOLDERS...................................38
THE MERGER...................................................................41
Overview..................................................................41
Background of the Merger..................................................41
Reasons for the Merger....................................................49
Recommendation of Simula's Board of Directors.............................52
Opinion of Simula's Financial Advisor.....................................52
Interests of Simula Directors and Officers in the Merger..................58
Material United States Federal Income Tax Consequences....................59
The Accounting Treatment of the Merger....................................62
Dissenters' Rights........................................................62
Regulatory Approvals......................................................62
Resale of Armor Common Stock by Affiliates of Simula......................63
Listing of Shares of Armor Common Stock Issued In the Merger on the
New York Stock Exchange..................................................63
Delisting and Deregistration of Simula Common Stock After the Merger......64
THE MERGER AGREEMENT.........................................................65
The Merger................................................................65
Effective Time............................................................65
Merger Consideration......................................................65
Conversion of Simula Common Stock in the Merger...........................68
Treatment of Simula Stock Options and Simula Stock Option
Plans.....................................................................70
Fractional Shares.........................................................71
Exchange of Certificates..................................................71
Management and Boards of Directors after the Merger.......................72
Representations and Warranties............................................73
Simula's Conduct of Business Before Completion of the Merger..............75
Simula Is Prohibited from Soliciting Other Offers.........................76
Obligation of Simula's Board of Directors with Respect to
Its Recommendation and Holding a Meeting of Its Shareholders..............77
Director and Officer Indemnification and Insurance........................78
i
Regulatory Filings; Antitrust Matters; Commercially
Reasonable Efforts to Obtain Regulatory Approvals.........................78
Definition of Material Adverse Change and Material Adverse
Effect....................................................................79
Conditions to the Merger..................................................80
Termination of the Merger Agreement.......................................82
Termination Fees and Expenses.............................................83
Waiver and Amendment......................................................84
Covenants Pending Closing.................................................84
Additional Agreements.....................................................84
Expenses..................................................................84
STOCKHOLDER AGREEMENTS RELATING TO THE MERGER................................85
INFORMATION ABOUT ARMOR......................................................86
INFORMATION ABOUT SIMULA.....................................................87
DESCRIPTION OF ARMOR CAPITAL STOCK...........................................91
COMPARISON OF THE RIGHTS OF SIMULA SHAREHOLDERS AND ARMOR
STOCKHOLDERS.................................................................92
FUTURE SIMULA SHAREHOLDER PROPOSALS..........................................99
LEGAL MATTERS................................................................99
EXPERTS......................................................................99
WHERE YOU CAN FIND MORE INFORMATION..........................................99
INDEX TO ANNEXES
Annex A Agreement and Plan of Merger dated as of August 29, 2003 by and
among Armor Holdings, Inc., AHI Bulletproof Acquisition, Corp.,
and Simula, Inc.
Annex B Form of Stockholder Agreement
Annex C Opinion of Relational Advisors LLC dated August 29, 2003
Annex D Annual Report on Form 10-K of Simula, Inc. for the year ended
December 31, 2002
Annex E Quarterly Report on Form 10-Q/A of Simula, Inc. for the quarter
ended March 31, 2003, filed with the Securities and Exchange
Commission on November 6, 2003
Annex F Quarterly Report on Form 10-Q/A of Simula, Inc. for the quarter
ended June 30, 2003, filed with the Securities and Exchange
Commission on November 6, 2003
ii
REFERENCES TO ADDITIONAL INFORMATION
Armor has supplied all information contained in or incorporated by
reference into this proxy statement/prospectus relating to Armor or AHI
Bulletproof, and Simula has supplied all information contained in or
incorporated by reference into this proxy statement/prospectus relating to
Simula. This proxy statement/prospectus incorporates important business and
financial information about Armor and Simula that is included in, or
delivered with, this proxy statement/prospectus. The documents incorporated by
reference into this proxy statement/prospectus by Simula are attached hereto as
Annexes D to F or, with respect to the current reports on Form 8-K filed on
February 18, 2003, March 31, 2003, May 15, 2003, June 17, 2003, July 28, 2003
(as amended on September 26, 2003), August 13, 2003, September 11, 2003 and
November 6, 2003, will be delivered to Simula shareholders with this proxy
statement/prospectus. The documents incorporated by reference into this proxy
statement/prospectus by Armor will be delivered to Simula shareholders with this
proxy statement/prospectus.
You also may obtain documents that Armor and Simula have filed with the
Securities and Exchange Commission and incorporated into this proxy statement/
prospectus, without charge, by making an oral or written request to the
appropriate company as follows:
Phil Baratelli Mari I. Valenzuela
Armor Holdings, Inc. Simula, Inc.
1400 Marsh Landing Parkway 7822 South 46th Street
Suite 112 Phoenix, Arizona 85044
Jacksonville, Florida 32250 Phone: (602) 643-7233
Phone: (904) 741-5400 Fax: (602) 631-9005
Fax: (904) 741-5403
IN ORDER TO RECEIVE TIMELY DELIVERY BEFORE THE SPECIAL MEETING OF ANY
DOCUMENTS YOU MAY REQUEST, PLEASE MAKE YOUR REQUEST BY ______________, 2003,
WHICH IS FIVE BUSINESS DAYS BEFORE THE DATE OF THE SIMULA SPECIAL MEETING.
For a more detailed discussion of the information Armor and Simula have
incorporated by reference into this proxy statement/prospectus, see the section
of this proxy statement/prospectus entitled "Where You Can Find More
Information" beginning on page 98.
NOTE ON TRADEMARKS
Each of Armor and Simula owns or has rights to trademarks that are used in
conjunction with the sale of their respective products. ARMOR HOLDINGS, among
others, is a registered trademark of Armor Holdings, Inc. SIMULA, among others,
is a copyright and trademark of Simula, Inc. All other trade names and
trademarks used in this proxy statement/prospectus are the property of their
respective owners.
iii
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: WHAT AM I BEING ASKED TO VOTE ON?
A: As a Simula shareholder, you are being asked to approve and adopt the
merger agreement among Armor, AHI Bulletproof, a wholly-owned subsidiary
of Armor, and Simula and to approve the transactions it contemplates,
including the merger of AHI Bulletproof with and into Simula.
Q: WHY ARE THE COMPANIES PROPOSING THE MERGER?
A: Armor and Simula believe the businesses will complement each other and
the merger will increase the scale and scope of the combined company's
business in the specialized security products, mobile security, and
defense industries, diversify the combined company's product offerings,
provide cross-selling opportunities, and create opportunities for cost
reductions through integration savings and rationalization of operations.
Q: HOW MUCH WILL ARMOR PAY SIMULA'S SHAREHOLDERS FOR EACH SHARE OF COMMON
STOCK OF SIMULA?
A: The merger agreement provides that Armor will acquire Simula for $110.5
million, subject to adjustment, including adjustments for certain
transaction fees and costs. After repayment of Simula's outstanding
indebtedness, the remainder of the merger consideration will be paid to
Simula's shareholders as follows. For the purposes of illustration only,
Simula's management estimates that if the merger consideration was
calculated as of September 30, 2003, the total merger consideration
payable to Simula's shareholders would have been approximately
$44,060,736.00 or approximately $3.27 per share. In addition, based on
Simula's internal projections, which are subject to numerous variables,
Simula's management currently estimates that if the merger consideration
is calculated as of December 1, 2003, the total merger consideration
payable to Simula's shareholders will be approximately $42,169,575.00 or
approximately $3.13 per share.
Simula's management currently estimates that a reasonable projection of
the total merger consideration payable by Armor to Simula's shareholders
will range from approximately $39 million to $44 million, or from
approximately $2.90 per share to $3.25 per share. Please note, however,
that there is no floor, or minimum, on the merger consideration to be
paid by Armor for each share of Simula common stock under the merger
agreement. This is only an estimate for the purposes of illustration and
the actual final per share merger consideration payable to Simula's
shareholders is subject to numerous factors and variables, including
Simula's financial performance and cash flow through the date of the
calculation of the per share merger consideration, and many of such
factors and variables are outside of the control of Simula.
IN THE EVENT THAT THE ACTUAL PER SHARE MERGER CONSIDERATION IS LESS THAN
THE LOW END OF THIS ESTIMATED RANGE, AND A MAJORITY OF SIMULA'S
SHAREHOLDERS HAVE VOTED IN FAVOR OF THE MERGER WITH ARMOR IN PERSON OR BY
PROXY AT THE SHAREHOLDERS' MEETING, THERE WILL BE NO RESOLICITATION OF
THE SHAREHOLDERS' VOTE AND THE MERGER MAY BE CONSUMMATED AS CONTEMPLATED
BY THE MERGER AGREEMENT.
In order to provide Simula's shareholders with updated information
regarding the calculation of the per share merger consideration, the
following information will be provided to Simula's shareholders:
o Notification of an updated estimate by Simula management of the per
share merger consideration by 5:00 pm Mountain Standard Time on the
tenth business day prior to the shareholders' meeting;
o Notification of an updated estimate by Simula management of the per
share merger consideration by 5:00 pm Mountain Standard Time on the
fifth business day prior to the shareholders' meeting; and
o Notification of the final calculation of the per share merger
consideration as soon as practicable following its calculation
pursuant to the merger agreement, which Simula and Armor anticipate
will occur not later than 5:00 pm Mountain Standard Time on the
date that is one business day prior to the shareholders' meeting.
The provision of such information described above to Simula's
shareholders will be made by the issuance of press releases, the
filing of Forms 8-K under Section 13 or 15(d) of the Securities
Exchange Act of 1934 with the Securities and Exchange Commission, and
the posting of the press releases and Forms 8-K on Simula's website
at: www.simula.com.
Finally, you should be aware that following the date of Simula's
notification to its shareholders of the final calculation of the per
share merger consideration described above, Simula's shareholders will
continue to have the right to revoke their proxies as described in the
section entitled "Questions And Answers About The Merger -- May I Change
My Vote After I Have Mailed My Signed Proxy Or Voting Instruction Card Or
Voted Using The Internet?" beginning on page v of this proxy
statement/prospectus.
Q: WHAT WILL I RECEIVE IN THE MERGER?
A: Armor will pay the merger consideration in cash or in a combination of
cash and shares of Armor common stock. Each shareholder will receive the
same ratio of cash and stock. Armor will elect the amount of the merger
consideration to pay in cash and the amount to pay in stock after
considering the following factors: (i) the relationship between the
closing price of Armor's common stock on the date Armor makes its
decision and the mean of the average of the bid and ask prices of Armor
common stock as reported at the close of the market for the 20
consecutive trading days ending 10 trading days prior to the anticipated
closing date and (ii) alternative uses for Armor's available cash at the
time the election is made. Armor has not yet elected the ratio of cash
and stock to be paid; however, pursuant to the terms of the merger
agreement, Armor is required to elect the ratio of cash and stock at
least five business days prior to the closing of the merger. However,
Armor has agreed to make and inform Simula of this determination at least
one business day prior to the date of the Simula shareholders' meeting.
In order to provide Simula's shareholders with updated information,
Simula will provide its shareholders with Armor's determination of the
ratio of cash and stock to be paid in the merger not later than 5:00 pm
Mountain Standard Time on the day that is one business day prior to the
shareholders' meeting.
The number of shares of Armor common stock Simula's shareholders will
receive is primarily dependent upon the total amount of merger
consideration to be paid to Simula's shareholders, the percentage of the
merger consideration to be paid in shares of Armor common stock, and the
mean of the average between the bid and ask price of Armor common stock
on the New York Stock Exchange, as reported on the composite tape at the
close of the market for the 20 consecutive trading days ending 10 trading
days prior to the date the merger is completed. Consequently,
fluctuations in the price of Armor's common stock both during the period
in which the price of Armor's common stock is calculated and during the
period between the price of Armor's common stock is calculated and the
closing date will have an effect on the value of the merger consideration
received by each Simula shareholder.
Assuming the merger consideration payable on each share of outstanding
Simula common stock will range from approximately $2.90 to $3.25, and
assuming Armor elects to pay 20% of the merger consideration in cash and
80% of the merger consideration in Armor's common stock, if the price of
Armor's common stock is $15.00, then each share of common stock of Simula
would be exchanged for $0.58-$0.65 in cash and .155-.173 shares of
Armor's common stock. If the price of Armor's common stock is $20.00,
then each share of common stock of Simula would be exchanged for
$0.58-$0.65 in cash and .116-.130 shares of Armor's common stock.
Based on the assumptions set forth above, a Simula shareholder who
holds 100 shares of Simula common stock would receive between
$58.00-$65.00 in cash and between 15.50 and 17.30 shares of Armor
common stock if the price of Armor common stock is $15.00 and would
receive between $58.00-$65.00 in cash and between 11.60 and 13.00
shares of Armor common stock if the price of Armor common stock is
$20.00.
See also the section entitled "The Merger Agreement -- Merger
Consideration" beginning on page 65 of this proxy statement/prospectus.
For a discussion of the treatment of fractional shares, see
the section entitled "The Merger Agreement -- Fractional Shares"
beginning on page 71 of this proxy statement/prospectus.
Q: WHAT RISKS SHOULD I CONSIDER IN DECIDING WHETHER TO APPROVE AND ADOPT THE
MERGER AGREEMENT?
A: In evaluating the merger, you should carefully read this proxy statement/
prospectus and carefully consider the factors discussed in the section
entitled "Risk Factors" beginning on page 22.
Q: WHEN WILL THE MERGER BE COMPLETED?
A: Simula and Armor are working to complete the merger during the fourth
calendar quarter of this year. Because completion is subject to
shareholder approval and the other conditions to the merger, exact timing
is difficult to predict.
Q: WHAT ARE THE MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER TO
ME?
A: Unless the fair market value of the Armor common stock given as
consideration in the merger is equal to or greater than 80% of the total
consideration given in the merger, the exchange of Simula common stock
for Armor common stock and cash pursuant to the merger will be fully
taxable to you for United States federal income tax purposes. In general,
you will recognize capital gain or loss equal to the difference between
(a) the sum of the amount of cash and the fair market value of the Armor
common stock you receive, and (b) your adjusted tax basis in the Simula
common stock surrendered in exchange therefor. Such gain or loss will be
long-term gain or loss if you have held the Simula common stock for more
than one year.
If the fair market value of the Armor common stock given as consideration
in the merger is equal to or greater than 80% of the total consideration
given in the merger, there is a possibility (but not a certainty) that
the merger would constitute a tax-free reorganization within the meaning
of section 368(a) of the Code. If the merger does constitute a tax-free
reorganization, you will recognize capital gain (but not capital loss)
equal to the lesser of (a) the amount of cash you receive, or (b) the
difference between (i) the sum of the amount of cash and the fair market
value (as of the effective date of the merger) of the Armor common stock
you receive (including any fractional shares of Armor common stock deemed
received and exchanged for cash), and (ii) your adjusted tax basis in the
Simula common stock surrendered in exchange therefor.
Q: ARE THERE ANY ADVERSE TAX CONSEQUENCES OF THE MERGER TO SIMULA OR THE
COMBINED COMPANY?
A: As of December 31, 2002, Simula and its subsidiaries had consolidated net
operating loss carryovers of approximately $99,584,927 for federal income
tax purposes. In general, net operating loss carryovers can be used to
reduce or eliminate federal income tax payable in future years. If the
merger is consummated, Simula's net operating loss carryovers will be
either extinguished or limited (for a discussion of federal tax
consequences, see the section entitled "The Merger -- Material United
States Federal Income Tax Consequences" beginning on page 59 of this
proxy statement/prospectus).
Q: WHEN AND WHERE IS THE SHAREHOLDER MEETING?
A: The special meeting will be held on __________, 2003, at 9:00 a.m., local
time, at Simula's corporate offices, 7822 South 46th Street, Phoenix,
Arizona 85044.
Q: WHO CAN VOTE?
A: All record holders of Simula common stock at the close of business on
October 17, 2003 can vote at the special meeting.
Q: WHAT DO I DO TO VOTE?
A: After carefully reading this proxy statement/prospectus, you should cast
your vote by mail, the Internet or in person at the special meeting. To
cast your vote by mail, complete, date, sign and mail the enclosed proxy
card in the enclosed, postage prepaid envelope. Votes cast by mail must
be received prior to the vote at the meeting in order to be counted. When
you cast your vote using the proxy card, you also appoint certain members
of Simula's management as your representatives, or proxies, at the
meeting. They will vote your shares at the meeting in accordance with
your instructions on the proxy card. Specific instructions on how to vote
by the Internet are included on the proxy card. You also may vote in
person at the meeting. If you hold your shares in street name, then you
must contact your broker or other nominee and request a legal proxy to
vote in person at the meeting. Street name holders may be able to vote by
telephone or the Internet if their broker or other nominee makes such
methods available, in which case the broker or other nominee will enclose
the instructions with the proxy materials.
Q: WHAT HAPPENS IF I DO NOT INDICATE MY PREFERENCE FOR OR AGAINST THE MERGER
PROPOSAL ON MY PROXY CARD?
A: If you submit a proxy without specifying the manner in which you would
like your shares to be voted, your proxy will be counted as a vote "FOR"
the approval and adoption of the merger agreement and approval of the
merger.
Q: WHAT HAPPENS IF I DO NOT SUBMIT A PROXY CARD OR VOTE?
A: If you do not submit your proxy card, vote using the telephone or the
Internet, if available, or vote at the special meeting or if you mark the
"abstain" box on the proxy card, it will have the effect of a vote
"AGAINST" the approval and adoption of the merger agreement and approval
of the merger.
iv
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER OR OTHER NOMINEE,
WILL MY BROKER OR OTHER NOMINEE VOTE MY SHARES FOR ME?
A: No. If you do not provide your broker or other nominee with instructions
on how to vote your "street name" shares on the merger proposal, your
broker or other nominee will not be permitted to vote those shares on
that proposal. Therefore, you should be sure to provide your broker or
other nominee with specific instructions as to how to vote your shares on
the merger proposal. Please check the voting form used by your broker or
other nominee to see if it offers telephone or Internet submission of
proxies.
Q: MAY I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY OR VOTING
INSTRUCTION CARD OR VOTED USING THE INTERNET?
A: Yes. If you have completed a proxy, you may change your vote at any time
before your proxy is voted at the special meeting by:
o delivering to the Corporate Secretary of Simula a written notice,
dated later than the proxy that you wish to revoke, stating that the
proxy is revoked;
o submitting to the Corporate Secretary of Simula a new, signed proxy
with a date later than the proxy you wish to revoke;
o re-voting via the Internet; or
o attending the special meeting and voting in person.
However, if your shares are held in the name of your broker or other
nominee, you must check with your broker or other nominee to determine
how to revoke your proxy.
Q: WHAT DOES IT MEAN IF I RECEIVE MORE THAN ONE PROXY CARD?
A: This means you own shares of Simula common stock that are registered
under different names. For example, you may own some shares directly as a
shareholder of record and other shares through a broker or you may own
shares through more than one broker. In these situations you will receive
multiple proxy cards. In order to vote all of the shares you own, it is
necessary for you to vote, sign and return all of the proxy cards or
follow the instructions for any alternative voting procedure on each of
the proxy cards you receive. Each proxy card you received came with its
own prepaid return envelope; if you vote by mail, make sure you return
each proxy card in the return envelope which accompanied that proxy card.
Q: SHOULD STOCK CERTIFICATES BE SENT IN WITH THE ENCLOSED PROXY CARD?
A: No. If the merger is completed, Simula shareholders will be sent
instructions for exchanging their Simula stock certificates for a portion
of the merger consideration. Do not send in your certificates until you
receive these instructions.
Q: WILL I HAVE DISSENTERS' RIGHTS IN THIS TRANSACTION?
A: No. Under Arizona law, holders of Simula common stock will not have
dissenters' rights in connection with this merger.
Q: WHO CAN HELP ANSWER QUESTIONS?
A: If you would like additional copies of this proxy statement/prospectus
without charge or if you have questions about the merger or Simula's
special meeting of shareholders, including the procedures for voting your
shares, you should contact:
Simula, Inc.
7822 South 46th Street
Phoenix, Arizona 85044
Attention: Mari I. Valenzuela
Telephone: (602) 631-4005
v
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN OR INCORPORATED BY
REFERENCE INTO THIS PROXY STATEMENT/PROSPECTUS TO VOTE ON THE MERGER PROPOSAL.
WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT
FROM OR IN ADDITION TO THE INFORMATION CONTAINED IN OR INCORPORATED BY REFERENCE
INTO THIS PROXY STATEMENT/PROSPECTUS. THIS PROXY STATEMENT/PROSPECTUS IS DATED
_________, 2003. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN THIS
PROXY STATEMENT/PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN THAT DATE OR,
IN THE CASE OF DOCUMENTS INCORPORATED BY REFERENCE, THE DATE OF THE REFERENCED
DOCUMENT, OR SUCH OTHER DATE AS MAY BE SPECIFIED THEREIN, AND NEITHER THE
MAILING OF THIS PROXY STATEMENT/PROSPECTUS TO YOU NOR THE ISSUANCE OF ARMOR
COMMON STOCK IN CONNECTION WITH THE MERGER SHALL CREATE ANY IMPLICATION TO THE
CONTRARY.
vi
SUMMARY
This summary highlights selected information from this proxy
statement/prospectus and may not contain all the information that is important
to you. To understand the merger fully, and for more complete descriptions of
the legal terms of the merger, you should carefully read this entire proxy
statement/ prospectus and the documents to which we refer you. See also the
section of this proxy statement/prospectus entitled "Where You Can Find More
Information" beginning on page 99. Unless the context otherwise requires, the
terms "we," "our" and "us" refer to Armor and Simula. When we refer to the
"combined company," we mean Simula and Armor as combined after the merger. When
we refer to the "surviving corporation," we mean Simula and AHI Bulletproof as
combined after the merger.
THE MERGER TRANSACTION (SEE PAGE 65)
Upon the terms of the proposed merger, AHI Bulletproof, a wholly-owned
subsidiary of Armor formed for the purpose of the merger, will merge with and
into Simula. As a result, Simula will survive the merger and will become a
wholly-owned subsidiary of Armor upon completion of the merger.
In this proxy statement/prospectus, any reference to the merger agreement
includes the Agreement and Plan of Merger, dated as of August 29, 2003, by and
among Armor, AHI Bulletproof and Simula, a copy of which is attached to this
proxy statement/prospectus as Annex A. We encourage you to read the merger
agreement carefully and fully, as it is the legal document that governs the
merger.
MERGER CONSIDERATION (SEE PAGE 65)
The merger agreement provides that Armor will acquire Simula for $110.5
million, subject to adjustment, including adjustments for certain transaction
fees and costs. After repayment of Simula's outstanding indebtedness, the
remainder of the merger consideration will be paid to Simula's shareholders as
follows. For the purposes of illustration only, Simula's management estimates
that if the merger consideration was calculated as of September 30, 2003, the
total merger consideration payable to Simula's shareholders would have been
approximately $44,060,736.00 or approximately $3.27 per share. In addition,
based on Simula's internal projections, which are subject to numerous variables,
Simula's management currently estimates that if the merger consideration is
calculated as of December 1, 2003, the total merger consideration payable to
Simula's shareholders will be approximately $42,169,575.00 or approximately
$3.13 per share.
The per share amount of merger consideration to be received by Simula's
shareholders (a minimum of 20% of which must be paid in cash, with the balance
to be paid in shares of Armor's common stock, at Armor's discretion) in exchange
for outstanding shares of Simula common stock will be determined five business
days prior to the closing of the merger (which is anticipated to be no later
than two business days after the date of the special meeting of Simula's
shareholders), and the price of Armor's common stock to be used to calculate the
number of shares of Armor common stock to be received by Simula's shareholders
in exchange for Simula common stock will be determined ten business days prior
to the closing of the merger. Accordingly, fluctuations in the price of Armor's
common stock between the date the merger agreement was signed and the date of
this proxy statement/prospectus will not affect the value of the merger
consideration received by Simula's shareholders.
However, fluctuations in the price of Armor's common stock between the
date of this proxy statement/prospectus and the date of the closing of the
merger will have an effect on the merger consideration received by Simula's
shareholders, as described immediately below.
The number of shares of Armor common stock received by Simula's
shareholders will be based, in part, upon the mean of the average between the
bid and ask price of Armor common stock on the New York Stock Exchange, as
reported on the composite tape at the close of the market for the 20 consecutive
trading days ending 10 trading days prior to the date the merger is completed.
Fluctuations in the price of Armor's common stock during these 20 trading days
will have an impact on the value of the merger consideration received by
Simula's shareholders. The following chart sets forth two examples of the effect
that fluctuations in the price of Armor's common stock during such 20-trading-
day period would have on the value of the merger consideration received in
exchange for each share of Simula common stock:
CLOSING PRICE OF ASSUMED VALUE OF THE CASH AND SHARES OF ACTUAL MARKET VALUE OF
ARMOR COMMON STOCK ARMOR COMMON STOCK TO BE RECEIVED CASH AND SHARES OF ARMOR
ON LAST DAY OF 20 MEAN OF THE IN EXCHANGE FOR EACH SHARE OF COMMON STOCK RECEIVED IN
TRADING-DAY PERIOD AVERAGE OF THE BID SIMULA COMMON STOCK (CALCULATED EXCHANGE FOR EACH SHARE
CLOSING PRICE OF (I.E., 10 AND ASK PRICES OF USING THE MEAN OF THE AVERAGE OF OF SIMULA COMMON STOCK
ARMOR COMMON STOCK TRADING DAYS PRIOR ARMOR COMMON STOCK THE BID AND ASK PRICES OF ARMOR (AS OF THE LAST DAY OF
ON FIRST DAY OF 20- TO THE CLOSING OF DURING SUCH 20- COMMON STOCK DURING SUCH 20- THE 20-TRADING-DAY
TRADING-DAY PERIOD THE MERGER) TRADING-DAY PERIOD TRADING-DAY PERIOD)(1) PERIOD)(1)
------------------ ------------------ ------------------ -------------------------------- ------------------------
$15.00 $18.00 $16.00 $3.25 $3.58
$18.00 $15.00 $16.00 $3.25 $3.05
(1) Assumes Armor elects to pay 20% of the merger consideration in cash
and 80% of the merger consideration in shares of Armor's common stock.
In addition, fluctuations in the price of Armor's common stock between
the time the number of shares of Armor common stock to be received by Simula's
shareholders is determined (i.e., 10 trading days prior to the closing of the
merger) and the date of the closing of the merger will effect the value of the
merger consideration each Simula shareholder receives. The following chart sets
forth two examples of the effect such fluctuations would have on the value of
the merger consideration received in exchange for each share of Simula common
stock:
ACTUAL MARKET VALUE OF CASH AND SHARES
ASSUMED MARKET VALUE OF CASH AND SHARES OF ARMOR OF ARMOR COMMON STOCK RECEIVED IN
COMMON STOCK RECEIVED IN EXCHANGE FOR EXCHANGE FOR EACH SHARE OF SIMULA
EACH SHARE OF SIMULA COMMON STOCK (AS OF CLOSING PRICE OF ARMOR COMMON COMMON STOCK (BASED ON THE CLOSING
THE LAST DAY OF THE 20-TRADING-DAY STOCK ON THE DAY THE MERGER IS PRICE OF ARMOR COMMON STOCK ON THE DAY
PERIOD)(1) COMPLETED THE MERGER IS COMPLETED)(1)
----------------------------------------- ------------------------------ --------------------------------------
$3.58 $19.00 $3.74
$3.58 $17.00 $3.41
(1) Assumes Armor elects to pay 20% of the merger consideration in cash
and 80% of the merger consideration in shares of Armor's common stock.
The following table summarizes the estimates of the effect of a change in
the price of Armor common stock on the number of shares of Armor common stock
that will be received by Simula's shareholders in exchange for each outstanding
share of Simula common stock (assuming 20% of the merger consideration is paid
in cash and the balance is paid in shares of Armor common stock), based on
Simula management's current estimate that the per share merger consideration
payable to Simula's shareholders as a result of the merger will range from
approximately $2.90 per share to $3.25 per share. The following table does not
set forth the effect of such fluctuations on the market value of the merger
consideration after the date of determination of the price of Armor's common
stock for purposes of determining the exchange ratio.
ESTIMATED NUMBER OF SHARES OF
ESTIMATED CASH CONSIDERATION TO ARMOR COMMON STOCK TO BE PAID PER
ASSUMED MARKET PRICE PER BE PAID PER SHARE OF SIMULA SHARE OF
SHARE OF ARMOR COMMON STOCK COMMON STOCK (1) SIMULA COMMON STOCK (1)
--------------------------- ------------------------------- ---------------------------------
$15.00 $0.58-$0.65 .155-.173
$15.20 $0.58-$0.65 .152-.171
$15.40 $0.58-$0.65 .150-.169
$15.60 $0.58-$0.65 .149-.167
$15.80 $0.58-$0.65 .147-.165
$16.00 $0.58-$0.65 .145-.163
$16.20 $0.58-$0.65 .143-.160
$16.40 $0.58-$0.65 .141-.159
$16.60 $0.58-$0.65 .140-.157
$16.80 $0.58-$0.65 .138-.155
$17.00 $0.58-$0.65 .136-.153
$17.20 $0.58-$0.65 .135-.151
$17.40 $0.58-$0.65 .133-.149
$17.60 $0.58-$0.65 .132-.148
$17.80 $0.58-$0.65 .130-.146
$18.00 $0.58-$0.65 .129-.144
$18.20 $0.58-$0.65 .127-.143
$18.40 $0.58-$0.65 .126-.141
$18.60 $0.58-$0.65 .125-.140
$18.80 $0.58-$0.65 .123-.138
$19.00 $0.58-$0.65 .122-.137
$19.20 $0.58-$0.65 .121-.135
$19.40 $0.58-$0.65 .120-.134
$19.60 $0.58-$0.65 .118-.133
$19.80 $0.58-$0.65 .117-.131
$20.00 $0.58-$0.65 .116-.130
(1) Assumes Armor elects to pay 20% of the merger consideration in cash
and 80% of the merger consideration in shares of Armor's common stock.
From July 1, 2003 to October 20, 2003, the per share closing price of
Armor common stock on the New York Stock Exchange fluctuated from a low of
$12.98 to a high of $18.25. On August 29, 2003 (the date the merger agreement
was signed), the per share closing price of Armor common stock on the New York
Stock Exchange was $15.16. We encourage you to consider the market price of
Armor common stock before you make your voting decision regarding the merger.
UPDATED INFORMATION REGARDING PER SHARE CONSIDERATION
In order to provide Simula's shareholders with updated information
regarding the calculation of the per share merger consideration, the following
information will be provided to Simula's shareholders:
o Notification of an updated estimate by Simula management of the per
share merger consideration by 5:00 pm Mountain Standard Time on the
tenth business day prior to the shareholders' meeting;
o Notification of an updated estimate by Simula management of the per
share merger consideration by 5:00 pm Mountain Standard Time on the
fifth business day prior to the shareholders' meeting; and
o Notification of the final calculation of the per share merger
consideration as soon as practicable following its calculation
pursuant to the merger agreement, which Simula and Armor anticipate
will occur not later than 5:00 pm Mountain Standard Time on the
date that is one business day prior to the shareholders' meeting.
The provision of such information described above to Simula's
shareholders will be made by the issuance of press releases, the filing of Forms
8-K under Section 13 or 15(d) of the Securities Exchange Act of 1934 with the
Securities and Exchange Commission, and the posting of the press releases and
Forms 8-K on Simula's website at: www.simula.com.
You should be aware that following the date of Simula's notification to
its shareholders of the final calculation of the per share merger consideration
described above, Simula's shareholders will continue to have the right to revoke
their proxies as described in the section entitled "The Special Meeting of
Simula Shareholders -- How to Revoke A Proxy" beginning on page 38 of this proxy
statement/prospectus.
ANTICIPATED CLOSING DATE
It is anticipated that the closing of the merger will occur no later than
two business days after the Simula shareholders' meeting, subject to the
satisfaction or waiver of the closing conditions described herein. See the
section entitled "The Merger Agreement--Conditions to the Merger" on page 80 of
this proxy statement/prospectus.
Armor will elect the amount of the merger consideration to pay in cash
and the amount to pay in stock after considering the following factors: (i) the
relationship between the closing price of Armor's common stock on the date Armor
makes its decision and the mean of the average of the bid and ask prices of
Armor common stock as reported at the close of the market for the 20 consecutive
trading days ending 10 trading days prior to the anticipated closing date and
(ii) alternative uses for Armor's available cash at the time the election is
made.
For example, if the closing price of Armor's common stock on the date
Armor makes it decision is lower than the mean of the average of the bid and ask
prices of Armor common stock at the close of the market during such 20-
trading-day period (i.e. $15.00 vs. $16.00), Armor's board of directors would be
more inclined to elect to pay the merger consideration using its common stock.
Alternatively, if the closing price of Armor's common stock on the date Armor
makes its decision is higher than the mean of the average of the bid and ask
prices of Armor common stock at the close of the market during such
20-trading-day period (i.e. $18.00 vs. $16.00), Armor's board of directors would
be more inclined to elect to pay the merger consideration using its available
cash.
However, in making its decision, Armor will also consider the amount of
cash available to it at such time and alternative uses of such cash. For
example, Armor's board of directors would be more inclined not to pay more than
20% of merger consideration in cash, if it determines that its available cash
would be better used for other purposes, such as to fund future acquisitions, to
take advantage of business development opportunities, and for general corporate
and working capital purposes, including the funding of capital expenditures.
PARTIES TO THE MERGER (SEE PAGES 86 and 87)
ARMOR HOLDINGS, INC.
AHI BULLETPROOF ACQUISITION CORP.
1400 Marsh Landing Parkway, Suite 112
Jacksonville, Florida 32250
Phone: (904) 741-5400
Internet address: www.armorholdings.com
Armor Holdings, Inc., or Armor, is a leading manufacturer and provider of
specialized security products, training and support services related to these
products, and vehicle armor systems. Armor's products include a range of branded
law enforcement equipment such as concealable and tactical body armor, hard
armor, forensic products, firearms accessories and weapon maintenance products.
Armor also manufactures and installs ballistic and blast protected armoring
systems, or up-armoring, for military vehicles such as the U.S. military's High
Mobility Multi-purpose Wheeled Vehicles, or HMMWV (commonly known as the
Humvee), commercial vehicles, military aircraft and missile components. Armor's
products and systems are used domestically and internationally by military, law
enforcement, security and corrections personnel, as well as governmental
agencies, multinational corporations and individuals. AHI Bulletproof
Acquisition Corp., or AHI Bulletproof, is a newly-formed, wholly-owned
subsidiary of Armor. Armor formed AHI Bulletproof solely for the purpose of
effecting the merger, and AHI Bulletproof has not conducted any prior business.
SIMULA, INC.
7822 South 46th Street
Phoenix, Arizona 85044
Phone: (602) 631-4005
Internet address: www.simula.com
1
Simula, Inc., or Simula, is a safety technology company and supplier of
human safety and survivability systems to all branches of the U.S. military,
major aerospace and defense contractors, international military forces and
consumer markets. Its core markets are military aviation safety, military
personnel safety and land and marine safety. Serving the defense industry for
almost 30 years, Simula provides personnel protective equipment, including
military body armor, energy absorbing seating systems and lightweight armor for
aircraft, inflatable restraints for military aircraft and other protective
equipment and technology to the military for the protection of soldiers in a
variety of life-threatening or catastrophic situations. Simula's products are
deployed in military platforms such as the AH-64 Apache and the UH-60 Black Hawk
helicopters, the C-17 Globemaster III Transport Aircraft, the M1117 Guardian
Security Vehicle and the M998 HMMWV and in body-worn equipment for personal
protection of the U.S. Army, Marine Corps and Air Force Special Operations
Forces. Simula's primary aerospace and defense customers include Boeing,
Sikorsky, Bell Helicopter, the U.S. military services and the U.S. Coast Guard.
SPECIAL MEETING OF SHAREHOLDERS OF SIMULA (SEE PAGE 38)
Simula will hold a special meeting of its shareholders on ___________,
2003, at 9:00 a.m., local time, at Simula's corporate offices, 7822 South 46th
Street, Phoenix, Arizona 85044, at which shareholders will be asked to vote upon
a proposal to approve and adopt the merger agreement and approve the merger.
RISK FACTORS (SEE PAGE 22)
The "Risk Factors" beginning on page 22 of this proxy statement/prospectus
should be considered carefully by Simula shareholders in evaluating whether to
approve and adopt the merger agreement and approve the merger or invest in
Armor's common stock. These risk factors should be considered along with any
additional risk factors in the reports of Simula and Armor filed with the
Securities and Exchange Commission and any other information included in this
proxy statement/prospectus.
RECORD DATE; VOTING RIGHTS; SHARES HELD BY DIRECTORS AND EXECUTIVE OFFICERS (SEE
PAGE 38)
The record date for determining the Simula shareholders entitled to vote at
the special meeting is October 17, 2003. Only holders of record of Simula common
stock as of the close of business on that date are entitled to vote at the
special meeting. As of the record date, there were 13,153,546 shares of Simula
common stock issued and outstanding, held by approximately 4,800 shareholders of
record. This number includes brokers, banks and other nominees who hold shares
for other shareholders. Each share of Simula common stock issued and outstanding
as of the record date entitles its holder to cast one vote at the special
meeting.
As of the record date, the directors and executive officers of Simula and
their respective affiliates owned approximately 1% of the total outstanding
shares of Simula common stock.
Upon the effective time of the merger, assuming that Armor issues 2,229,754
shares of its common stock to the Simula shareholders and based upon 34,198,044
shares of Armor common stock issued and outstanding as of October 10, 2003, the
directors and executive officers of Armor and their respective affiliates may be
deemed to be the beneficial owners of shares of Armor common stock representing
approximately 10.13% of the outstanding voting power of Armor in the aggregate.
REASONS FOR THE MERGER (SEE PAGE 49)
Armor's board of directors has identified the following potential benefits,
among others, that it believes will result from the merger:
o Strengthens Armor's position as a leading mid-tier defense and security
industry consolidator through increased scale and scope.
o Increases Armor's relevance to Department of Defense customers and
programs.
2
o Diversifies Armor's business mix by adding fixed-wing and rotorcraft
crashworthy seating.
o Adds sole source positions on attractive Department of Defense
programs, including certain small arms protective insert, or SAPI
plates, programs, and numerous rotorcraft crashworthy seating programs.
o Combines body armor capabilities of Simula and PROTECH, a subsidiary of
Armor, supplementing Armor's position in the SAPI market.
o Provides cross-selling opportunities by leveraging Armor's global sales
force and relationships.
o Offers opportunities for cost reduction through integration savings and
rationalization of operations.
Simula's board of directors has identified the following potential
benefits, among others, that it believes will result from the merger:
o Simula's high leverage, fixed costs and the financial and other
covenants in its debt instruments with near term maturities may limit
Simula's ability to fund general corporate requirements, limit its
flexibility in responding to competitive developments, limit its
ability to refinance its debt and increase its vulnerability to adverse
economic and industry conditions. Consequently, Simula's board of
directors determined that the merger is Simula's best available
alternative to preserve shareholder value.
o A merger with Armor would be more favorable to Simula's shareholders
than Simula remaining independent, based on the potential value of such
alternative and the risks associated with remaining independent.
o The strategic fit with Armor would be strong, given the complementary
rather than competitive nature of their respective businesses and
products.
o The operating style and culture of Armor would be well received by
Simula's employees and customers and would increase the likelihood of a
non-disruptive integration process.
o Based on the value of the proposals considered and the form of
consideration proposed, Armor's proposal was most favorable to Simula's
shareholders.
RECOMMENDATION OF THE SIMULA BOARD OF DIRECTORS (SEE PAGE 52)
After careful consideration, the Simula board of directors unanimously
determined that the merger is advisable and fair to, and in the best interests
of, Simula and its shareholders, and unanimously approved the merger agreement.
The Simula board of directors unanimously recommends that the Simula
shareholders vote "FOR" the proposal to approve and adopt the merger agreement
and approve the merger.
OPINION OF SIMULA'S FINANCIAL ADVISOR REGARDING THE MERGER (SEE PAGE 52)
On August 27, 2003, Relational Advisors LLC rendered its oral opinion,
subsequently confirmed by delivery of its written opinion dated August 29, 2003,
that, as of August 29, 2003 and subject to the considerations set forth in its
written opinion, the merger consideration to be received by the holders of
Simula common stock pursuant to the merger agreement, assuming this amount to be
$3.00 per share, is fair from a financial point of view to such holders. As
discussed in the section entitled "The Merger Agreement--Merger Consideration"
beginning on page 63 of this proxy statement/prospectus, Simula's management
currently estimates that a reasonable projection of the total per share merger
consideration payable to Simula shareholders will range from approximately $2.90
to $3.25, the low end of which projection is below the per share merger
consideration price that Simula's financial advisor determined to be fair.
The full text of Relational Advisors' opinion, which sets forth the
qualifications, assumptions made, matters considered, limitations on the review
undertaken in connection with the opinion and circumstances where the opinion
should not be relied upon, is attached to this proxy statement/prospectus as
Annex C and is incorporated by reference in its entirety in this proxy
statement/prospectus. Relational Advisors provided its opinion for the
information and assistance of Simula's board of directors in connection with its
consideration of the transaction contemplated by the merger agreement, and such
opinion is not a recommendation as to how any holder of Simula common stock
should vote with respect to such transaction.
3
INTERESTS OF SIMULA DIRECTORS AND OFFICERS IN THE MERGER (SEE PAGE 58)
When Simula shareholders consider Simula's board of directors'
recommendation that they vote in favor of the proposal to approve and adopt the
merger agreement and approve the merger, they should be aware that certain
officers of Simula and members of Simula's board of directors have interests in
the merger that may be different from, or in addition to, the interests of
shareholders generally. These interests include, among others, the right to
receive change of control, severance and/or retention payments and the
continuation of rights to indemnification and liability insurance. Simula's
board of directors was aware of and considered these potentially conflicting
interests when they approved the merger agreement.
TREATMENT OF SIMULA STOCK OPTIONS (SEE PAGE 70)
At the effective time of the merger, each outstanding option to purchase
Simula's common stock granted under Simula's 1992 Stock Option Plan, 1994 Stock
Option Plan, and 1999 Stock Option Plan which has not previously expired or been
exercised in full and has an exercise price per share less than the total dollar
value of the merger consideration per share of Simula common stock payable by
Armor in connection with the merger, whether or not vested or exercisable on the
date the merger is completed, shall be deemed to have been automatically
exercised by a "cashless exercise" immediately prior to the effective time of
the merger for the number of shares of Simula common stock issuable upon
exercise of such option and converted into the right to receive the merger
consideration for each resulting share of Simula common stock, less an amount of
cash and a number of shares of common stock equal, in the aggregate, to the
amount of the applicable exercise price for such option and subject to the
deduction of applicable withholding taxes.
TREATMENT OF SIMULA STOCK PURCHASE PLAN (SEE PAGE 70)
At the effective time of the merger, Simula's 1996 Employee Stock Purchase
Plan shall be terminated and liquidated and all outstanding rights to purchase
shares of Simula common stock granted or awarded thereunder, if any, shall no
longer be outstanding and shall automatically be canceled and shall cease to
exist, other than and subject to the rights of holders of outstanding rights to
purchase shares of Simula common stock granted or awarded under the 1996
Employee Stock Purchase Plan which will, whether or not vested or exercisable
immediately prior to the effective time of the merger, become fully vested and
automatically exercised immediately prior to the effective time of the merger
and shall each be deemed to be a share of Simula common stock retired and
converted at the effective time of the merger into the right to receive the
merger consideration for each resulting share of Simula common stock, subject to
Simula (as the surviving corporation in the merger) withholding by payroll
deduction any unpaid amount of the purchase price therefor pursuant to the terms
and conditions of the 1996 Employee Stock Purchase Plan and subject to the
deduction of applicable withholding taxes.
MANAGEMENT AND BOARDS OF DIRECTORS AFTER THE MERGER (SEE PAGE 72)
If the merger is completed, the officers and directors of Armor immediately
prior to the merger will remain as officers and directors of Armor after the
merger. After the merger, the officers and directors of Simula will be replaced
with the officers and directors of AHI Bulletproof, the wholly-owned subsidiary
of Armor that merged with and into Simula.
CONDITIONS TO COMPLETE THE MERGER (SEE PAGE 80)
Several conditions must be satisfied or waived before we complete the
merger, including those summarized below:
o approval and adoption of the merger agreement and approval of the
merger by the affirmative vote of holders of a majority of the shares
of Simula common stock outstanding on the record date;
o absences of any law, regulation or order making the merger illegal or
otherwise prohibiting the merger, which would have a material impact on
Armor on a combined basis with Simula;
4
o receipt of United States antitrust approvals;
o accuracy of each party's representations and warranties in the merger
agreement, except as would not have a material adverse effect on such
party;
o absence of any material adverse change in Simula's condition (financial
or otherwise), results of operations, assets, liabilities, properties
or business; and
o material compliance by each party with its covenants in the merger
agreement.
SIMULA IS PROHIBITED FROM SOLICITING OTHER OFFERS (SEE PAGE 76)
The merger agreement contains detailed provisions that prohibit Simula and
its subsidiaries and affiliates, and their respective representatives, from
taking any action to solicit or engage in discussions or participate in
negotiations with any person or group with respect to an "alternative
transaction" as defined in the merger agreement, including an acquisition
involving all or a significant part of the capital stock or assets of Simula or
any material subsidiary of Simula, or a material debt or equity investment in
Simula or any material subsidiary of Simula, except as expressly permitted by
the merger agreement. Simula also is required to use reasonable efforts to make
effective the transactions contemplated by the merger agreement. The merger
agreement does not, however, prohibit Simula or its board of directors from
considering an unsolicited bona fide written acquisition proposal from a third
party if specified conditions are met.
SIMULA AND ARMOR MAY TERMINATE THE MERGER AGREEMENT UNDER SPECIFIED
CIRCUMSTANCES (SEE PAGE 82)
Under certain circumstances specified in the merger agreement, either
Simula or Armor may terminate the merger agreement. These circumstances
generally include if:
o the merger is not completed by December 31, 2003;
o law, regulation, order or other nonappealable act by a government
authority, as defined in the merger agreement, has the effect of
permanently prohibiting the consummation of the merger;
o the required approval of Simula shareholders has not been obtained at
its duly held special meeting; or
o the Simula board of directors withdraws its recommendation that its
shareholders approve the merger agreement or Simula publicly announces
or gives notice to Armor that Simula has agreed to a superior
transaction.
Additionally, Armor may terminate the merger agreement if:
o there has occurred a material adverse change, as such term is defined
in the merger agreement, with respect to Simula.
SIMULA MAY PAY A TERMINATION FEE UNDER SPECIFIED CIRCUMSTANCES (SEE PAGE 83)
If the merger agreement is terminated, Simula may be required to pay a
termination fee of not more that $5 million.
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES (SEE PAGE 59)
As of December 31, 2002, Simula and its subsidiaries had consolidated net
operating loss carryovers of approximately $99,584,927 for federal income tax
purposes. In general, net operating loss carryovers can be used to reduce or
eliminate federal income tax payable in future years. If the merger is
consummated, Simula's net operating loss carryovers will be either extinguished
or subject to an annual limitation.
5
Unless the fair market value of the Armor common stock given as
consideration in the merger is equal to or greater than 80% of the total
consideration given in the merger, the exchange of Simula common stock for Armor
common stock and cash pursuant to the merger will be fully taxable to Simula
shareholders for United States federal income tax purposes. In general, you will
recognize capital gain or loss equal to the difference between (a) the sum of
the amount of cash and the fair market value of the Armor common stock you
receive, and (b) your adjusted tax basis in the Simula common stock surrendered
in exchange therefor. Such gain or loss will be long-term gain or loss if you
have held the Simula common stock for more than one year.
If the fair market value of the Armor common stock given as consideration
in the merger is equal to or greater than 80% of the total consideration given
in the merger, there is a possibility (but not a certainty) that the merger
would constitute a tax-free reorganization within the meaning of section 368(a)
of the Code. If the merger does constitute a tax-free reorganization, you will
recognize capital gain (but not capital loss) equal to the lesser of (a) the
amount of cash you receive, or (b) the difference between (i) the sum of the
amount of cash and the fair market value (as of the effective date of the
merger) of the Armor common stock you receive (including any fractional shares
of Armor common stock deemed received and exchanged for cash), and (ii) your
adjusted tax basis in the Simula common stock surrendered in exchange therefor.
ACCOUNTING TREATMENT OF THE MERGER (SEE PAGE 62)
In accordance with United States generally accepted accounting principles,
Armor will account for the merger under the purchase method of accounting for
business combinations.
THE MERGER IS SUBJECT TO ANTITRUST LAWS (SEE PAGE 62)
Simula and Armor were required to make filings under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, with the Antitrust Division of
the United States Department of Justice and the United States Federal Trade
Commission. Simula and Armor each filed the required notification and report
forms on October 10, 2003, and requested early termination of the required
waiting period. We are not permitted to complete the merger until the applicable
waiting period has expired or terminated. Reviewing agencies or governments,
states or private persons may challenge the merger under antitrust or similar
laws at any time before or after its completion.
ARMOR EXPECTS TO LIST SHARES OF ARMOR COMMON STOCK ISSUED TO SIMULA SHAREHOLDERS
ON THE NEW YORK STOCK EXCHANGE (SEE PAGE 63)
If we complete the merger, and the merger consideration includes shares of
Armor common stock, Simula shareholders are expected to be able to trade the
shares of Armor common stock they receive in the merger on the New York Stock
Exchange, subject to restrictions on affiliates described in the section
entitled "The Merger--Resale of Armor Common Stock by Affiliates of Simula"
beginning on page 63 of this proxy statement/prospectus. If we complete the
merger, Simula common stock will no longer be quoted on the American Stock
Exchange or any other market or exchange.
DISSENTERS' RIGHTS (SEE PAGE 62)
Under Arizona law, holders of Simula common stock will not have dissenters'
rights in connection with the merger.
6
COMPARATIVE MARKET PRICES AND DIVIDENDS
Armor common stock is listed on the New York Stock Exchange, or NYSE, under
the symbol "AH," and Simula common stock is listed on the American Stock
Exchange, or AMEX, under the symbol "SMU." The table below shows the high and
low prices of Armor common stock and Simula common stock for the last two fiscal
years and 2003 to date.
THE MARKET PRICE RANGE BY QUARTER
ARMOR SIMULA
COMMON STOCK COMMON STOCK
------------------------- -------------------------
HIGH LOW HIGH LOW
---- --- ---- ---
2003
Fourth Quarter (through _________, 2003)...... $ $ $ $
Third Quarter................................. $ 17.80 $ 12.55 $ 2.96 $ 1.91
Second Quarter................................ $ 14.95 $ 9.91 $ 3.22 $ 2.00
First Quarter................................. $ 14.60 $ 9.40 $ 2.31 $ 1.15
2002
Fourth Quarter................................ $ 16.50 $ 12.50 $ 2.36 $ 1.14
Third Quarter................................. $ 25.50 $ 12.00 $ 3.60 $ 2.32
Second Quarter................................ $ 29.55 $ 22.00 $ 5.58 $ 3.40
First Quarter................................. $ 28.25 $ 20.45 $ 5.80 $ 3.65
2001
Fourth Quarter................................ $ 27.60 $ 19.25 $ 6.66 $ 2.36
Third Quarter................................. $ 23.50 $ 14.20 $ 3.79 $ 1.62
Second Quarter $ 19.25 $ 11.00 $ 3.87 $ 1.50
First Quarter................................. $ 17.75 $ 14.60 $ 3.06 $ 1.56
The following table sets forth the last reported sale price of one share of
Armor common stock and one share of Simula common stock, as reported on NYSE and
AMEX, respectively, on August 29, 2003, the last full trading day prior to the
public announcement of the proposed merger, and on _____________, 2003, the last
day for which that information could be calculated prior to the date of this
proxy statement/prospectus.
COMPARATIVE MARKET PRICE DATA
ARMOR SIMULA
COMMON STOCK COMMON STOCK
August 29, 2003........................ $15.16 $2.78
_____________, 2003.................... $__.__ $_.__
The per share amount of merger consideration to be received by Simula's
shareholders in exchange for outstanding shares of Simula common stock will be
determined five business days prior to the closing of the merger, which is
anticipated to be no later than two business days after the date of the special
meeting of Simula's shareholders. Accordingly, the per share amount of merger
consideration will be determined prior to the special meeting of Simula's
shareholders and will be announced promptly following such determination. See
the section entitled "The Merger Agreement--Merger Consideration" beginning on
page 63 of this proxy/statement prospectus. The price of Armor's common stock to
be used to calculate the number of shares of Armor common stock to be received
by Simula's shareholders will be determined 10 business days prior to the
closing of the merger. Accordingly, fluctuations in the price of Armor's common
stock between the date the merger agreement was signed and the date of this
proxy statement/prospectus will not affect the value of the merger consideration
received by Simula's shareholders. However, fluctuations in the price of Armor's
common stock after the date of this proxy statement/prospectus will have an
effect on the value of the merger consideration received by Simula's
shareholders. See the section entitled "The Merger Agreement -- Merger
Consideration" beginning on page 65 of this proxy statement/prospectus.
The above table shows only historical comparisons. The comparisons may not
provide meaningful information to you in determining whether to approve and
adopt the merger agreement and approve the merger. You are urged to obtain
current market quotations for Simula common stock and Armor common stock and to
review carefully the other information contained in this proxy
statement/prospectus or incorporated by reference into this proxy
statement/prospectus in considering whether to approve and adopt the merger
agreement and approve the merger. See the section entitled "Where You Can Find
More Information" beginning on page 99 of this proxy statement/prospectus.
7
As of the record date, there were 13,153,546 shares of Simula common stock
outstanding and entitled to vote, held of record by approximately 4,800
shareholders.
DIVIDEND INFORMATION
Armor has never declared or paid cash dividends on its common stock and
does not intend to pay any cash dividends on its common stock in the foreseeable
future. Armor currently intends to retain any earnings for working capital,
repayment of indebtedness, capital expenditures and general corporate purposes.
Armor's credit facility and indenture relating to its 8 1/4% Senior Subordinated
Notes due 2013, or 8 1/4% Notes, contain restrictions on its ability to pay
dividends or make any other distributions. Simula has not declared or paid cash
dividends on its common stock since its April 1992 initial public offering and
does not intend to pay any cash dividends on its common stock in the foreseeable
future. Simula currently intends to retain any earnings for working capital,
repayment of indebtedness, capital expenditures and general corporate purposes.
In addition, under the merger agreement, Simula has agreed not to pay any such
dividends.
8
SELECTED HISTORICAL CONSOLIDATED
FINANCIAL DATA OF ARMOR
The following selected consolidated financial data is derived from Armor's
audited consolidated financial statements as of December 31, 2002 and December
31, 2001, and for each of the three years ended December 31, 2000, which are
audited by PricewaterhouseCoopers LLP. The information as of December 31, 2000,
December 31, 1999 and December 31, 1998, and for each of the two years ended
December 31, 1999 was derived from Armor's consolidated financial statements
audited by PricewaterhouseCoopers LLP and subsequently adjusted by management on
an unaudited basis to reflect the presentation required for discontinued
operations as a result of Armor's decision in July of 2002 to sell its Services
Division. The selected consolidated financial information as of, and for each of
the six months ended June 30, 2003 and June 30, 2002 are derived from Armor's
unaudited consolidated financial statements. The unaudited consolidated
financial statements include all adjustments, consisting of normal recurring
accruals, which Armor considers necessary for a fair presentation of Armor's
financial position and the results of operations for these periods.
Operating results for the six months ended June 30, 2003 and the year ended
December 31, 2002 are not necessarily indicative of the results that may be
expected for the entire year ending December 31, 2003 or for any other future
period.
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------ --------------------------------------------------------
2003 2002 2002 2001 2000 1999 1998
------- ------- -------- -------- -------- ------- -------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
INCOME STATEMENT DATA:
Revenues:
Products.................... $93,354 $82,002 $179,946 $149,868 $139,904 $96,706 $45,644
Mobile Security............. 68,779 59,207 125,171 47,232 -- -- --
------ ------ ------- ------ -------- ------- -------
Total Revenues.............. 162,133 141,209 305,117 197,100 139,904 96,706 45,644
Costs and Expenses:
Cost of sales............... 114,443 96,534 210,745 126,330 85,457 56,304 28,064
Operating expenses.......... 28,528 24,194 49,836 38,659 30,286 21,933 10,760
Amortization (1)............ 129 151 245 2,142 1,704 1,329 494
Integration and other
non-recurring charges (3). 4,197 3,117 5,926 3,296 2,588 2,014 --
------ ------ ------- ------ -------- ------- -------
Operating Income:............. 14,836 17,213 38,365 26,673 19,869 15,126 6,326
Interest expense (income),
net....................... 816 326 923 3,864 1,849 137 (274)
Other expense (income), net. 85 (64) 51 (82) (67) (811) (13)
------ ------ ------- ------ -------- ------- -------
Income from continuing
operations before provision
for income taxes............ 13,935 16,951 37,391 22,891 18,087 15,800 6,613
Provision for income taxes.... 5,212 6,560 16,054 8,207 7,240 6,472 2,674
------ ------ ------- ------ -------- ------- -------
Income from continuing
operations.................. 8,723 10,391 21,337 14,684 10,847 9,328 3,939
------ ------ ------- ------ -------- ------- -------
Income (loss) from
discontinued operations
before provision (benefit)
for income taxes (2)........ 1,914 (574) (41,468) (7,066) 8,303 5,399 7,060
Provision (benefit) for
income taxes................ 937 (218) (2,442) (2,510) 2,102 1,531 2,403
------ ------ ------- ------ -------- ------- -------
Income (loss) from
discontinued operations (2). 977 (356) (39,026) (4,556) 6,201 3,868 4,657
Net income (loss)............. $ 9,700 $10,035 $(17,689) $10,128 $17,048 $13,196 $8,596
======= ======= ======== ======= ======= ======= ======
Basic income from continuing
operations per share ....... $ 0.31 $ 0.33 $ 0.70 $ 0.61 $ 0.48 $ 0.44 $ 0.24
Diluted income from
continuing operations per
share ...................... $ 0.31 $ 0.32 $ 0.69 $ 0.59 $ 0.46 $ 0.43 $ 0.23
Basic Earnings per share ..... $ 0.34 $ 0.32 $(0.58) $ 0.42 $ 0.75 $ 0.63 $ 0.53
Diluted Earnings per share ... $ 0.34 $ 0.31 $(0.57) $ 0.41 $ 0.73 $ 0.61 $ 0.50
9
BALANCE SHEET DATA
(AT END OF PERIOD):
Cash and cash equivalents.... $ 12,757 $ 41,763 $ 16,551 $ 53,719 $ 7,257 $ 13,246 $ 6,789
Working capital ............. $101,287 $150,564 $100,591 $142,723 $ 67,937 $ 53,993 $ 24,366
Total assets ................ $372,547 $398,785 $367,753 $388,057 $225,957 $178,922 $ 94,353
Long-term obligations ....... $ 19,975 $ 4,273 $ 5,240 $ 4,640 $ 38,288 $ 2,453 $ 344
Stockholders' equity ........ $278,538 $338,129 $288,077 $326,019 $166,771 $157,883 $ 75,102
----------
(1) Effective January 1, 2002, Armor adopted Statement of Financial Accounting
Standard No. 142, "Goodwill and Other Intangible Assets" (SFAS 142).
Amortization of goodwill, including goodwill recorded in past business
combinations, ceased upon adoption of this statement. In addition, this
statement requires that goodwill be tested for impairment at least annually
at the reporting unit level.
(2) As described in Note 2 of Armor's fiscal 2002 audited financial statements,
Armor recorded an impairment charge of $30.3 million for the Services
Division in fiscal 2002. This impairment charge consisted of approximately
$6.1 million in estimated disposal costs and a $24.2 million non-cash
goodwill reduction. In fiscal 2001, Armor recorded a pre-tax restructuring
charge of $10.3 million for the Services Division as a result of an
approved restructuring plan to close its U.S. investigations businesses,
realign the Division's organization, eliminate excess facilities and reduce
overhead in its businesses worldwide. Operating results for 1998 through
the first six months of fiscal 2003 ended June 30, 2003 reflect the
reclassification of the Services Division as discontinued operations. USDS,
Inc., a subsidiary providing certain training services, formerly reported
as a part of the Services Division, is not included in the amounts
classified as assets held for sale. The assets and liabilities as well as
the operating results of USDS, Inc. have been reclassified to the Armor
Holdings Products Division where management oversight currently resides.
(3) Includes one-time non-recurring charges and certain non-capitalized
expenses relating to the acquisition and integration of acquired
businesses. Acquisition and integration expenses include but are not
limited to severance, integration of sales, marketing, distribution and
manufacturing operations, as well as, relocation and lease termination
expenses as well as one-time non-recurring charges and direct expenses
associated with acquisition and due diligence efforts for acquisitions not
completed.
10
SELECTED HISTORICAL CONSOLIDATED
FINANCIAL DATA OF SIMULA
The selected consolidated financial data presented below has been derived
from Simula's historical audited consolidated financial statements for each of
the five years ended December 31, 2002, as adjusted by management on an
unaudited basis to reflect the presentation required for discontinued operations
as a result of Simula's decision to sell its automotive safety business. The
selected consolidated financial data as of and for each of the six months ended
June 30, 2003 and June 30, 2002 are derived from Simula's unaudited consolidated
financial statements. The unaudited consolidated financial statements include
all adjustments, consisting of normal recurring accruals, which Simula considers
necessary for a fair presentation of its financial position and the results of
operations for these periods. Operating results for the six months ended June
30, 2003 and the year ended December 31, 2002 are not necessarily indicative of
the results that may be expected for the entire year ending December 31, 2003 or
for any other future period.
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
---------------------- -------------------------------------------------------------
2003 2002 2002 2001 2000 1999 1998
--------- --------- --------- --------- --------- --------- ---------
(AS RESTATED (2))
(UNAUDITED)
(DOLLARS IN THOUSANDS)
INCOME STATEMENT DATA:
Total revenues ....................... $ 32,422 $ 41,410 $ 75,556 $ 69,937 $ 60,318 $ 98,875 $ 72,652
Costs and expenses:
Cost of sales ...................... 20,392 26,693 48,168 46,550 43,801 84,483 70,339
Administrative expenses ............ 7,270 6,851 14,791 13,956 17,286 21,677 17,306
Research & development ............. 1,129 714 1,864 1,549 1,865 -- --
Restructuring & other costs ........ 599 -- 322 408 2,156 18,403
--------- --------- --------- --------- --------- --------- ---------
Operating income (loss) .............. 3,032 7,153 10,411 7,474 (4,790) (25,688) (14,993)
Interest expense, net .............. 5,757 5,115 10,411 10,231 9,803 7,079 4,861
Gain (loss) on early
retirement of debt ................. -- -- -- (3,815)(1) 1,524(1) (232)(1) --
Other expense (income) net ........ 1,000 -- 81 -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Income (loss) from
continuing operations
before income taxes ................ (3,725) 2,038 (81) (6,572) (13,069) (32,999) (19,854)
Income tax (expense) benefit ......... (17) (840) (37,960) 2,091 3,547 11,619 7,092
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before
discontinued operations
and extraordinary items ............ (3,742) 1,198 (38,041) (4,481) (9,522) (21,380) (12,762)
Income (loss) from
discontinued operations ............ 219 (316) 4,006 3,448 4,602 (1,466) (14,947)
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) .................... (3,523) 883 (34,035) (1,033) (4,920) (22,846) (27,709)
Dividends on preferred stock -- -- -- -- 1,083 280 --
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) available
for common shareholders $ (3,523) $ 883 $ (34,035) $ (1,033) $ (6,003) $ (23,126) $ (27,709)
========= ========= ========= ========= ========= ========= =========
Basic income (loss) from continuing
operations per share $ (0.29) $ 0.09 $ (2.94) $ (0.36) $ (0.93) $ (2.12) $ (1.29)
Diluted income (loss) from
continuing operations per share $ (0.29) $ 0.09 $ (2.94) $ (0.36) $ (0.93) $ (2.12) $ (1.29)
Basic income (loss) per share $ (0.27) $ 0.07 $ (2.64) $ (0.09) $ (0.52) $ (2.26) $ (2.80)
Diluted income (loss) per share $ (0.27) $ 0.07 $ (2.64) $ (0.08) $ (0.52) $ (2.26) $ (2.80)
BALANCE SHEET DATA
(AT END OF PERIOD):
Cash and cash equivalents ............ $ 21 $ 460 $ 212 $ 362 $ 746 $ 5,223 $ 933
Working capital ...................... $ 57,883 $ 6,239 $ (24,631) $ 4,946 $ (11,385) $ 5,012 $ 13,047
Total assets ......................... $ 48,865 $ 93,088 $ 54,879 $ 92,653 $ 85,899 $ 107,340 $ 119,589
Long-term obligations ................ $ 1,717 $ 62,816 $ 33,609 $ 62,540 $ 39,526 $ 53,820 $ 47,244
Stockholders' equity ................. $ (42,462) $ (1,868) $ (38,428) $ (2,640) $ (661) $ 3,375 $ 18,570
(1) In accordance with Financial Accounting Standards No. 145, the gains or
losses on extinguishment of debt that had been recorded as an extraordinary
item within the historical financial statements totaling ($2,183), $1,109
and ($151) for the years ended December 31, 2001, 2000 and 1999,
respectively, have been tax effected and reclassified into continuing
operations.
(2) Subsequent to the issuance of Simula's unaudited consolidated financial
statements for the quarter ended June 30, 2003, Simula determined that
certain costs of the sale of the automotive safety business and the
potential merger with Armor Holdings were incorrectly capitalized as
Prepaid Expense and Other on the June 30, 2003 balance sheet. These costs
totaled $593,890, a correction to the June 30, 2003 financial statements
has been made to change these costs to expense.
11
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The unaudited pro forma condensed consolidated financial statements for the
periods indicated show the effect of Armor's acquisition of Simula.
The unaudited pro forma condensed consolidated balance sheets present the
financial position of Armor at June 30, 2003 giving effect to the acquisition of
Simula as if it had occurred on such date. The unaudited pro forma condensed
consolidated statements of continuing operations for the six months ended June
30, 2003 and for the year ended December 31, 2002 give effect to the acquisition
of Simula as if they had occurred on January 1, 2002.
The unaudited pro forma balance sheets as of June 30, 2003 have been
prepared by combining the historical condensed consolidated balance sheet of
Armor with the historical condensed consolidated balance sheet of Simula as of
June 30, 2003. The unaudited pro forma condensed consolidated statements of
continuing operations for the year ended December 31, 2002 have been prepared by
combining Armor's historical condensed consolidated statement of continuing
operations for the year ended December 31, 2002 with the historical condensed
consolidated statement of continuing operations of Simula for the year ended
December 31, 2002. The interim unaudited pro forma condensed consolidated
statements of continuing operations for the six months ended June 30, 2003 have
been prepared by combining Armor's historical condensed consolidated statement
of continuing operations for the six months ended June 30, 2003 with Simula's
historical condensed consolidated statement of continuing operations for the
six months ended June 30, 2003. Appropriate pro forma adjustments have been
applied to the historical accounts.
The unaudited pro forma condensed consolidated financial information is
presented for informational purposes only and it is not necessarily indicative
of the financial position and results of operations that would have been
achieved had the acquisition been completed as of the dates indicated and is not
necessarily indicative of Armor's future financial position or results of
operations.
The acquisition of Simula will be structured as a merger, pursuant to
which a wholly-owned subsidiary of Armor will be merged with and into Simula,
with Simula surviving the merger and becoming a wholly-owned subsidiary of
Armor. The acquisition will be accounted for under the purchase method of
accounting. Under the purchase method of accounting, assets acquired and
liabilities assumed are recorded at their estimated fair values. Goodwill is
generated to the extent that the merger consideration, including transaction and
closing costs, exceeds the fair value of net assets acquired. We are in the
process of determining the purchase price allocation, which will allocate the
excess of purchase price, including transaction costs, over the fair value of
the tangible and identifiable intangible assets to be acquired to goodwill. We
have not finished this purchase price allocation. As a result, the final
allocation of the excess purchase price over the fair value of the assets to be
acquired could differ from what is presented herein.
The unaudited pro forma condensed consolidated financial statements should
be read in conjunction with the historical consolidated financial statements of
Armor and Simula, respectively, including related notes thereto, which are
referenced elsewhere in this proxy statement/prospectus. The unaudited pro forma
condensed consolidated balance sheets assume that the $150 million Senior
Subordinated Notes were issued on June 30, 2003.
Armor will acquire Simula for $110.5 million, subject to adjustment,
including adjustments for certain transaction fees and costs. After repayment of
Simula's outstanding indebtedness, the remainder of the merger consideration
will be paid to Simula's shareholders. Solely for purposes of preparing the
unaudited pro forma condensed consolidated financial statements, the parties
have assumed that the merger consideration payable by Armor to Simula's
shareholders will be approximately $44 million. Up to 100%, but not less than
20%, of the merger consideration received by Simula's shareholders will be paid
in cash, with the balance, if any, of the merger consideration paid in shares of
Armor's common stock.
12
Under the terms of the merger agreement, it is not currently possible to
determine the actual amount of such merger consideration that will be paid in
cash or the actual amount of such merger consideration that will be paid in
shares of Armor's common stock since Armor has not yet notified Simula of its
irrevocable election regarding the form of payment. Therefore, two pro forma
presentations are used to depict the bounds of the range of possible outcomes
under the merger agreement. The following unaudited pro forma condensed
consolidated statements of continuing operations for the year ended December 31,
2002 and for the six month period ended June 30, 2003, and the unaudited pro
forma condensed consolidated balance sheets as of June 30, 2003 depict the two
ends of the spectrum under the merger agreement. The first pro forma column
depicts the scenario assuming 80% Armor stock and 20% cash is paid to Simula
shareholders after payment of funded indebtedness. The second pro forma column
depicts the scenario assuming 100% cash is paid to Simula shareholders. The
ultimate form of payment of such merger consideration could be between these two
scenarios and is at the total discretion of Armor.
For purposes of the unaudited pro forma condensed consolidated statements
of operations of the year ended December 31, 2002 and for the six-month period
ended June 30, 2003, and the unaudited pro forma condensed consolidated balance
sheets as of June 30, 2003, the fair value of Armor's common stock was
calculated based upon the average closing price of such stock on the NYSE during
the 20 trading days during the period from August 19, 2003 through September 16,
2003.
13
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF
CONTINUING OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2002
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Assuming 80% Armor Stock and
20% Cash Paid to Simula Assuming 100% Cash Paid to
Shareholders Simula Shareholders
---------------------------- -----------------------------
Historical Historical Pro Forma Pro Forma
Armor Simula (1) Adjustments Pro Forma Adjustments Pro Forma
----- ---------- ----------- --------- ----------- ---------
Revenues
Products $ 179,946 $ -- $ -- $ 179,946 $ -- $ 179,946
Mobile Security 125,171 -- -- 125,171 -- 125,171
Simula -- 75,556 (1,152)(2) 74,404 (1,152)(2) 74,404
--------- --------- --------- --------- --------- ---------
Total revenues 305,117 75,556 (1,152) 379,521 (1,152) 379,521
Costs and expenses
Cost of sales 210,745 48,168 2,572 (2) 261,485 2,572 (2) 261,485
Operating expenses 50,081 16,977 2,810 (3)(4) 69,868 2,810 (3)(4) 69,868
Integration and
other non-recurring
charges 5,926 -- -- 5,926 -- 5,926
--------- --------- --------- --------- --------- ---------
Operating income 38,365 10,411 (6,534) 42,242 (6,534) 42,242
Interest expense, net 923 10,411 (3,921)(5) 7,413 (3,921)(5) 7,413
Other expense, net 51 81 -- 132 -- 132
--------- --------- --------- --------- --------- ---------
Income (loss) from
continuing operations before
provision for income taxes 37,391 (81) (2,613) 34,697 (2,613) 34,697
Provision for income taxes 16,054 37,960 (38,934)(6) 15,080 (38,934)(6) 15,080
--------- --------- --------- --------- --------- ---------
Income (loss) from
continuing operations $ 21,337 $ (38,041) $ 36,321 $ 19,617 $ 36,321 $ 19,617
========= ========= ========= ========= ========= =========
Earnings per common share for
continuing operations:
Basic $ 0.70 (8) $ 0.60 (8) $ 0.65
Diluted $ 0.69 (8) $ 0.59 (8) $ 0.63
Weighted average common
shares outstanding:
Basic 30,341 2,230 (7) 32,571 30,341
Diluted 30,957 2,230 (7) 33,187 30,957
14
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF CONTINUING
OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2002
(1) Simula's condensed consolidated statement of continuing operations as
adjusted for the sale of its automotive safety business is presented for
the year ended December 31, 2002.
(2) Reflects a change of Simula's revenue recognition policy to conform to
accounting policy used by Armor on long-term contracts from percentage
completion based on the cost incurred basis to Armor's policy of percentage
completion based on the units completed basis. For the year ended December
31, 2002, this change in revenue recognition would have resulted in a
decrease in revenues of approximately $1.2 million and an increase in cost
of sales of approximately $2.6 million including reduction in margin for
opening in-process inventory.
(3) Reflects a reduction to depreciation expense of $280,000 due to an increase
in the weighted average estimated useful lives of property and equipment to
six years and leasehold improvements to 12 years which exceeds the
remaining useful life on a historical basis.
(4) Reflects an increase to amortization expense of $3.1 million due to an
increase from purchase accounting in the fair value of identifiable
intangible assets over their estimated useful lives. See Note 5 to the Pro
Forma Condensed Consolidated Balance Sheet.
(5) Reflects interest expense of $6.5 million related to the acquisition debt
used to fund this transaction, net of the elimination of Simula's
historical interest expense of $10.4 million. If interest rates were to
increase or decrease by 1/8%, pro forma income from continuing operations
would be $19.4 million and $19.8 million, respectively. The acquisition
debt was issued by Armor in August of 2003 and matures in August of 2013.
The acquisition debt carries a current variable interest rate of six-month
LIBOR, set in arrears, plus a spread ranging from 2.735% to 2.75%, or
3.9285% to 3.93% as of September 9, 2003, as a result of interest rate
hedge transactions.
(6) Reflects the adjustment to the provision for taxes by applying Armor's
statutory tax rate of approximately 37.4% to the pro forma adjustments and
eliminating the provision of $37.9 million that Simula recognized in 2002,
which principally related to providing a valuation allowance for deferred
tax assets resulting from net operating loss carry-forward deductions.
(7) Reflects the assumed issuance of 2,229,754 shares of Armor common stock
with $0.01 par value per share common stock. For purposes of preparing the
pro forma information, a stock price of $15.80 was used to calculate the
amount of shares to be issued based on the amount of equity consideration
to be paid to common shareholders of $35.2 million divided by Armor's
average closing price for the previous 20 trading days pursuant to the
merger agreement up to and including September 16, 2003.
(8) Basic earnings per common share for continuing operations is computed as
follows: Income from continuing operations divided by basic weighted
average common shares outstanding. Diluted earnings per common share for
continuing operations is computed as follows: Income from continuing
operations divided by diluted weighted average common shares outstanding.
15
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF
CONTINUING OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2003
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Assuming 80% Armor Stock and
20% Cash Paid to Simula Assuming 100% Cash Paid to
Shareholders Simula Shareholders
-------------------------------- --------------------------------
Historical Historical Pro Forma Pro Forma
Armor Simula (1) Adjustments Pro Forma Adjustments Pro Forma
------------- ----------- ------------ ---------- ------------ ------------
(as restated (a)) (as restated (a)) (as restated (a))
Revenues
Products $ 93,354 $ - $ - $ 93,354 $ - $ 93,354
Mobile Security 68,779 - - 68,779 - 68,779
Simula -- 32,422 7,694(2) 40,116 7,694(2) 40,116
------------- ----------- ------------ ---------- ------------ ------------
Total revenues 162,133 32,422 7,694 202,249 7,694 202,249
Costs and expenses
Cost of sales 114,443 20,392 6,061(2) 140,896 6,061(2) 140,896
Operating expenses 28,657 8,399 826(3)(4) 37,882 826(3) 37,882
Integration and
other non-recurring
charges 4,197 599 - 4,796 - 4,796
------------- ----------- ------------ ---------- ------------ ------------
Operating income 14,836 3,032 807 18,675 807 18,675
Interest expense, net 816 5,757 (2,510)(5) 4,063 (2,510)(5) 4,063
Other expense, net 85 1,000 (1,000)(6) 85 (1,000)(6) 85
------------- ----------- ------------ ---------- ------------ ------------
Income (loss) from
continuing operations
before provision for
income taxes 13,935 (3,725) 4,317 14,527 4,317 14,527
Provision for income taxes 5,212 17 244(7) 5,473 244(7) 5,473
------------- ----------- ------------ ---------- ------------ ------------
Income (loss) from
continuing operations $ 8,723 $ (3,742) $ 4,073 $ 9,054 $ 4,073 $ 9,054
============= =========== ============ ========== ============ ============
Earnings per common share
for continuing operations:
Basic $ 0.29 (9) $ 0.28 (9) $ 0.30
Diluted $ 0.28 (9) $ 0.27 (9) $ 0.29
Weighted average common
shares outstanding:
Basic 30,341 2,230 (8) 32,571 30,341
Diluted 30,957 2,230 (8) 33,187 30,957
(a) As discussed at (2) on page 11, a restatement was made to Simula's
historical unaudited financial statements, related to transaction selling
costs. Since these costs have now been expensed within Simula's unaudited
historical financial statements, pro forma adjustments have been modified
to reflect this change.
16
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF CONTINUING OPERATIONS FOR THE SIX-MONTHS ENDED
JUNE 30, 2003
(1) Simula's condensed consolidated statement of continuing operations as
adjusted for the sale of its automotive safety division is presented for
the six months ended June 30, 2003.
(2) Reflects a change of Simula's revenue recognition policy to conform to the
accounting policy used by Armor on long-term contracts from percentage
completion based on the cost incurred basis to Armor's policy of percentage
completion based on the units completed basis. For the six-months ended
June 30, 2003, this change in revenue recognition would have resulted in an
increase in revenues of approximately $7.7 million and an increase in cost
of sales of approximately $6.1 million.
(3) Reflects a reduction to depreciation expense of $154,000 due to an increase
in the weighted average estimated useful lives of property and equipment to
six years and leasehold improvements to 12 years, which exceeds the
remaining useful life on a historical basis. Reflects a reduction for
transaction costs of approximately $594,000 related to the sale of Simula's
automotive safety division and costs to sell the entire Company.
(4) Reflects an increase to amortization expense of $1.6 million from purchase
accounting due to an increase in the fair value of identifiable intangible
assets over their estimated useful lives. See Note 5 to the Pro Forma
Condensed Consolidated Balance Sheet.
(5) Reflects interest expense of $3.3 million related to the acquisition debt
used to fund this transaction, net of the elimination of Simula's allocated
interest expense of $5.8 million. If interest rates were to increase or
decrease by 1/8%, pro forma income from continuing operations would be $9.0
million and $9.1 million, respectively. The acquisition debt was issued by
Armor in August of 2003 and matures in August of 2013. The acquisition debt
carries a current variable interest rate of six-month LIBOR, set in
arrears, plus an spread ranging from 2.735% to 2.75%, or 3.9285% to 3.93%
as of September 9, 2003, as a result of interest rate hedge transactions.
(6) Reflects the elimination of the $1.0 million performance fee paid related
to Simula's default on a certain non-monetary financial covenant under
their Senior Secured Note.
(7) Reflects the adjustment to the provision for taxes by applying Armor's
statutory tax rate of approximately 37.4% to the pro forma adjustments and
to recognize the tax benefit for Simula's historical losses.
(8) Reflects the issuance of 2,229,754 shares of Armor common stock with $0.01
par value per share common stock. A stock price of $15.80 was used to
calculate the amount of shares to be issued based on the amount of equity
consideration to be paid to common shareholders of $35.2 million divided by
Armor's average closing price for the previous 20 trading days up to and
ended September 16, 2003 pursuant to the merger agreement.
(9) Basic earnings per common share for continuing operations is computed as
follows: Income from continuing operations divided by basic weighted
average common shares outstanding. Diluted earnings per common share for
continuing operations is computed as follows: Income from continuing
operations divided by diluted weighted average common shares outstanding.
17
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2003
(AMOUNTS IN THOUSANDS)
Assuming 80% Armor Stock and 20% Assuming 100% Cash Paid
Cash Paid to Simula Shareholders to Simula Shareholders
-------------------------------- --------------------------
Historical Historical Pro Forma Pro Forma
Armor Simula (1) Adjustments Pro Forma Adjustments Pro Forma
---------- ---------- ----------- --------- ----------- ---------
(as restated (a)(b)) (as restated (a)(b)) (as restated (a)(b))
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 10,841 $ 193 $ 66,429 (10) $ 77,463 $ 31,200 (14) $ 42,234
Accounts receivable (net of
allowance for doubtful
accounts) 58,077 9,338 - 67,415 - 67,415
Costs and earned gross profit
in excess of billings 1,423 8,208 (8,208)(2) 1,423 (8,208)(2) 1,423
Inventories 60,909 2,823 10,218 (2) 73,950 10,218 (2) 73,950
Prepaid expenses and other
current assets 15,840 673 350 (7) 16,863 350 (7) 16,863
Current assets of discontinued
operations 28,231 10,493 (10,493)(3) 28,231 (10,493)(3) 28,231
--------- --------- --------- --------- --------- ---------
Total Current Assets 175,321 31,728 58,296 265,345 23,067 230,116
Property and Equipment (net of accumulated
depreciation) 49,281 6,253 - 55,534 - 55,534
Goodwill (net of accumulated amortization) 98,913 - 65,382 (4) 164,295 65,382 (4) 164,295
Patents, Licenses & Trademarks
(net of accumulated amortization) 7,433 1,389 35,654 (5) 44,476 35,654 (5) 44,476
Other Assets 11,552 1,764 1,864 (7) 15,180 1,864 (7) 15,180
Long-Term Assets of Discontinued Operations 30,047 7,731 (7,731)(3) 30,047 (7,731)(3) 30,047
--------- --------- --------- --------- --------- ---------
TOTAL ASSETS $ 372,547 $ 48,865 $ 153,465 $ 574,877 $ 117,642 $ 539,648
========= ========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 1,961 $ 61,893 $ (61,893)(3)(10) $ 1,961 (61,893)(3)(14) $ 1,961
Short-term debt 627 9,555 (9,555)(3)(10) 627 (9,555)(3)(14) 627
Accounts payable 19,417 4,090 - 23,507 - 23,507
Accrued expenses and other
current liabilities 34,221 7,956 6,098 (2)(6) 48,275 6,098 (2)(6) 48,275
Income taxes payable 2,265 -- - 2,265 - 2,265
Current liabilities of
discontinued operations 15,543 6,116 (6,116)(3) 15,543 (6,116)(3) 15,543
--------- --------- --------- --------- --------- ---------
Total current liabilities 74,034 89,610 (71,466) 92,178 (71,466) 92,178
LONG-TERM DEBT, less current portion 19,730 1,713 147,244 (8)(9) 168,687 147,244 (8)(9) 168,687
LONG-TERM LIABILITIES OF DISCONTINUED
OPERATIONS 245 4 (4)(3) 245 (4)(3) 245
--------- --------- --------- --------- --------- ---------
Total Liabilities 94,009 91,327 75,774 261,110 75,774 261,110
STOCKHOLDERS' EQUITY
Common stock 336 130 (108)(10)(11)(13) 358 (130)(13) 336
Additional paid-in capital 308,702 62,772 (27,565)(10)(12)(13) 343,909 (62,772)(13) 308,702
Retained earnings (accumulated deficit) 43,756 (100,935) 100,935 (13) 43,756 100,935 (13) 43,756
Accumulated other comprehensive loss (1,939) (4,429) 4,429 (13) (1,939) 4,429 (13) (1,939)
Treasury Stock (72,317) - - (72,317) - (72,317)
--------- --------- --------- --------- --------- ---------
Total stockholders' equity 278,538 (42,462) 77,691 313,767 42,462 278,538
--------- --------- --------- --------- --------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 372,547 $ 48,865 $ 153,465 $ 574,877 $ 118,236 $ 539,648
========= ========= ========= ========= ========= =========
(a) See footnote discussion item (2) at page 11.
(b) See footnote discussion item (a) at page 16.
18
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS AS OF JUNE
30, 2003
(1) Simula's condensed consolidated balance sheet as of June 30, 2003.
(2) Reflects the adjustment of Simula's historical costs in excess of billings
and inventory resulting from a change in Simula's revenue recognition
policy to conform to the accounting policy used by Armor on long-term
contracts from percentage completion based on the cost incurred basis to
Armor's policy of percentage completion on the units completed basis. This
change in revenue recognition results in a decrease in costs in excess of
billings of $8.2 million, increase in inventory of $10.2 million (includes
$2.6 million related to the application of purchase accounting), increase
of accounts payable, accrued expenses and other current liabilities of $5.6
million and a decrease in retained earnings of $3.6 million.
(3) Reflects the disposition of Simula's automotive safety division ($12.1
million carrying value), which was sold in July 2003 for $12.5 million of
net proceeds which were used to pay down part of the current portion of
long-term debt.
(4) The excess of the amount paid to acquire 100% of Simula, Inc. common stock
over the fair value of the net tangible and identifiable intangible assets
(see note 5) of $64.8 million is reported as goodwill.
(5) Reflects the estimated fair value of identifiable intangible assets
acquired of $35.7 million. These assets consist of $25.2 million in
customer relationships, $8.8 million in technology and $1.7 million in
licensing agreements. We estimate these identifiable intangible asset
categories have weighted average useful lives of 14, eight and 10 years,
respectively.
(6) Reflects an increase of $532,000 in Simula's pension obligation to adjust
the obligation to the difference between the fair market value of the plan
assets and the projected benefit obligation.
(7) Reflects the capitalization of current debt issuance costs of $0.3 million
and long-term debt issuance costs of $3.2 million for Armor's $150 million
senior subordinated note offering of which a portion of the proceeds were
used to acquire Simula. Other long-term assets were reduced by the
elimination of Simula's capitalized debt issuance costs of $1.3 million
related to the Revolving Line of Credit, 8% Senior Subordinated Convertible
Notes, 9.5% Senior Subordinated Notes, and other long-term debt.
(8) Reflects Simula's repayment of $0.3 million of outstanding debt under the
Revolving Line of Credit, 8% Senior Subordinated Convertible Notes, 9.5%
Senior Subordinated Notes, as well as other long-term debt upon completion
of the acquisition.
(9) Reflects the issuance of $150 million in 8.25% Senior Subordinated Notes
due in 2013 with an original issue discount of $2.5 million.
(10) The estimated total purchase price is $112.8 million, including $2.3
million of estimated transaction costs for Armor, of which approximately
$44 million is to be paid to Simula common shareholders, $59.2 million will
repay Simula debt and $7.3 million will pay transaction costs for Simula.
Of the approximately $44 million to be paid to common shareholders, 80%, or
$35.2 million, is estimated to be paid in Armor common stock and 20%, or
$8.8 million, in cash. Pursuant to the merger agreement, Armor retains the
right to pay the approximately $44 million to Simula common shareholders in
any ratio of cash to common stock as long as at least 20% is paid in cash.
The 2,229,754 shares that Armor expects to issue to Simula common
shareholders is based on $35.2 million divided by $15.80 per share,
calculated using the average closing price of the previous 20 trading days
up to and including September 16, 2003.
19
The cash proceeds from the issuance of $147.5 million in debt were used as
follows:
Total purchase price $ 112,800
Less common stock issued to Simula common shareholders (35,229)
---------
Note proceeds used to purchase Simula $ 77,571
=========
Face value of notes issued $ 150,000
Original issue discount (2,496)
Debt issuance costs (3,504)
Repayment of Simula debt (59,178)
Cash paid for Simula's transaction costs (7,286)
Cash paid to Simula's common shareholders (8,807)
Armor's transaction costs (2,300)
---------
Total excess cash $ (66,429)
=========
(11) Reflects the issuance of 2,229,754 shares of Armor common stock with $0.01
par value per share common stock. A stock price of $15.80 was used to
calculate the amount of shares to be issued based on the amount of equity
consideration to be paid to common shareholders of $35.2 million divided by
our average closing price for the previous 20 trading days up to and ended
September 16, 2003.
(12) Reflects additional paid-in capital associated with the issuance of
2,229,754 shares of Armor common stock. An assumed price of $15.80 per
share issued was determined using the average closing price of the 20
trading days up to and including September 16, 2003 as consideration for
the Simula acquisition.
(13) Reflects the elimination of the historical shareholders' equity of Simula.
(14) The estimated total purchase price is $112.8 million, including $2.3
million of estimated transaction costs for Armor, of which approximately
$44 million is to be paid to Simula common shareholders. Pursuant to the
merger agreement, Armor retains the right to pay the approximately $44
million to Simula common shareholders in any ratio of cash to common stock
as long as at least 20% is paid in cash.
The cash proceeds from the issuance of $147.5 million in debt were used as
follows:
Total purchase price $ 112,800
----------
Note proceeds used to purchase Simula $ 112,800
==========
Face value of notes issued $ 150,000
Original issue discount (2,496)
Debt issuance costs (3,504)
Repayment of Simula debt (59,178)
Cash paid for Simula's transaction costs (7,286)
Cash paid to Simula's common shareholders (44,036)
Armor's transaction costs (2,300)
----------
Total excess cash $ (31,200)
==========
20
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This proxy statement/prospectus includes forward-looking statements. These
statements may be identified by the use of forward-looking terminology such as
"anticipate," "believe," "continue," "could," "estimate," "expect," "intend,"
"may," "might," "plan," "potential," "predict," "should," or "will," or the
negative thereof or other variations thereon or comparable terminology. In
particular, statements about our expectations, beliefs, plans, objectives,
assumptions or future events or performance contained in this proxy
statement/prospectus, including certain statements under the headings entitled
"Summary," "Risk Factors" and "The Merger," constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995.
We have based these forward-looking statements on our current expectations,
assumptions, estimates and projections. While we believe these expectations,
assumptions, estimates and projections are reasonable, such forward-looking
statements are only predictions and involve known and unknown risks and
uncertainties, many of which are beyond our control. These and other important
factors, including those discussed in this proxy statement/prospectus under the
headings entitled "Summary," "Risk Factors," and "The Merger" may cause our or
the combined company's actual results, performance or achievements to differ
materially from any future results, performance or achievements expressed or
implied by these forward-looking statements. Some of the key factors that could
cause actual results to differ from our expectations are:
o our ability to fund future growth;
o the market demand and market acceptance for our products;
o reductions in military or law enforcement spending;
o suspension or cessation of orders under existing contracts with the
U.S. military;
o our ability to protect our intellectual property rights;
o new regulation and legislation;
o trends for the continued growth of our businesses;
o our ability to successfully market existing products and develop and
market new products;
o our ability to integrate our businesses and any businesses acquired by
us through subsequent mergers and acquisitions;
o our ability to expand our market for existing products;
o the effects of our accounting policies and general changes in
accounting principles generally accepted in the United States of
America;
o increased competition or our inability to compete effectively;
o claims against us for product liability;
o interruptions to our supply or distribution networks or facilities;
o our ability to obtain adequate supplies of raw materials;
o our ability to successfully complete the sale of the Services Division;
and
o other risks and uncertainties included in the section of this proxy
statement/prospectus entitled "Risk Factors" beginning on page 22.
Given these risks and uncertainties, you are cautioned not to place undue
reliance on such forward-looking statements. The forward-looking statements
included in or incorporated by reference into this proxy statement/prospectus
are made only as of the date hereof. We do not undertake and specifically
decline any obligation to update any such statements or to publicly announce the
results of any revisions to any such statements to reflect future events or
developments.
21
RISK FACTORS
The merger involves a high degree of risk. A Simula shareholder who votes
in favor of the merger may be choosing to invest in Armor common stock. In
addition to the other information contained in this proxy statement/prospectus,
the annexes and exhibits hereto and the documents incorporated by reference
herein, you should carefully consider the following risk factors in determining
how to vote. Additional risks and uncertainties not presently known to Simula
and Armor or that are not currently believed to be important to you, if they
materialize, also may adversely affect the merger and Simula and Armor as a
combined company. If any of the following risks occur you may lose all or part
of your investment.
RISKS RELATED TO THE MERGER
THE COMBINED COMPANY MAY NOT REALIZE BENEFITS OF THE MERGER BECAUSE OF
INTEGRATION AND OTHER CHALLENGES.
The failure of the combined company to meet the challenges involved in
integrating the operations of Simula and Armor successfully or otherwise to
realize any of the anticipated benefits of the merger could seriously harm the
results of operations of the combined company. The anticipated benefits and
synergies are based on projections and assumptions, not actual experience, and
assume a successful integration. Realizing the benefits of the merger will
depend in part on the integration of technology, operations and personnel. The
integration of the companies is a complex, time-consuming and expensive process
that, without proper planning and implementation, could significantly disrupt
the businesses of Simula and Armor. The challenges involved in this integration
include the following:
o combining product and service offerings;
o coordinating research and development activities to enhance
introduction of new products and services;
o preserving important customer relationships of both Simula and Armor
and resolving potential conflicts that may arise;
o minimizing the diversion of management's attention from ongoing
business concerns;
o addressing differences in the business cultures of Simula and Armor,
maintaining employee morale and retaining key employees;
o coordinating and combining operations, relationships and facilities,
which may be subject to additional constraints imposed by geographic
distance, local laws and regulations; and
o managing a complex integration process shortly after the completion of
other independent acquisitions or dispositions by each of Simula and
Armor.
The combined company may not successfully integrate the operations of
Simula and Armor in a timely manner, or at all, and the combined company may not
realize the anticipated benefits or synergies of the merger to the extent, or in
the timeframe, anticipated. The anticipated benefits and synergies are based on
projections and assumptions, not actual experience, and assume a successful
integration. In addition to the integration risks discussed above, the combined
company's ability to realize these benefits and synergies could be adversely
impacted by practical or legal constraints on its ability to combine operations.
FLUCTUATIONS IN THE MARKET PRICE OF ARMOR COMMON STOCK AFTER THE DATE OF THIS
PROXY STATEMENT/PROSPECTUS WILL HAVE AN EFFECT ON THE VALUE OF THE MERGER
CONSIDERATION SIMULA SHAREHOLDERS RECEIVE IN THE MERGER.
At the closing of the merger, Simula's shareholders will exchange their
shares of Simula common stock for cash or, at the option of Armor, a combination
of cash and shares of Armor common stock valued at approximately $39 million to
$44 million or from approximately $2.90 per share to $3.25 per share. Once the
total amount of consideration is calculated five business days prior to the
completion of the merger, there will be no adjustment in the number of shares of
Armor common stock or the amount of cash distributed to Simula shareholders
because of changes in the market price of either Armor common stock or Simula
common stock. Accordingly, the specific
22
dollar value of Armor common stock that Simula shareholders will receive, if
any, upon the merger's completion will depend in part upon the market value of
Armor common stock at the time the merger is completed, as more fully set forth
in the merger agreement. This value may substantially decrease from the date you
submit your proxy. Moreover, completion of the merger may occur some time after
Simula shareholder approval has been obtained, so that the specific dollar value
of Armor common stock that Simula shareholders will receive, if any, upon the
merger's completion may substantially decrease from the date of the special
meeting of Simula shareholders. See the section entitled "The Merger Agreement
-- Conversion of Simula Common Stock in the Merger" beginning on page 68 of this
proxy statement/prospectus. In addition, Simula may not terminate the merger
agreement or refuse to complete the merger solely because of changes in the
market price of Armor common stock or Simula common stock. The share prices of
Armor common stock and Simula common stock are by nature subject to the general
price fluctuations in the market for publicly-traded equity securities, and the
prices of both companies' common stock have experienced volatility in the past.
We urge you to obtain recent market quotations for Armor common stock and Simula
common stock. Neither Armor nor Simula can predict or give any assurances as to
the respective market prices of its common stock at any time before or after the
completion of the merger. From July 1, 2003 to October 20, 2003, the per share
closing price of Armor common stock on the New York Stock Exchange fluctuated
from a low of $12.98 to a high of $18.25. On August 29, 2003 (the date the
merger agreement was signed), the per share closing price of Armor common stock
on the New York Stock Exchange was $15.16. We encourage you to consider the
market price of Armor common stock before you make your voting decision
regarding the merger.
BECAUSE THE PER SHARE AMOUNT OF MERGER CONSIDERATION WILL NOT BE FIXED UNTIL
FIVE BUSINESS DAYS PRIOR TO THE CLOSING OF THE MERGER (WHICH IS ANTICIPATED TO
BE NO LATER THAN TWO BUSINESS DAYS AFTER THE DATE OF THE SPECIAL MEETING OF
SIMULA'S SHAREHOLDERS), THE PER SHARE AMOUNT OF MERGER CONSIDERATION PAYABLE TO
SIMULA SHAREHOLDERS MAY BE LESS THAN THE PER SHARE AMOUNT OF MERGER
CONSIDERATION THAT SIMULA'S FINANCIAL ADVISOR HAS DETERMINED TO BE A FAIR PRICE.
Simula's financial advisor, Relational Advisors LLC, has advised Simula's
board of directors that an estimated merger consideration of $3.00 per share to
Simula's shareholders is fair from a financial point of view. However, the
actual per share amount of merger consideration payable to Simula's shareholders
will not be determined until five business days prior to the closing of the
merger (which is anticipated to be no later than two business days after the
date of the special meeting of Simula's shareholders). Simula's management
currently estimates, as of the date of this proxy statement/prospectus, that a
reasonable projection of the merger consideration payable to Simula shareholders
will range from approximately $2.90 per share to $3.25 per share subject to a
number of variables, some of which are beyond Simula's control. If the actual
amount of the per share merger consideration is at the lower end of the range,
the per share amount of merger consideration payable to Simula shareholders will
be less than the estimated per share amount of merger consideration determined
by Simula's financial advisor to be fair from a financial point of view.
THERE IS NO REQUIREMENT THAT ANY MINIMUM AMOUNT OF MERGER CONSIDERATION BE
PAYABLE TO SIMULA SHAREHOLDERS. IF THE AMOUNT OF MERGER CONSIDERATION DETERMINED
TO BE PAYABLE TO SIMULA SHAREHOLDERS DECLINES BELOW THE RANGE OF $2.90 TO $3.25
PER SHARE, WHICH IS THE PER SHARE RANGE OF MERGER CONSIDERATION CURRENTLY
ESTIMATED BY SIMULA'S MANAGEMENT, THERE IS NO REQUIREMENT THAT ANY SHAREHOLDER'S
VOTE ON THE MERGER BE RESOLICITED BEFORE THE MERGER IS CONSUMMATED.
The actual per share amount of merger consideration payable to Simula
shareholders in the merger will not be determined until five business days prior
to the consummation of the merger (which is anticipated to be no later than two
business days after the date of the special meeting of Simula's shareholders)
and will be affected by the many factors which are discussed under the section
entitled "The Merger Agreement--Merger Consideration" beginning on page 63 of
this proxy statement/prospectus. This means that the actual merger price and
amount of consideration payable to Simula shareholders in the merger is not
currently known. Simula's management currently estimates that a reasonable
projection of the total merger consideration payable to Simula's shareholders
will range from approximately $39 million to $44 million, or from approximately
$2.90 per share to $3.25 per share. However, it is not a condition to the
consummation of the merger that any minimum amount of merger consideration be
payable to Simula shareholders, and, if the actual per share amount of merger
consideration falls below the low end of the estimated range, there is no
requirement in the merger agreement or otherwise that Simula shareholders be
resolicited in connection with their decision to vote on the approval and
adoption of the merger agreement and approval of the merger.
ARMOR EXPECTS TO INCUR SIGNIFICANT COSTS ASSOCIATED WITH THE MERGER.
Armor estimates that it will incur direct transaction costs of
approximately $2.3 million associated with the merger, which will be included
as part of the total purchase price for financial accounting purposes. In
addition, Simula estimates that it will incur direct transaction costs of
approximately $5.0 million, which will be recognized as expenses as incurred.
Simula and Armor believe the combined entity may incur charges to operations,
which are not currently reasonably estimatable, in the quarter in which the
merger is completed or the following quarters, to reflect costs associated with
integrating the two companies. There can be no assurance that the combined
company will not incur additional material charges in subsequent quarters to
reflect additional costs associated with the merger and the integration of the
two companies.
THE STOCK PRICES AND BUSINESSES OF SIMULA AND ARMOR MAY BE ADVERSELY
AFFECTED IF THE MERGER IS NOT COMPLETED.
Completion of the merger is subject to several closing conditions,
including obtaining requisite regulatory and shareholder approvals, and Simula
and Armor may be unable to obtain such approvals on a timely basis or at all. If
the merger is not completed, the prices of Armor common stock and Simula common
stock may decline to the extent that the current market prices of Armor common
stock and Simula common stock reflect a market assumption that the merger will
be completed. In addition, Simula's operations may be harmed to the extent that
customers or suppliers believe that Simula cannot effectively compete in the
marketplace without the merger, or there is uncertainty surrounding the future
direction of the product and service offerings and strategy of Simula or Armor
on a standalone basis. If the merger is not completed, Armor would not derive
the strategic benefits expected to result from the merger. Simula and Armor also
will be required to pay significant costs incurred in connection with the
merger, including legal, accounting and a portion of the financial advisory
fees, whether or not the merger is completed. Moreover, under specified
circumstances described in the section entitled "The Merger Agreement--
Termination Fees and Expenses" beginning on page 83 of this proxy
statement/prospectus, Simula may be required to pay Armor a termination fee of
$5 million in connection with the termination of the merger agreement.
CERTAIN DIRECTORS AND EXECUTIVE OFFICERS OF SIMULA HAVE INTERESTS AND
ARRANGEMENTS THAT COULD AFFECT THEIR DECISION TO SUPPORT OR APPROVE THE
MERGER.
The directors and executive officers of Simula will receive continuing
indemnification against liabilities and liability insurance coverage, and some
of the directors and executive officers of Simula, including Bradley P. Forst,
Joseph W. Coltman and John A. Jenson, may be entitled to receive payments
pursuant to change of control severance and/or retention agreements with Simula
if their employment is terminated following the merger under certain
circumstances. As a result, these directors and executive officers may be more
likely to vote to approve and adopt the merger agreement and approve the merger
and recommend that you approve and adopt the merger agreement and approve the
merger than if they did not have these interests. As of the close of business on
the record date, Simula directors and executive officers and their respective
affiliates beneficially owned approximately 10.7% of all outstanding shares of
Simula common stock entitled to vote at the special meeting. For a description
of some of these interests, please see the section entitled "The
Merger--Interests of Simula Directors and Officers in the Merger" beginning on
page 58 of this proxy statement/prospectus.
23
SIMULA MAY LOSE AN OPPORTUNITY TO ENTER INTO A MERGER OR BUSINESS COMBINATION
WITH ANOTHER PARTY ON MORE FAVORABLE TERMS BECAUSE OF PROVISIONS IN THE MERGER
AGREEMENT.
While the merger agreement is in effect, Simula is, with limited
exceptions, prohibited from entering into or soliciting, initiating or
encouraging any inquiries or proposals that may lead to a proposal or offer for
a merger, with any person other than Armor. As a result of this prohibition,
Simula may lose an opportunity to enter into a transaction with another
potential partner on more favorable terms.
CHARGES TO EARNINGS RESULTING FROM THE APPLICATION OF THE PURCHASE METHOD OF
ACCOUNTING MAY ADVERSELY AFFECT THE MARKET VALUE OF ARMOR'S COMMON STOCK
FOLLOWING THE MERGER.
In accordance with United States generally accepted accounting principles,
the combined company will account for the merger using the purchase method of
accounting, which will result in charges to earnings that could have a material
adverse effect on the market value of the common stock of Armor following
completion of the merger. Under the purchase method of accounting, the combined
company will allocate the total estimated purchase price to Simula's net
tangible assets and amortizable intangible assets based on their fair values as
of the date of completion of the merger, and record the excess of the purchase
price over those fair values as goodwill. The combined company will incur
amortization expense over the useful lives of amortizable intangible assets
acquired in connection with the merger. In addition, to the extent the value of
goodwill becomes impaired, the combined company may be required to incur
material charges relating to the impairment of that asset. These amortization
and potential impairment charges could have a material impact on the combined
company's results of operations.
IN ORDER TO BE SUCCESSFUL, THE COMBINED COMPANY MUST RETAIN AND MOTIVATE KEY
EMPLOYEES, WHICH WILL BE MORE DIFFICULT IN LIGHT OF UNCERTAINTY REGARDING THE
MERGER, AND FAILURE TO DO SO COULD SERIOUSLY HARM THE COMBINED COMPANY.
In order to be successful, the combined company must retain and motivate
executive officers and other key employees, including those in managerial and
technical positions. Experienced management and technical personnel in the
companies' respective industries are in high demand and competition for their
talents is intense. Employee retention may be a particularly challenging issue
in connection with the merger. Employees of Simula or Armor may experience
uncertainty about their future role with the combined company until or after
strategies with regard to the combined company are announced or executed. In
addition, a portion of Simula's employee options have exercise prices in excess
of the current value of the merger consideration. These circumstances may
adversely affect the combined company's ability to attract and retain key
management and technical personnel. The combined company also must continue to
motivate employees and keep them focused on the strategies and goals of the
combined company, which may be particularly difficult due to the potential
distractions of the merger.
THE MARKET PRICE OF THE SHARES OF ARMOR COMMON STOCK MAY BE AFFECTED BY
FACTORS DIFFERENT FROM THOSE AFFECTING THE SHARES OF SIMULA COMMON STOCK.
Upon completion of the merger, holders of Simula common stock may become
holders of Armor common stock. An investment in Armor common stock has different
risks than an investment in Simula common stock. Former holders of Simula common
stock will be subject to additional risks upon exchange of their shares of
Simula common stock for Armor common stock in the merger, some of which are
described below in the section entitled "Risk Factors--Risks Related to Armor"
beginning on page 25 of this proxy statement/prospectus. For a discussion of the
businesses of Simula and Armor, see the documents incorporated by reference into
this proxy statement/prospectus and referred to in the section entitled "Where
You Can Find More Information" beginning on page 99 of this proxy
statement/prospectus.
IF ARMOR DOES NOT SUCCESSFULLY INTEGRATE SIMULA OR THE MERGER'S BENEFITS DO
NOT MEET THE EXPECTATIONS OF FINANCIAL OR INDUSTRY ANALYSTS, THE MARKET PRICE
FOR ARMOR'S COMMON STOCK MAY DECLINE.
24
The market price of Armor common stock may decline as a result of the
merger if:
o the integration of Armor and Simula is unsuccessful;
o Armor does not achieve the perceived benefits of the merger as rapidly
or to the extent anticipated by financial or industry analysts; or
o the effect of the merger on Armor's financial results is not consistent
with the expectations of financial or industry analysts.
IF THE MERGER IS CONSUMMATED, SIMULA'S NET OPERATING LOSS CARRYOVERS WILL BE
EITHER EXTINGUISHED OR LIMITED.
As of December 31, 2002, Simula and its subsidiaries had consolidated net
operating loss carryovers of approximately $99,584,927 for federal income tax
purposes. In general, net operating loss carryovers can be used to reduce or
eliminate federal income tax payable in future years. If the merger is
consummated, Simula's net operating loss carryovers will be either extinguished
or limited. For a discussion of federal income tax consequences see the section
entitled "The Merger -- Material United States Federal Income Tax Consequences"
beginning on page 59 of this proxy statement/prospectus.
THE MERGER MAY BE TAXABLE TO YOU.
The merger will be taxable to you for United States federal income tax
purposes if the fair market value of the Armor common stock given as
consideration in the merger is less than 80% of the total consideration given in
the merger, and may be taxable to you even if the fair market value of the Armor
common stock given as consideration is equal to or greater than 80% of the total
consideration. If the merger is taxable to you for federal income tax purposes,
and assuming you hold your Simula common stock as a capital asset, you will
generally recognize capital gain or loss equal to the difference between (a) the
sum of the amount of cash and the fair market value of the Armor common stock
you receive, and (b) your adjusted tax basis in the Simula common stock
surrendered in exchange therefor. Such gain or loss will be long-term gain or
loss if you have held the Simula common stock for more than one year.
IN ADDITION TO THE RISKS DESCRIBED ABOVE, ARMOR AND SIMULA ARE EACH SUBJECT TO
THEIR OWN SPECIFIC RISKS AND UNCERTAINTIES, INCLUDING THOSE RISKS AND
UNCERTAINTIES DESCRIBED BELOW:
RISKS RELATED TO ARMOR
RISKS RELATED TO ARMOR'S INDUSTRY
THE PRODUCTS ARMOR SELLS ARE INHERENTLY RISKY AND COULD GIVE RISE TO PRODUCT
LIABILITY AND OTHER CLAIMS.
The products that Armor manufactures are typically used in applications and
situations that involve high levels of risk of personal injury. Failure to use
Armor's products for their intended purposes, failure to use them properly,
their malfunction, or, in some limited circumstances, even correct use of
Armor's products could result in serious bodily injury or death. Armor's
products include: body armor designed to protect against ballistic and sharp
instrument penetration; less-lethal products such as less-lethal munitions,
pepper sprays, distraction devices and flameless expulsion grenades; various
models of police batons made of wood, alloy steel, acetate, aluminum and
polycarbonate products; vehicle and hard armoring systems; and police duty gear.
Claims have been made and are pending against certain of Armor's
subsidiaries, involving permanent physical injury and death caused by
self-defense sprays and other munitions intended to be less-lethal. In addition,
the manufacture and sale of certain less-lethal products may be the subject of
product liability claims arising from the design, manufacture or sale of such
goods. If these claims are decided against Armor and Armor is found to be
liable, it may be required to pay substantial damages and its insurance costs
may increase significantly as a result. Also, a significant or extended lawsuit,
such as a class action, could also divert significant amounts of management's
time and attention. Armor cannot assure you that its insurance coverage would be
sufficient to cover the payment of any potential claim. In addition, Armor
cannot assure you that this or any other insurance coverage will continue to be
available or, if available, that it will be able to obtain it at a reasonable
cost. Armor's cost of obtaining insurance coverage has risen substantially since
September 11, 2001. Any material uninsured loss could have a material adverse
effect on Armor's business, financial condition and results of operations. In
addition, the inability to obtain product liability coverage would prohibit
Armor from bidding for orders from certain governmental customers since, at
present, many bids from governmental entities require such coverage, and any
such inability would have a material adverse effect on our business, financial
condition and results of operations.
ARMOR IS SUBJECT TO EXTENSIVE GOVERNMENT REGULATION AND ITS FAILURE OR
INABILITY TO COMPLY WITH THESE REGULATIONS COULD MATERIALLY RESTRICT ITS
OPERATIONS AND SUBJECT ARMOR TO SUBSTANTIAL PENALTIES.
Armor is subject to federal licensing requirements with respect to the sale
in foreign countries of certain of its products. In addition, Armor is obligated
to comply with a variety of federal, state and local regulations governing
certain aspects of its operations and workplace, including regulations
promulgated by, among others, the U.S. Departments of Commerce, State and
Transportation, the U.S. Environmental Protection Agency and the U.S. Bureau of
Alcohol, Tobacco and Firearms. Additionally, the failure to obtain applicable
governmental approval and clearances could adversely affect Armor's ability to
continue to service the government contracts it maintains. Furthermore, Armor
has material contracts with governmental entities and are subject to rules,
regulations and approvals applicable to government contractors. Armor is also
subject to routine audits to assure its compliance with these requirements. In
addition, a number of Armor's employees involved with certain of its federal
government contracts are required to obtain specified levels of security
clearances. Armor's business may suffer if it or its employees are unable to
obtain the security clearances that are needed to perform services contracted
for the
25
Department of Defense, one of Armor's major customers. Armor's failure to comply
with these contract terms, rules or regulations could expose it to substantial
penalties, including the loss of these contracts and disqualification as a U.S.
government contractor.
Like other companies operating internationally, Armor is subject to the
Foreign Corrupt Practices Act and other laws which prohibit improper payments to
foreign governments and their officials by U.S. and other business entities.
Armor operates in countries known to experience endemic corruption. Armor's
extensive operations in such countries creates the risk of an unauthorized
payment by an employee or agent of Armor which would be in violation of various
laws including the Foreign Corrupt Practices Act. Violations of the Foreign
Corrupt Practices Act may result in severe criminal penalties which could have a
material adverse effect on Armor's business, financial condition and results of
operations.
ARMOR HAS SIGNIFICANT INTERNATIONAL OPERATIONS AND ASSETS AND IS THEREFORE
SUBJECT TO ADDITIONAL FINANCIAL AND REGULATORY RISKS.
Armor sells its products and services in foreign countries and seeks to
increase its level of international business activity. In addition, Armor's
discontinued operations have operations and assets in many parts of Africa,
South America, Southeast Asia, Central Asia, the Balkans and Russia. Armor's
overseas operations are subject to various risks, including: U.S.-imposed
embargoes of sales to specific countries (which could prohibit sales of our
products there); foreign import controls (which may be arbitrarily imposed and
enforced and which could interrupt our supplies or prohibit customers from
purchasing our products); exchange rate fluctuations; dividend remittance
restrictions; expropriation of assets; war, civil uprisings and riots;
government instability; the necessity of obtaining government approvals for both
new and continuing operations; and legal systems of decrees, laws, taxes,
regulations, interpretations and court decisions that are not always fully
developed and that may be retroactively or arbitrarily applied.
Armor may also be subject to unanticipated income taxes, excise duties,
import taxes, export taxes or other governmental assessments. In addition, a
percentage of the payments to Armor in its international markets are often in
local currencies. Although most of these currencies are presently convertible
into U.S. dollars, Armor cannot be sure that convertibility will continue. Even
if currencies are convertible, the rate at which they convert is subject to
substantial fluctuation. Armor's ability to transfer currencies into or out of
local currencies may be restricted or limited. Any of these events could result
in a loss of business or other unexpected costs which could reduce revenue or
profits and have a material adverse effect on Armor's business, financial
condition and results of operations.
Armor routinely operates in areas where local government policies regarding
foreign entities and the local tax and legal regimes are often uncertain, poorly
administered and in a state of flux. Armor cannot, therefore, be certain that it
is in compliance with, or will be protected by, all relevant local laws and
taxes at any given point in time. A subsequent determination that Armor failed
to comply with relevant local laws and taxes could have a material adverse
effect on its business, financial condition and results of operations.
RISKS RELATED TO ARMOR'S BUSINESS
MANY OF ARMOR'S CUSTOMERS HAVE FLUCTUATING BUDGETS WHICH MAY CAUSE SUBSTANTIAL
FLUCTUATIONS IN ITS RESULTS OF OPERATIONS.
Customers for Armor's products include federal, state, municipal, foreign
and military, law enforcement and other governmental agencies. Government tax
revenues and budgetary constraints, which fluctuate from time to time, can
affect budgetary allocations for these customers. Many domestic and foreign
government agencies have in the past experienced budget deficits that have led
to decreased spending in defense, law enforcement and other military and
security areas. Armor's results of operations may be subject to substantial
period-to-period fluctuations because of these and other factors affecting
military, law enforcement and other governmental spending. For example, Armor
attributes part of the decline in its Products Division revenue during the first
quarter of 2001 with the timing of the Bulletproof Vest Partnership Act, which
provides federal matching funds to law enforcement agencies purchasing bullet
resistant vests. Armor believes that many agencies delayed their purchasing
decisions during the first quarter of 2001 until such federal funds were fully
allocated. A reduction of funding for federal,
26
state, municipal, foreign and other governmental agencies could have a material
adverse effect on sales of Armor's products and its business, financial
condition and results of operations.
THE LOSS OF, OR A SIGNIFICANT REDUCTION IN, U.S. MILITARY BUSINESS WOULD HAVE
A MATERIAL ADVERSE EFFECT ON ARMOR.
U.S. military contracts account for a significant portion of the business
of Armor's Mobile Security Division. The U.S. military funds these contracts in
annual increments. These contracts require subsequent authorization and
appropriation that may not occur or that may be greater than or less than the
total amount of the contract. Changes in the U.S. military's budget, spending
allocations, and the timing of such spending could adversely affect Armor's
ability to receive future contracts. None of Armor's contracts with the U.S.
military have a minimum purchase commitment and the U.S. military generally has
the right to cancel its contracts unilaterally without prior notice. Armor's
Mobile Security Division is the sole-source provider to the U.S. military for
up-armoring of the HMMWV. Up-Armored HMMWVs, and related programs such as
maintenance, spare parts and engineering services associated with Up-Armored
HMMWVs, accounted for approximately 39% of the sales of the Mobile Security
Division in 2002. The HMMWVs are manufactured by AM General Corporation under
separate U.S. military contracts. Should production or deliveries of HMMWVs be
significantly interrupted, or should other single source suppliers significantly
interrupt deliveries of Armor's components for up-armoring the HMMWVs, Armor
will not be able to deliver such up-armoring systems for the HMMWVs to the U.S.
military on schedule, which could have a material adverse effect on Armor's
business, financial condition and results of operations.
ARMOR MAY LOSE MONEY OR GENERATE LESS THAN EXPECTED PROFITS ON OUR FIXED-PRICE
CONTRACTS.
Some of Armor's government contracts provide for a predetermined, fixed-
price for the products Armor makes regardless of the costs it incurs. Therefore,
fixed-price contracts require Armor to price its contracts by forecasting its
expenditures. When making proposals for fixed-price contracts, Armor relies on
its estimates of costs and timing for completing these projects. These estimates
reflect management's judgments regarding Armor's capability to complete projects
efficiently and timely. Armor's production costs may, however, exceed forecasts
due to unanticipated delays or increased cost of materials, components, labor,
capital equipment or other factors. Therefore, Armor may incur losses on fixed-
price contracts that it had expected to be profitable, or such contracts may be
less profitable than expected, which could have a material adverse effect on
Armor's business, financial condition and results of operations.
ARMOR'S BUSINESS IS SUBJECT TO VARIOUS LAWS AND REGULATIONS FAVORING THE U.S.
GOVERNMENT'S CONTRACTUAL POSITION, AND OUR FAILURE TO COMPLY WITH SUCH LAWS
AND REGULATIONS COULD HARM OUR OPERATING RESULTS AND PROSPECTS.
As a contractor to the U.S. government, Armor must comply with laws and
regulations relating to the formation, administration and performance of the
federal government contracts that affect how Armor does business with its
clients and may impose added costs on its business. These rules generally favor
the U.S. government's contractual position. For example, these regulations and
laws include provisions that contracts we have been awarded are subject to:
o protest or challenge by unsuccessful bidders; and
o unilateral termination, reduction or modification by the government.
The accuracy and appropriateness of certain costs and expenses used to
substantiate Armor's direct and indirect costs for the U.S. government under
both cost-plus and fixed-price contracts are subject to extensive regulation and
audit by the Defense Contract Audit Agency, an arm of the U.S. Department of
Defense. Responding to governmental audits, inquiries or investigations may
involve significant expense and divert management's attention. Armor's failure
to comply with these or other laws and regulations could result in contract
termination, suspension or debarment from contracting with the federal
government, civil fines and damages and criminal prosecution and penalties, any
of which could have a material adverse effect on its operating results.
27
ARMOR'S MARKETS ARE HIGHLY COMPETITIVE AND IF IT IS UNABLE TO COMPETE
EFFECTIVELY, ARMOR WILL BE ADVERSELY AFFECTED.
The markets in which Armor operates include a large number of competitors
ranging from small businesses to multinational corporations and are highly
competitive. Competitors who are larger, better financed and better known than
Armor may compete more effectively than Armor can. In order to stay competitive
in its industry, Armor must keep pace with changing technologies and client
preferences. If Armor is unable to differentiate its services from those of its
competitors, its revenues may decline. In addition, Armor's competitors have
established relationships among themselves or with third parties to increase
their ability to address client needs. As a result, new competitors or alliances
among competitors may emerge and compete more effectively than Armor can. There
is also a significant industry trend towards consolidation, which may result in
the emergence of companies which are better able to compete against Armor.
THERE ARE LIMITED SOURCES FOR SOME OF ARMOR'S RAW MATERIALS WHICH MAY
SIGNIFICANTLY CURTAIL ITS MANUFACTURING OPERATIONS.
The raw materials that Armor uses in manufacturing ballistic resistant
garments and up-armored vehicles include: SpectraShield, a patented product of
Honeywell, Inc.; Z-Shield, a patented product of Honeywell, Inc.; Zylon, a
patented product of Toyobo Co., Ltd.; Kevlar, a patented product of E.I. du Pont
de Nemours Co., Inc., or DuPont; and Twaron, a patented product of Akzo-Nobel
Fibers, B.V. Armor purchases these materials in the form of woven cloth from
five independent weaving companies. In the event Du Pont or its licensee in
Europe cease, for any reason, to produce or sell Kevlar to Armor, Armor would
utilize these other ballistic resistant materials as a substitute. However, none
of SpectraShield, Twaron, Z-Shield or Zylon is expected to become a complete
substitute for Kevlar in the near future. Armor enjoys a good relationship with
its suppliers of Kevlar, SpectraShield, Twaron, Z-Shield and Zylon. The use of
Zylon and Z-Shield in the design of ballistic resistant vests is a recent
technological advancement that is subject to continuing development and study.
Toyobo is the only producer of Zylon, and Honeywell is the only producer of
Z-Shield. Should these materials become unavailable for any reason, Armor would
be unable to replace them with materials of like weight and strength. Thus, if
Armor's supply of any of these materials were materially reduced or cut off or
if there were a material increase in the prices of these materials, its
manufacturing operations could be adversely affected and its costs increased,
and its business, financial condition and results of operations would be
materially adversely affected.
ARMOR MAY BE UNABLE TO COMPLETE OR INTEGRATE ACQUISITIONS EFFECTIVELY, IF AT
ALL, AND AS A RESULT MAY INCUR UNANTICIPATED COSTS OR LIABILITIES OR
OPERATIONAL DIFFICULTIES.
Armor intends to grow through the acquisition of businesses and assets that
will complement its current businesses. Armor cannot be certain that it will be
able to identify attractive acquisition targets, obtain financing for
acquisitions on satisfactory terms or successfully acquire identified targets.
Furthermore, Armor may have to divert its management's attention and its
financial and other resources from other areas of Armor's business. Armor's
inability to implement its acquisition strategy successfully may hinder the
expansion of its business. Because Armor depends in part on acquiring new
businesses and assets to develop and offer new products, failure to implement
its acquisition strategy may also adversely affect Armor's ability to offer new
products in line with industry trends.
Armor may not be successful in integrating acquired businesses into its
existing operations. Integration may result in unanticipated liabilities or
unforeseen operational difficulties, which may be material, or require a
disproportionate amount of management's attention. Acquisitions may result in
Armor incurring additional indebtedness or issuing preferred stock or additional
common stock. Competition for acquisition opportunities in the industry may
rise, thereby increasing its cost of making acquisitions or causing it to
refrain from making further acquisitions. In addition, the terms and conditions
of Armor's new secured revolving credit facility and the indenture governing
Armor's 8 1/4% Notes impose restrictions on Armor that, among other things,
restrict its ability to make acquisitions.
ARMOR'S RESOURCES MAY BE INSUFFICIENT TO MANAGE THE DEMANDS IMPOSED BY ITS
GROWTH.
Armor has rapidly expanded its operations, and this growth has placed
significant demands on its management, administrative, operating and financial
resources. The continued growth of Armor's customer base, the types of
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services and products offered and the geographic markets served can be expected
to continue to place a significant strain on its resources. In addition, Armor
cannot easily identify and hire personnel qualified both in the provision and
marketing of its security services and products. Armor's future performance and
profitability will depend in large part on its ability to attract and retain
additional management and other key personnel; its ability to implement
successful enhancements to its management, accounting and information technology
systems; and its ability to adapt those systems, as necessary, to respond to
growth in its business.
ARMOR MAY BE UNABLE TO PROTECT ITS PROPRIETARY TECHNOLOGY, INCLUDING THE
TECHNOLOGIES IT USES TO FURNISH THE UP-ARMORING OF HMMWVS.
Armor is dependent upon a variety of methods and techniques that it regards
as proprietary trade secrets. Armor is also dependent upon a variety of
trademarks, service marks and designs to promote brand name development and
recognition. Armor relies on a combination of trade secret, copyright, patent,
trademark, unfair competition and other intellectual property laws as well as
contractual agreements to protect its rights to such intellectual property. Due
to the difficulty of monitoring unauthorized use of and access to intellectual
property, however, such measures may not provide adequate protection. It is
possible that Armor's competitors may access its intellectual property and
proprietary information and use it to their advantage. In addition, there can be
no assurance that courts will always uphold Armor's intellectual property
rights, or enforce the contractual arrangements that it has entered into to
protect its proprietary technology. Any unenforceability or misappropriation of
Armor's intellectual property could have a material adverse effect on its
business, financial condition and results of operations. Furthermore, Armor
cannot assure you that any pending patent application or trademark application
made by it will result in an issued patent or registered trademark, or that, if
a patent is issued, it will provide meaningful protection against competitors or
competitor technologies. In addition, if Armor brings or becomes subject to
litigation to defend against claimed infringement of its rights or of the rights
of others or to determine the scope and validity of Armor's intellectual
property rights, such litigation could result in substantial costs and diversion
of its resources which could have a material adverse effect on its business,
financial condition and results of operations. Unfavorable results in such
litigation could also result in the loss or compromise of our proprietary
rights, subject Armor to significant liabilities, require Armor to seek licenses
from third parties on unfavorable terms, or prevent it from manufacturing or
selling its products, any of which could have a material adverse effect on its
business, financial condition and results of operations.
ARMOR MAY BE ADVERSELY AFFECTED BY APPLICABLE ENVIRONMENTAL LAWS AND
REGULATIONS.
Armor is subject to federal, state, local and foreign laws and regulations
governing the protection of the environment and human health, including those
regulating discharges to the air and water, the management of wastes, and the
control of noise and odors. Armor cannot assure you that it is at all times in
complete compliance with all such requirements. Like all companies in Armor's
industry, Armor is subject to potentially significant fines or penalties if it
fails to comply with environmental requirements. Environmental requirements are
complex, change frequently, and could become more stringent in the future.
Accordingly, Armor cannot assure you that these requirements will not change in
a manner that will require material capital or operating expenditures or will
otherwise have a material adverse effect on it in the future. In addition, Armor
is also subject to environmental laws requiring the investigation and clean-up
of environmental contamination. Armor may be subject to liability, including
liability for clean-up costs, if contamination is discovered at one of Armor's
current or former facilities, in some circumstances even if such contamination
was caused by a third party such as a prior owner. Armor also may be subject to
liability if contamination is discovered at a landfill or other location where
it has disposed of wastes, notwithstanding that its historic disposal practices
may have been in accordance with all applicable requirements. Armor uses
Orthochlorabenzalmalononitrile and Chloroacetophenone chemical agents in
connection with its production of tear gas, and these chemicals are hazardous
and could cause environmental damage if not handled and disposed of properly.
Moreover, private parties may bring claims against Armor based on alleged
adverse health impacts or property damage caused by its operations. The amount
of liability for cleaning up contamination or defending against private party
claims could be material.
ARMOR MAY BE UNABLE TO SELL ITS ARMORGROUP SERVICES DIVISION.
Armor has previously announced its intention to terminate operation of its
ArmorGroup Services Division, or Services Division, which provides certain
security and investigative services, and to sell the division. Armor may
29
not be able to sell the Services Division at a commercially reasonable price, or
at all. If Armor is unable to sell the Services Division in a timely manner,
Armor will be required to continue to direct its management and financial
resources to the operation of the Services Division, while continuing to seek
potential buyers for this business. Armor's discontinued operations may continue
to have a negative impact on its overall business, financial condition and
operating results, and Armor may have to record further writedowns of the assets
comprising such division. Armor's Services Division is classified as held for
sale and is reported as discontinued operations. If Armor fails to sell its
Services Division we may have to report it as part of our continuing operations.
THE SERVICES PROVIDED BY THE ARMORGROUP SERVICES DIVISION ARE INHERENTLY
RISKY, REQUIRE ARMOR TO REGULARLY LOCATE EMPLOYEES IN SITUATIONS WHERE THEY
ARE SUBJECT TO RISK OF PERSONAL INJURY AND MAY SUBJECT ARMOR TO CLAIMS SEEKING
SUBSTANTIAL DAMAGES.
Armor provides security training services through its Services Division,
which is currently being accounted for as discontinued operations. These
services are most in demand in areas of the world encountering high levels of
violence, unstable or chaotic political environments and little or no effective
local law enforcement authorities. As a result, Armor's management and employees
are often located, and provide services, in hostile and high risk environments
characterized by political instability, emerging market conditions and/or
significant natural resources such as Africa, South America, Southeast Asia,
Central Asia, the Balkans and Russia. In addition, Armor operates in locations
where murders, kidnappings, terrorism and attacks on facilities and
installations are endemic. Any personal attacks on Armor's personnel could
materially adversely effect its operations, particularly in the locations where
such attacks occur and may subject Armor to material claims from its employees
who are subject to physical harm or their beneficiaries. Additionally, Armor
cannot be certain whether parties will bring lawsuits in the future alleging
negligence or other theories of liability in the provision of security services
and seeking substantial amounts in damages. Armor cannot assure you that its
insurance coverage would be sufficient to cover the payment of any potential
claim. In addition, Armor cannot assure you that this or any other insurance
coverage will continue to be available or, if available, that Armor will be able
to obtain it at a reasonable cost. Any material uninsured loss could have a
material adverse effect on Armor's business, financial condition and results of
operations. Even if Armor sells its Services Division, Armor may retain
liability for claims made after the sale with respect to incidents that occur
prior to the sale. Any such lawsuit, if successful, could have a material
adverse effect on Armor's business, financial condition and results of
operations.
RISKS RELATED TO OWNERSHIP OF ARMOR COMMON STOCK
DELAWARE LAW MAY LIMIT POSSIBLE TAKEOVERS.
Armor's certificate of incorporation makes it subject to the anti-takeover
provisions of Section 203 of the Delaware General Corporation Law. In general,
Section 203 prohibits publicly-held Delaware corporations to which it applies
from engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved in
a prescribed manner. This provision could discourage others from bidding for
Armor's shares and could, as a result, reduce the likelihood of an increase in
Armor's stock price that would otherwise occur if a bidder sought to buy its
stock.
ARMOR'S CERTIFICATE OF INCORPORATION AUTHORIZES THE ISSUANCE OF SHARES OF
BLANK CHECK PREFERRED STOCK.
Armor's certificate of incorporation provides that its board of directors
will be authorized to issue from time to time, without further stockholder
approval, up to 5,000,000 shares of preferred stock in one or more series and to
fix or alter the designations, preferences, rights and any qualifications,
limitations or restrictions of the shares of each series, including the dividend
rights, dividend rates, conversion rights, voting rights, terms of redemption,
including sinking fund provisions, redemption price or prices, liquidation
preferences and the number of shares constituting any series or designations of
any series. Such shares of preferred stock could have preferences over Armor's
common stock with respect to dividends and liquidation rights. Armor may issue
additional preferred stock in ways which may delay, defer or prevent a change in
control of it without further action by its stockholders. Such shares of
preferred stock may be issued with voting rights that may adversely affect the
voting power of the holders of Armor's common stock by increasing the number of
outstanding shares having voting rights, and by the creation of class or series
voting rights.
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THE MARKET PRICE FOR ARMOR'S COMMON STOCK IS VOLATILE.
The market price for Armor's common stock may be highly volatile. Armor
believes that a variety of factors, including announcements by it or its
competitors, quarterly variations in financial results, trading volume, general
market trends and other factors, could cause the market price of its common
stock to fluctuate substantially. Additionally, due to Armor's relatively modest
size, it winning or losing a large contract may have the effect of distorting
Armor's overall financial results.
ARMOR MAY ISSUE A SUBSTANTIAL AMOUNT OF ITS COMMON STOCK IN CONNECTION WITH
FUTURE ACQUISITIONS AND THE SALE OF THOSE SHARES COULD ADVERSELY AFFECT ITS
STOCK PRICE.
As part of Armor's acquisition strategy, it anticipates issuing additional
shares of common stock as consideration for such acquisitions. To the extent
that Armor is able to grow through acquisitions and issue its shares of common
stock as consideration, the number of outstanding shares of common stock that
will be eligible for sale in the future is likely to increase substantially.
Persons receiving shares of Armor's common stock in connection with these
acquisitions may be more likely to sell large quantities of their common stock
that may influence the price of its common stock. In addition, the potential
issuance of additional shares in connection with anticipated acquisitions could
lessen demand for Armor's common stock and result in a lower price than would
otherwise be obtained.
ARMOR STOCK PRICE MAY BE ADVERSELY AFFECTED WHEN ADDITIONAL SHARES ARE SOLD.
If Armor's stockholders sell substantial amounts of its common stock in the
public market, the market price of its common stock could fall. These sales
might make it more difficult for Armor to sell equity or equity-related
securities in the future at a time and price that it deems appropriate and may
require Armor to issue greater amounts of its common stock to finance such
acquisition. Additional shares sold to finance acquisitions may dilute Armor's
earnings per share if the new operations' earnings are disappointing.
ARMOR CURRENTLY DOES NOT INTEND TO PAY DIVIDENDS.
Armor has never declared or paid cash dividends on its common stock and
currently does not intend to pay any cash dividends on its common stock. Armor
currently intends to retain any earnings for working capital, repayment of
indebtedness, capital expenditures and general corporate purposes. Armor's
credit facility and indenture regarding its 8 1/4% Notes contain restrictions on
its ability to pay dividends or make other distributions.
ARMOR HAS A HIGH LEVEL OF DEBT.
As of September 17, 2003, Armor's outstanding debt was approximately $154.0
million, of which $147.5 million represents Armor's 8 1/4% Notes. Armor is
obligated to repay aggregate principal in the amount of $150 million on the
8 1/4% Notes upon maturity or acceleration thereof. Effective as of September 2,
2003, Armor completed a series of interest rate swaps on its 8 1/4% Notes. The
interest rate swaps convert the 8 1/4% fixed coupon on the notes to a variable
rate equal to six-month LIBOR, set in arrears, plus a spread ranging from 2.735%
to 2.75%.
Armor's high level of debt could have important consequences to you and to
us. For example:
o No payment of any kind may be made to Armor's common stockholders
without first meeting its obligations under the 8 1/4% Notes;
o Armor may become more vulnerable to general adverse economic and
industry conditions and adverse changes in governmental regulations;
o Armor may have to dedicate a substantial portion of its cash flow from
operations to make payments on the 8 1/4% Notes, reducing the
availability of cash flow to fund future capital expenditures, working
capital, execution of Armor's growth strategy, research and development
costs and other general corporate requirements;
31
o Armor may have limited flexibility in planning for, or reacting to,
changes in its business and its industry, which may place Armor at a
competitive disadvantage compared with competitors that have less debt
or more financial resources; and
o Armor may have limited ability to borrow additional funds, even when
necessary to maintain adequate liquidity.
The terms of Armor's secured revolving credit facility and the indenture
governing the 8 1/4% Notes will allow Armor to incur substantial amounts of
additional debt, subject to certain limitations. Armor might incur additional
debt for various reasons, including to pay for additional acquisitions that
Armor may make and assuming debt of companies that it may acquire.
RISKS RELATED TO SIMULA
RISKS RELATED TO SIMULA'S INDUSTRY
GOVERNMENT CONTRACTOR LAWS AND REGULATION AND LEGAL UNCERTAINTIES MAY DAMAGE
SIMULA'S BUSINESS.
As a contractor and subcontractor to the United States government, Simula
is subject to various laws and regulations that are more restrictive than those
applicable to non-government contractors. Sales of many of Simula'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. Simula's government-related revenue has resulted almost exclusively
from firm, fixed-price contracts. Fixed-price contracts involve certain inherent
risks to Simula, including underestimating 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 Simula 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, or the
DCAA, an arm of the United States Department of Defense. The DCAA has the right
to challenge Simula's cost estimates or allocations with respect to any such
contract. If a DCAA audit establishes overcharges or discrepancies in costs or
accounting, it can seek the repayment of such overcharges or seek other
reconciliations. DCCA audits are routine in the defense contracting industry,
and Simula has been subject to such audits from time to time.
SIMULA FACES NEW AND ADDITIONAL RISKS IN INTERNATIONAL MARKETS AND IT MAY BE
UNABLE TO SUCCESSFULLY EXECUTE ITS BUSINESS MODEL IN INTERNATIONAL MARKETS.
One component of Simula's strategy is to expand its operations into
selected international markets. Military procurement, for example, has
traditionally had a large international base. Countries in which Simula is
actively marketing include Germany, Canada, France, Italy, the United Kingdom,
Norway, Japan, India, Korea and Australia. Simula, however, may be unable to
execute its business model in these markets or new markets. Further, foreign
providers of competing products and services may have a substantial advantage
over Simula in attracting consumers and businesses in their country due to
earlier established businesses in that country, greater knowledge with respect
to the cultural differences of consumers and businesses residing in that country
and/or their focus on a single market. Simula expects to continue to experience
higher costs as a percentage of revenues in connection with the development and
maintenance of international products and services. In pursuing Simula's
international expansion strategy, it faces several additional risks, including:
o foreign laws and regulations, which may vary country by country, that
may impact how Simula conducts its business;
o higher costs of doing business in foreign countries, including
different employment laws;
o potential adverse tax consequences if taxing authorities in different
jurisdictions worldwide disagree with its interpretation of various tax
laws or its determinations as to the income and expenses attributable
to specific jurisdictions, which could result in Simula's paying
additional taxes, interest and penalties;
o technological differences that vary by marketplace, which Simula may
not be able to support;
o longer payment cycles and foreign currency fluctuations;
o economic downturns; and
o revenue growth outside of the United States may not continue at the
same rate if it is determined that Simula has already launched its
products and service in the most significant markets.
One or more of these factors could adversely effect Simula's future
international operations and, consequently, Simula's business, operating results
and financial condition.
32
RISKS RELATED TO SIMULA'S BUSINESS
SIMULA RELIES TO A GREAT EXTENT ON U.S. MILITARY BUSINESS.
Simula's business relies to a great extent on relatively few major
customers, although the mix of major customers has varied from year to year
depending on the status of then current contracts. During fiscal 2002, on a pro
forma basis adjusting to reflect Simula's sale of its automotive safety
business, all branches of the United States military and its prime contractors
represented substantially all of Simula's revenue. One of Simula's current
customers, the United States Army, accounted for approximately 60% of Simula's
revenue in 2001 and 2002 after adjusting to reflect Simula's later sale of its
automotive safety business. Although Simula has long-established relationships
with a number of its customers, Simula does not have long-term supply contracts
with any customers. Simula's customers also generally do not commit to long-term
production schedules and, as a result, customer orders generally can be canceled
and volume levels changed or delayed. The timely replacement of canceled,
delayed, or reduced orders cannot be assured. The loss or reduction in sales to
a major customer may have a more material adverse effect on Simula's operations
and financial condition than would be the case if Simula's revenue were less
concentrated by customer.
Simula believes that the United States Army and other branches of the
United States armed forces as well as prime defense contractors, to which Simula
has supplied products for approximately 25 years, will continue to be major
customers. Reliance upon defense contracts involves certain inherent risks,
including dependence on Congressional appropriations and the department of
defense budget, changes in governmental policies that reflect military and
political developments, shifts in the political climate affecting military
procurement plans and other factors characteristic of the defense industry.
SIMULA'S EXECUTIVE OFFICERS AND CERTAIN OTHER KEY PERSONNEL ARE CRITICAL TO
ITS BUSINESS, AND THESE KEY PERSONNEL MAY NOT REMAIN WITH SIMULA IN THE
FUTURE.
Simula's future success depends upon the continued service of its executive
officers and other key technology personnel. None of Simula's key employees are
bound by an employment agreement for any specific term other than Bradley P.
Forst, President and Chief Executive Officer of Simula, and Joseph W. Coltman,
Executive Vice President of Simula; provided, however, each may terminate his
employment with Simula for any reason or no reason upon 120 days prior written
notice to Simula of his intent to terminate. If Simula loses the services of one
or more of its key employees, or if one or more of its key employees decides to
join a competitor or otherwise compete directly or indirectly with Simula, this
could have a material adverse effect on Simula's business, operating results and
financial condition. The announcement of Simula's acquisition by Armor may cause
some of Simula's key employees to discontinue employment with Simula, or some of
Simula's key employees may discontinue employment with Simula subsequent to the
close of the acquisition.
33
SIMULA MAY NOT BE ABLE TO PROTECT ITS INTELLECTUAL PROPERTY RIGHTS UPON WHICH
ITS BUSINESS RELIES.
Simula relies in large part on patent, trade secret and copyright laws to
protect its intellectual property. There can be no assurance that any patent
owned by Simula will not be invalidated or challenged, that the rights granted
thereunder will provide competitive advantages to Simula, or that any of
Simula's pending or future patent applications will be issued with the scope of
the claims sought by Simula, if at all. Furthermore, there can be no assurance
that others will not develop technologies that are similar or superior to
Simula's technology, duplicate Simula's technology, or design around the patents
owned by Simula. In addition, effective patent and other intellectual property
protection may be unavailable or limited in certain foreign countries. There can
be no assurance that the steps taken by Simula will prevent misappropriation of
its technology. Litigation may be necessary in the future to enforce Simula's
patents and other intellectual property rights, to protect Simula's trade
secrets, and to determine the validity and scope of the proprietary rights of
others. Similarly, there can be no assurance that Simula's technologies will not
be subject to claims that they infringe the rights of others, which would
require Simula to defend such claims. Patent and trade secret litigation could
result in substantial costs and diversion of resources, which could harm
Simula's operating results and financial condition.
TECHNOLOGICAL ADVANCES, THE INTRODUCTION OF NEW PRODUCTS, AND NEW DESIGN AND
MANUFACTURING TECHNIQUES COULD ADVERSELY AFFECT SIMULA'S OPERATIONS UNLESS
SIMULA IS ABLE TO ADAPT TO THE RESULTING CHANGE IN CONDITIONS.
Simula's future success and competitive position depend to a significant
extent upon its proprietary technology. Simula must make significant investments
to continue to develop and refine its technologies. Simula will be required to
expend substantial funds for and commit significant resources to the conduct of
continuing research and development activities, the engagement of additional
engineering and other technical personnel, the purchase of advanced design,
production and test equipment, and the enhancement of design and manufacturing
processes and techniques. Simula's future operating results will depend to a
significant extent on its ability to continue to provide design and
manufacturing services for new products that compare favorably on the basis of
time to introduction, cost and performance with the design and manufacturing
capabilities of aircraft suppliers. The success of new design and manufacturing
services depends on various factors, including utilization of advances in
technology, innovative development of new solutions for customer products,
efficient and cost-effective services, timely completion and delivery of new
product solutions and market acceptance of customers' end products. Because of
the complexity of Simula's products, Simula may experience delays from time to
time in completing the design and manufacture of new product solutions. In
addition, there can be no assurance that any new product solutions will receive
or maintain customer or market acceptance. If Simula were unable to design and
manufacture solutions for new products of its customers on a timely and
cost-effective basis, its future operating results would be adversely affected.
COMPETITION COULD DECREASE SIMULA'S REVENUES.
The government and defense markets served by Simula are intensely
competitive. Competition relates primarily to technical know-how, cost,
marketing efforts and the award of contracts for the development of proposed
products. Contracts for supply of products primarily tend to follow the
development contracts because of the extensive investment necessary to develop
and qualify new products. Many of Simula's competitors have greater marketing
capabilities and financial and other resources than we do that may, among other
things, allow them to secure strategic alliances with some or all of our
customers, prime contractors, or original equipment manufacturers (OEMs) or to
develop other high profile strategic relationships, potentially affecting the
success of our marketing programs. Simula may be required to reduce prices or
increase spending in response to competition to pursue new market opportunities
or to invest in additional research and development efforts. As a result,
Simula's revenue may decrease. There can be no assurance that we will be able to
compete successfully against current or future competitors or that competitive
pressures faced by us will not harm our business or financial condition.
34
SIMULA IS DEPENDENT ON INDUSTRY RELATIONSHIPS.
A number of Simula's products are components in its customers' final
products. Accordingly, to gain market acceptance, Simula must demonstrate that
its products will provide advantages to the manufacturers of final products,
including increasing the safety of their products, providing such manufacturers
with competitive advantages or assisting such manufacturers in complying with
existing or new government regulations affecting their products. There can be no
assurance that Simula's products will be able to achieve any of these advantages
for the products of its customers. Furthermore, even if Simula is able to
demonstrate such advantages, there can be no assurance that such manufacturers
will elect to incorporate Simula's products into their final products, or if
they do, that Simula's products will be able to meet such customers'
manufacturing requirements. Additionally, there can be no assurance that
Simula's relationships with its manufacturer customers will ultimately lead to
volume orders for Simula's products. The failure of manufacturers to incorporate
Simula's products into their final products would adversely effect Simula's
business, results of operations and financial condition.
35
RISKS RELATED TO OWNERSHIP OF SIMULA COMMON STOCK
SIMULA'S HIGH LEVERAGE, FIXED COSTS AND THE FINANCIAL AND OTHER COVENANTS IN
ITS DEBT INSTRUMENTS MAY LIMIT SIMULA'S ABILITY TO FUND GENERAL CORPORATE
REQUIREMENTS, LIMIT ITS FLEXIBILITY IN RESPONDING TO COMPETITIVE DEVELOPMENTS,
LIMIT ITS ABILITY TO REFINANCE ITS DEBT AND INCREASE ITS VULNERABILITY TO
ADVERSE ECONOMIC AND INDUSTRY CONDITIONS.
Simula has significant indebtedness with near term maturities. In addition,
Simula has incurred significant capitalized and operating lease obligations in
connection with the financing of its business. As a result of Simula's high
leverage:
o Simula has only a limited ability to obtain additional financing, if
needed. Simula's existing debt is secured by a substantial portion of
its assets, leaving Simula with limited assets to use to obtain
additional financing. In addition, the terms of Simula's Revolving Line
of Credit with The CIT Group/Business Credit, Inc., or the CIT Debt,
and Senior Secured Note with Allied Capital Corporation, or the Allied
Debt, restrict Simula's ability to incur additional indebtedness or
issue equity unless Simula uses the proceeds of those transactions to
pay down the CIT Debt or the Allied Debt.
o Simula's ability to fund general corporate requirements, including
capital expenditures, may be impaired. Simula has substantial
obligations to pay principal and interest on its debt and other
recurring fixed costs. As such, Simula may have to use its working
capital to fund such repayments of indebtedness instead of to fund
general corporate requirements.
o Simula's ability to respond to competitive developments and adverse
economic conditions may be limited. Without the ability to obtain
additional financing and with substantial fixed costs, Simula may not
be able to fund the capital expenditures required to keep Simula
competitive or to withstand prolonged adverse economic conditions.
o Simula's potential lenders and/or investors may perceive Simula as a
credit risk, which may limit Simula's ability to obtain, and could
increase the cost of, capital.
Moreover, Simula's flexibility is limited because many of the agreements
governing its indebtedness contain negative covenants that restrict Simula's
ability to take certain actions as well as financial covenants that require
Simula to meet certain financial tests. A breach of these covenants or a failure
to make any required payments under its indebtedness could result in the
acceleration of a substantial portion of Simula's indebtedness.
SIMULA'S QUARTERLY FINANCIAL RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS
BECAUSE OF MANY FACTORS.
Simula believes that quarter-to-quarter comparisons of its operating
results are not a good indication of its future performance. Simula's operating
results have varied widely in the past, and Simula expects that they will
continue to vary widely from quarter-to-quarter due to variability in a number
of factors, including:
o the level and makeup of military expenditures;
o market acceptance and demand of both Simula's and its customers'
products;
o success in building strategic alliances with large prime contractors;
o the level of orders which are received and can be shipped and invoiced
in a quarter;
o customer order patterns and seasonality;
o levels of accounts receivable;
o changes in product mix;
o product performance and reliability;
o product obsolescence;
o availability and utilization of manufacturing capacity;
o fluctuations in manufacturing yield;
o the availability and cost of raw materials, equipment and other
supplies;
o the cyclical nature of the industries and markets addressed by Simula's
products;
o Simula's ability to design and introduce new products on a timely
basis;
o technological changes;
o competition and competitive pressures on pricing; and
o economic conditions in the United States and worldwide markets served
by Simula.
36
SIMULA'S STOCK HAS BEEN VOLATILE AND MAY CONTINUE TO BE VOLATILE IN THE
FUTURE, WHICH MAY LIMIT ITS OPERATING FLEXIBILITY.
Historically, Simula's stock price has been extremely volatile and Simula
cannot make assurances that the price of its common stock will not decline or be
extremely volatile in the future. It is likely that, in some future quarter,
Simula's operating results may be below historical levels and/or the
expectations of public market analysts and investors and, as a result of these
or other factors, the price of its common stock may fall and/or significantly
fluctuate.
Since Simula's initial public offering in April 1992, the per share trading
price of its common stock has ranged from an intra-day high of $34.88 on
September 28, 1995 to an intra-day low of $1.05 on December 24, 2002. Simula's
stock price may change due to a variety of factors, including those described
above in the risk factor entitled "Simula's Quarterly Financial Results Are
Subject to Significant Fluctuations Because of Many Factors." In addition,
short-term changes in Simula's stock price may have little relationship to its
financial results. If Simula's stock price is low, it may limit Simula's ability
to raise capital or pursue strategic opportunities, such as acquisitions. In
addition, it may reduce the incentive value of Simula's stock options and harm
employee morale.
SIMULA'S CHARTER DOCUMENTS AND CHANGE OF CONTROL SEVERANCE AGREEMENTS WITH ITS
MANAGEMENT MAY MAKE IT MORE DIFFICULT TO ACQUIRE SIMULA.
Provisions of Simula's certificate of incorporation and bylaws could make
it more difficult for a third party to acquire Simula, even if doing so would be
beneficial to Simula's shareholders. For example, Simula's board of directors is
divided into three classes, with one class being elected each year by its
shareholders, which generally makes it more difficult for shareholders to
replace a majority of directors and obtain control of Simula's board. In
addition, only Simula's board of directors and the president may call
shareholder meetings. Advance notice is required prior to shareholder proposals.
Further, Simula has authorized preferred stock that is undesignated, making it
possible for the board of directors to issue preferred stock with voting or
other rights or preferences that could impede the success of any attempt to
change control of Simula. Simula also has opted into Articles 2 and 3 of the
Arizona Takeover Act, Arizona Revised Statutes, Section 10-2701 et. seq., which
could make it more difficult for a third party to acquire Simula
Simula has entered into change of control severance and/or retention
agreements with members of its senior management and certain other key
employees. These agreements provide for certain benefits to these persons if
they are terminated other than for cause following an acquisition of Simula.
These agreements could make Simula less attractive to a third party who may want
to acquire it, because they will make any replacement of management and other
key employees more expensive. For a description of these agreements, please see
the section entitled "The Merger--Interests of Simula Directors and Officers in
the Merger" beginning on page 58 of this proxy statement/prospectus.
SIMULA MAY NEED ADDITIONAL CAPITAL, WHICH COULD DILUTE THE OWNERSHIP INTEREST
OF INVESTORS.
Simula requires substantial working capital to fund its business. In
addition, Simula's new business initiatives will require significant capital
outlays relating to, among other things, research and development related to new
product offerings. If Simula raises additional funds through the issuance of
equity, equity-related or convertible debt securities, these securities may have
rights, preferences or privileges senior to those of the rights of its common
stock, and Simula's shareholders may experience additional dilution. Simula
cannot be certain that additional financing will be available to it on favorable
terms when required, or at all. However, Simula may choose to raise additional
funds in the future.
37
THE SPECIAL MEETING OF SIMULA SHAREHOLDERS
This proxy statement/prospectus is being delivered to you as a Simula
shareholder to provide you with important information regarding the proposed
merger in connection with the solicitation of proxies by Simula's board of
directors for use at the special meeting of its shareholders and at any
adjournment or postponement thereof.
DATE, TIME AND PLACE
Simula will hold a special meeting of its shareholders on___________, 2003,
at 9:00 a.m., local time, at Simula's corporate offices, 7822 South 46th Street,
Phoenix, Arizona 85044.
MATTER FOR CONSIDERATION
At the special meeting, Simula shareholders will be asked to consider and
vote upon a proposal to approve and adopt the merger agreement and to approve
the merger. Simula shareholders also will consider and vote upon any other
business that may properly come before the special meeting or any adjournment or
postponement thereof. Simula currently does not contemplate that any other
matters will be considered at the special meeting.
BOARD OF DIRECTORS' RECOMMENDATION
After careful consideration, the Simula board of directors has unanimously
approved the merger agreement and the merger. The Simula board of directors
believes that the merger is advisable and fair to, and in the best interests of,
Simula and its shareholders. The Simula board of directors unanimously
recommends that the Simula shareholders vote "FOR" the proposal to approve and
adopt the merger agreement and to approve the merger.
RECORD DATE; VOTING RIGHTS; SHARES HELD BY DIRECTORS AND EXECUTIVE OFFICERS
The record date for determining the Simula shareholders entitled to vote at
the special meeting is October 17, 2003. Only holders of record of Simula common
stock as of the close of business on that date are entitled to vote at the
special meeting. As of the record date, there were 13,153,546 shares of Simula
common stock issued and outstanding, held by approximately 4,800 shareholders of
record. This number includes brokers, banks and other nominees who hold shares
for other shareholders. Each share of Simula common stock issued and outstanding
as of the record date entitles its holder to cast one vote at the special
meeting.
As of the record date, the directors and executive officers of Simula and
their respective affiliates owned 105,011 outstanding shares, or approximately
1% of the total outstanding shares, of Simula common stock.
Upon the effective time of the merger, assuming that Armor issues 2,229,754
shares of its common stock to Simula shareholders and based upon 34,198,044
shares of Armor common stock issued and outstanding as of October 10, 2003, the
directors and executive officers of Armor and their respective affiliates may be
deemed to be the beneficial owners of shares of Armor common stock representing
approximately 10.13% of the outstanding voting power of Armor in the aggregate.
QUORUM; REQUIRED VOTE
In order to conduct business at the special meeting, a quorum must be
present. The holders of a majority of the common stock outstanding on the record
date for the meeting present in person or represented by proxy at the special
meeting constitute a quorum under Simula's bylaws. Simula will treat shares of
common stock represented by a properly signed and returned proxy, including
abstentions and broker non-votes, as present at the meeting for purposes of
determining the existence of a quorum.
The affirmative vote of a majority of the shares of Simula common stock
outstanding on the record date in favor of the proposal to approve and adopt the
merger agreement and to approve the merger is required in order for the proposal
to pass. The inspector of elections appointed for the special meeting will
tabulate the votes.
38
ADJOURNMENT AND POSTPONEMENT
If a quorum is not present or represented at a meeting, Simula's bylaws
permit a majority of the shareholders entitled to vote at the special meeting,
present in proxy or represented by proxy, to adjourn the meeting, without notice
other than announcement at the meeting, until a quorum is present or
represented. If sufficient votes to constitute a quorum or to approve and adopt
the merger agreement and to approve the merger are not received by the date of
the special meeting, we anticipate that the persons named as proxies may propose
one or more adjournments of the meeting to permit further solicitation of
proxies and would generally exercise their authority to vote in favor of
adjournment. However, proxies voting against the merger will not be used to vote
for adjournment of the meeting in order to continue to solicit votes to approve
the merger.
VOTING OF PROXIES
The Simula proxy accompanying this proxy statement/prospectus is solicited
on behalf of the Simula board of directors for use at the special meeting.
GENERAL
Shares represented by properly executed proxies or properly voted by the
Internet received in time for the special meeting will be voted at the special
meeting in accordance with the instructions indicated on such proxies. Proxies
that are properly signed and dated but which do not contain voting instructions
will be voted "FOR" the proposal to approve and adopt the merger agreement and
to approve the merger. The proxy holder may vote the proxy in its discretion as
to any other matter that may properly come before the special meeting.
ABSTENTIONS
Simula will count a properly executed proxy marked "ABSTAIN" as present for
purposes of determining whether a quorum is present, but the shares represented
by that proxy will not be voted at the special meeting. Because the affirmative
vote of a majority of the outstanding shares of Simula common stock is required
to approve and adopt the merger agreement and to approve the merger, if you mark
your proxy "ABSTAIN," it will have the effect of a vote against the proposal to
approve and adopt the merger agreement and to approve the merger.
BROKER NON-VOTES
If your shares are held by a broker, bank or other nominee (commonly known
as "in street name"), your broker or other nominee will vote your shares for you
only if you provide instructions to your broker or other nominee on how to vote
your shares. You should follow the directions provided by your broker or other
nominee regarding how to instruct your broker or other nominee to vote your
shares. Your broker or other nominee cannot vote shares of Simula common stock
without specific instructions from you. Because the affirmative vote of a
majority of the outstanding shares of Simula common stock is required to approve
and adopt the merger agreement and to approve the merger, if you do not instruct
your broker or other nominee how to vote, it will have the effect of a vote
against the proposal to approve and adopt the merger agreement and to approve
the merger. If your shares are registered in the name of a bank or brokerage
firm, you may be eligible to vote your shares by telephone or the Internet.
Please review the voting instruction card provided with this proxy
statement/prospectus or contact your bank or brokerage firm for information.
VOTING SHARES IN PERSON THAT ARE HELD IN STREET NAME
If your shares are held in street name and you wish to vote those shares in
person at the special meeting, you must obtain from your broker or other nominee
holding your Simula common stock a properly executed legal proxy identifying you
as a Simula shareholder, authorizing you to act on behalf of the nominee at the
special meeting and identifying the number of shares with respect to which the
authorization is granted.
39
HOW TO REVOKE A PROXY
If you submit a proxy, you may revoke it at any time before it is voted by:
o delivering to the Corporate Secretary of Simula a written notice, dated
later than the proxy that you wish to revoke, stating that the proxy is
revoked;
o submitting to the Corporate Secretary of Simula a new, signed proxy
with a date later than the proxy you wish to revoke; or
o re-voting electronically via the Internet; or
o attending the special meeting and voting in person.
Notices to the Corporate Secretary of Simula should be addressed to Mari I.
Valenzuela, Corporate Secretary, Simula, Inc., 7822 South 46th Street, Phoenix,
Arizona 85044.
If you hold your shares in street name, you must give new instructions to
your broker prior to the special meeting or obtain a signed "legal proxy" from
the broker or other nominee to revoke your prior instructions and vote in person
at the meeting. Please check with your broker or other nominee for instructions
on how to revoke such a proxy.
SOLICITATION OF PROXIES AND EXPENSES
Simula will pay its own costs of soliciting proxies for the special
meeting. Certain directors, officers and employees of Simula may solicit
proxies, without additional compensation, by telephone, facsimile, electronic
mail, telegraph and in person. Simula expects that the expenses of this special
solicitation will be nominal. Following the mailing of this proxy
statement/prospectus, Simula will request brokers, custodians, nominees and
other record holders to forward copies of this proxy statement/prospectus to
persons for whom they hold shares of common stock and to request authority for
the exercise of proxies. In such cases, Simula, upon the request of the record
holder, will reimburse such holder for their reasonable expenses. A solicitor
has been retained by Simula to assist in soliciting proxies using the means
described above and will receive fees of approximately $30,000.00 plus customary
fees for services requested by Simula to be performed, in addition to
reimbursement of out-of-pocket expenses.
40
THE MERGER
The discussion below sets forth the material information concerning the
merger and the merger agreement. A copy of the merger agreement is attached to
this proxy statement/prospectus as Annex A and is incorporated herein by this
reference. All shareholders are urged to read the merger agreement in its
entirety.
OVERVIEW
This proxy statement/prospectus is being furnished to Simula shareholders
in connection with the solicitation of proxies for use at the Simula special
meeting.
At the Simula special meeting, holders of Simula common stock will be asked
to vote on the merger proposal, including the approval and adoption of the
merger agreement and approval of the merger.
The merger will not be completed unless the Simula shareholders approve the
merger proposal, which includes the approval and adoption of the merger
agreement and approval of the merger.
The merger agreement provides that AHI Bulletproof, a wholly-owned
subsidiary of Armor, will be merged with and into Simula. Simula will be the
surviving corporation in the merger and will become a wholly-owned subsidiary of
Armor. In the merger, all the shares of Simula common stock outstanding as of
the effective time of the merger shall be exchanged for cash and/or shares of
Armor common stock. See the section of this proxy statement/prospectus entitled
"The Merger Agreement--Merger Consideration" beginning on page 65.
BACKGROUND OF THE MERGER
In reading the following summary, please consider that where enterprise
values are provided in connection with indications of interest, offers and bids,
each such value is based on a number of different underlying assumptions made by
the potential acquirer, including, but not limited to, assumptions regarding
debt repayment by Simula and conversions of debt securities to equity
securities, the number of outstanding shares of Simula common stock and
exercisable Simula stock options and absorption of transaction expenses and
costs. Due to the variance in these underlying assumptions, the stated
enterprise value for the respective indications of interest, offers and bids may
not be directly comparable to one another.
On October 18, 2002, Simula's board of directors convened a meeting at
which Simula's President and Chief Executive Officer, Bradley P. Forst, outlined
a strategy and recommended refinancing, sale or series of sales of assets, or
merger of Simula. The board of directors authorized Mr. Forst to interview
investment bankers, select a banker and enter into an engagement letter for the
purpose of reviewing strategic alternatives available to Simula.
On December 2, 2002, Simula entered into a joint engagement agreement with
Relational Advisors LLC (formerly Batchelder & Partners, Inc.), to explore sale
and merger opportunities and with Libra Securities, LLC, to explore refinancing
and restructuring alternatives. Pursuant to such agreement, Simula agreed to pay
Libra Securities $800,000 in the event a transaction is completed, subject to
certain terms and conditions. Simula also agreed to reimburse Libra Securities
for reasonable expenses and to indemnify Libra Securities and related parties
against certain liabilities, including liabilities under federal securities
laws, arising out of its engagement. For the terms of Relational Advisors
engagement please see the section entitled "--Opinion of Simula's Financial
Advisor" beginning on page 52 of this proxy statement/prospectus.
41
On December 12, 2002, Simula held a board of directors meeting. Relational
Advisors gave a presentation discussing market overview, company update,
strategic alternatives, mergers and acquisition valuation and merger and
acquisitions timeline. On December 16, 2002, Simula publicly announced in a
press release that it had hired Relational Advisors and Libra Securities to
review strategic alternatives.
Between January 13, 2003 and January 19, 2003, Relational Advisors sent
informational packages to approximately 350 identified potential buyers.
Information packages included a letter, an executive summary and a standard
confidentiality agreement.
On January 14, 2003, Relational Advisors spoke with a representative of
Wachovia Securities, which was informally representing Armor. Wachovia
Securities asked that it and Armor be sent information packages, which were
furnished to them.
On January 24, 2003, Relational Advisors representatives met with
representatives of Armor to discuss a possible acquisition of Simula by Armor.
On January 28, 2003, Armor executed a confidentiality agreement with Simula.
Between February 6, 2003 and February 10, 2003, Relational Advisors sent a
Confidential Information Memorandum regarding Simula and its business to
prospective buyers who had executed confidentiality agreements, including Armor.
On February 11, 2003, Relational Advisors sent out a bid procedure letter
to all parties who executed confidentiality agreements. The letter described the
bid procedures and timing for the Simula process. The letter requested
preliminary indications of interest by February 27, 2003.
On February 12 and 13, 2003, the Simula board of directors held its
quarterly meeting. Outside participants included representatives of Simula's
outside legal counsel, Libra Securities and Relational Advisors. The focus of
the meeting was a review of Simula's 2002 financial results and a report to the
board of directors respecting the strategic alternatives. More than forty
parties had expressed interest in Simula's sale process and had executed
confidentiality agreements. Relational Advisors reported that Simula's
Confidential Information Memorandum describing the business had been distributed
to each interested party. The board of directors and its advisors engaged in a
discussion regarding the merger or sale process, refinancing options and
timeline. The board of directors discussed selling Simula's automotive safety
business separately, for which potential sale investment bankers R. W. Baird &
Co. had been engaged in the 2002 fiscal year. Management stated that other asset
sales were unlikely to meaningfully deleverage Simula, and the board of
directors authorized management to continue to negotiate a sale of the
automotive safety business assets. The board of directors further discussed sale
and refinancing strategies and expressed support for continuing the simultaneous
approach to selling or refinancing Simula or its various components.
Between February 25, 2003 and April 2, 2003, Simula received a number of
preliminary offers or indications of interest from potential transaction
candidates. The proposed transactions included, variously, the purchase of (i)
specified assets, (ii) various lines of Simula's business or all of Simula's
businesses, (iii) equity securities and refinancing of Simula's indebtedness, or
(iv) all of Simula's outstanding common stock, and included a preliminary
indication of interest from Armor to purchase Simula's aerospace and defense and
technology and licensing businesses through an asset sale.
Between March 1 and April 11, 2003, numerous potential acquirers and their
respective representatives participated in management presentations in Phoenix,
Arizona and visited Simula's facilities.
On March 6, 2003, the Simula board of directors met by telephone conference
call, with counsel, Libra Securities and Relational Advisors also participating.
Mr. Forst reported to the board of directors that negotiations
42
to sell the Simula automotive safety business had ended, largely due to
disagreement between the parties over significant terms such as pricing,
indemnification and escrow. Mr. Forst reported that management would continue to
pursue selling the automotive safety business separately, as well as
incorporating it into the ongoing company-wide sale strategy.
Relational Advisors reported that it had received indications of interest
in Simula's business from both strategic and financial parties. Relational
Advisors noted that Simula had received 11 preliminary proposals and expected to
receive four more proposals from strategic parties during the next week.
Relational Advisors informed the Simula board of directors that the strategic
and financial parties had been scheduled to attend management presentations
within the next thirty days. The directors inquired whether any parties had
expressed an interest in the automotive safety business as a separate
transaction. Relational Advisors confirmed that one party had done so, and that
management would review that opportunity. Relational Advisors also noted that
most potential transaction parties' opinion of the value of the automotive
safety business was "neutral to negative." Libra Securities discussed the status
of the refinancing process, including instances in which financial partners may
be interested in an equity infusion and refinancing option. Libra Securities
confirmed that some of the financial bidders (involved in the sale process) had
expressed an interest in this option. The board of directors confirmed its
support for the process being undertaken by Simula's management and financial
advisors.
On March 6, 2003, Simula received a preliminary bid from Armor for $80
million.
On March 11, 2003, Relational Advisors informed Armor that its proposal was
inadequate to continue Armor in the process.
On March 13, 2003, Relational Advisors received a revised preliminary
indication of interest from Armor to purchase all of the outstanding capital
stock of Simula for $90 to $95 million.
On March 24, 2003, Armor executed an engagement letter with Wachovia
Securities to provide advisory services in connection with a possible
acquisition of Simula. The Armor board of directors retained Wachovia to act as
the non-exclusive financial advisor to Armor and its board of directors in
connection with the merger. Wachovia was retained based upon its experience and
expertise in transactions similar to the merger and its reputation in the
investment community. Wachovia is a nationally recognized investment banking and
financial advisory firm and, as part of its investment banking activities, is
regularly engaged in the valuation of businesses and securities in connection
with merger transactions and other types of acquisitions, dispositions, business
combinations, private placements, and for corporate and other purposes. Wachovia
was not retained for the purposes of providing, nor did it provide, Armor's
board of directors with a fairness opinion in connection with a possible
acquisition of Simula.
On April 2 and April 3, 2003, Armor and its representatives participated in
management presentations in Phoenix, Arizona and visited Simula's facilities.
On April 11, 2003, Armor informed Simula that, due to management and other
internal changes and initiatives not related to Simula, Armor had decided to
withdraw its bid and not to continue in the process.
Between May 1, 2003 and May 22, 2003, Simula received bid proposals from
seven potential transaction candidates. The proposed transactions included,
variously, the purchase of (i) specified assets, (ii) various lines of Simula's
business or all of Simula's businesses, (iii) refinancing of Simula's
indebtedness, or (iv) all of Simula's outstanding common stock. Armor did not
submit a bid during this time period.
Between May 2, 2003 and July 17, 2003, Simula and its advisors negotiated a
draft letter of intent with one of the seven bidders noted above. The bidder
submitted an offer to purchase the entire business, subject to full due
diligence, financing contingencies and completion of market analysis by a
consulting firm. No letter of intent was executed.
On May 5, 2003, the Simula board of directors met by telephone conference
call. Outside participants included counsel, Libra Securities and Relational
Advisors. At the meeting, Mr. Forst updated the board of directors about the
status of Simula's automotive safety business. He noted that Simula was
continuing to negotiate the potential sale of Simula's automotive safety
business separate from, and in conjunction with, the sale or merger of the
entire
43
company. With regard to the potential sale or merger of Simula, Relational
Advisors informed the board of directors that all bids for Simula were typically
tied, directly or indirectly, to its earnings before interest, taxes,
depreciation and amortization, or EBITDA, and maintaining an expected level of
EBITDA through consummation of the proposed transaction. Relational Advisors
explained that Simula's first and second quarter financial results may present
some risk to maintaining the bids that had been submitted by various parties.
Next, Relational Advisors summarized the status of the sale process and
reported that 10 bidders had participated in management presentations, and
Simula had received final bids from seven parties not including Armor. Of these
bids, some bids were conforming cash offers for the entire business, some bids
involved infusions of equity, and one bid related solely to Simula's aerospace
and defense business' personnel safety systems business unit. Relational
Advisors outlined the preliminary terms of each of the bids in detail and
explained that the bids were subject to confirmatory due diligence and
financing. Relational Advisors informed the board of directors that several
parties that had initially expressed an interest in the sale process had not yet
submitted bids, and that the advisor would follow up with each of these parties.
On May 13, 2003, the Simula board of directors met by telephone conference
call, with counsel, Libra Securities and Relational Advisors participating.
Relational Advisors reported that bidders would be asked to confirm the terms of
their bid after reviewing Simula's financial results for the first calendar
quarter of 2003 and forecasts for fiscal year 2003. Mr. Forst confirmed that
Simula continued to negotiate terms of sale of the automotive safety business
with the potential purchaser who was engaged in due diligence with customers.
Relational Advisors reported to the board of directors about the status of each
bidder's offer and the next steps involved in the sale process, and advised
Simula to continue negotiating with the top bidders without agreeing to an
exclusivity arrangement.
On May 21, 2003, the Simula board of directors met by telephone conference
call, with counsel, Libra Securities and Relational Advisors participating. Mr.
Forst gave an overview of first quarter financial results and updated the board
of directors regarding status of sale of the automotive safety business. Mr.
Forst reported that Simula was actively negotiating the final terms of the sale
of the automotive safety business. A discussion regarding the potential positive
impact of this asset sale on the overall sale or merger transaction followed.
On May 28, 2003, representatives from a new potential bidder participated
in a management presentation in Phoenix, Arizona. On May 30, 2003, Relational
Advisors received a preliminary offer from another potential bidder, proposing a
"private investment in public equity", or PIPE transaction, with Simula. The
offer was subject to completion of due diligence and receipt of financing
commitments.
On May 30, 2003, Mr. Forst of Simula called Mr. Robert Schiller of Armor to
inquire as to Armor's interest in a transaction in light of a possible sale of
Simula's automotive safety business. Mr. Forst and Mr. Schiller discussed the
respective status of their companies, strategic fit, timing and valuation
issues. Mr. Schiller subsequently informed Mr. Forst that Armor was willing to
reopen its consideration of a transaction involving Simula.
On June 2, 2003, the Simula board of directors met by telephone conference
call, with counsel, Libra Securities and Relational Advisors participating. Mr.
Forst reported that the financial results for April were consistent with
Simula's projections. Next, Mr. Forst described the final details of the planned
sale of the automotive safety business. Relational Advisors reported to the
board of directors concerning the status of the sale or merger process, noting
that there were two leading bidders actively involved in the process. Relational
Advisors additionally reported that one financial bidder had significantly
reduced its initial offer. Relational Advisors reported that one strategic
bidder had changed the terms of its offer to an infusion of capital because of
its inability to obtain financing.
A lengthy discussion followed regarding Simula's alternatives including,
but not limited to, contacting several strategic bidders who had initially
expressed an interest in the aerospace and defense business only and had
declined to bid on the business as a whole. Mr. Forst described the potential
candidates to be recontacted. The directors reviewed the strategic alternatives
that would be expected to provide the best return for Simula's shareholders, in
order of preference: (1) sale or merger of Simula to a strategic buyer, (2) sale
or merger of Simula to a financial buyer, (3) refinance Simula debt, or (4)
restructure Simula with existing debt holders.
44
On June 3, 2003, Simula signed a non-binding letter of intent with a
potential acquirer under which Simula would issue a convertible preferred debt
instrument. This letter of intent did not grant exclusivity to the other party,
was subject to completion of due diligence and receipt of financing commitments
and terminated on June 30, 2003, unless defined milestones toward a definitive
transaction were met.
On June 6, 2003, Armor held a conference call with Wachovia in which
Wachovia provided a preliminary financial update on Simula, pro forma for the
possible sale of the Simula automobile safety business. During the balance of
the month of June, Armor resumed discussions with Simula to perform preliminary
financial and business due diligence.
On June 10, 2003, the Simula board of directors met in Tempe, Arizona, with
counsel, Libra Securities and Relational Advisors also present. Robert W. Baird
& Co., a nationally recognized investment banking and financial advisory firm
which had been engaged to advise Simula in connection with a potential sale of
the automotive safety business, participated by telephone conference call during
a portion of the meeting.
Relational Advisors gave an overview of the sale process and described the
parties currently participating in the sale process, their perspectives about
Simula's financial projections, and their valuations. Next, Relational Advisors
reported that, after an initial expression of interest, certain strategic
parties were unable to finance a transaction. As a result, these parties changed
their initial conforming offers to non-conforming offers involving a PIPE
transaction.
In light of a likely sale of Simula's automotive safety business, Mr. Forst
reported that he had contacted two strategic parties (including Armor) that had
initially expressed an interest in the aerospace and defense business
exclusively. Mr. Forst confirmed that both strategic parties expressed a renewed
interest in the sales process.
Relational Advisors summarized the options available to the Simula board of
directors, including continuing discussions with strategic and financial parties
(in the context of the pending sale of Simula's automotive safety business);
pursuing refinancings involving an equity infusion; preparing for out-of-court
restructuring; or preparing for Chapter 11 reorganization. A discussion
regarding each option and the preservation of shareholder value followed.
Relational Advisors recommended that Simula continue to pursue the first and
second options simultaneously, and grant exclusivity to a party that produces a
firm, favorable offer supported by a demonstrable ability to finance a
transaction. After discussions, the board of directors confirmed that Simula
should execute the strategies recommended by the bankers. Baird reported on
terms of the pending sale of Simula's automotive safety business and its role in
the sale process and its valuation analysis. Baird confirmed that it would issue
a fairness opinion in support of the sale transaction.
On June 12, 2003, a new bidder attended a Simula management presentation in
Phoenix, Arizona.
On June 16, 2003, Simula publicly announced the signing of an agreement for
the sale of the assets of its automotive safety business.
On June 30, 2003, the party to the June 3, 2003 letter of intent missed a
milestone and the letter of intent expired. The bidder informed Simula that due
to the sale of Simula's automotive safety business, the bidder needed more time
to arrange financing.
On July 2, 2003, Armor held a telephone conference call with Wachovia in
which Wachovia provided a updated financial review of Simula, pro forma for the
sale of the automobile safety business, reflecting the preliminary due diligence
executed during the month of June.
On July 3, 2003, an existing bidder submitted a revised increased offer to
purchase Simula's aerospace and defense and polymer businesses.
On July 7, 2003, Mr. Forst met with representatives of Armor and discussed
potential structures of transactions involving Armor and Simula.
45
On July 8, 2003, Simula delivered a condensed management presentation to
Armor and provided a facility tour of the aerospace and defense business. Armor
discussed a preliminary total enterprise value offer of $85 million for the
aerospace and defense and technology and licensing businesses, subject to
completion of due diligence. The indicated consideration consisted of repayment
of Simula's outstanding debt and payment of transaction fees as well as issuing
to Simula's shareholders warrants to purchase Armor stock.
On July 9, 2003, Simula received an updated bid from an existing bidder
offering a total enterprise value of approximately $85.5 million for Simula's
aerospace and defense business only. The offer was subject to completion of due
diligence and receipt of financing commitments.
On July 11, 2003, Relational Advisors received an updated offer from an
existing bidder for a convertible debenture offering by Simula under Rule 144A.
The offer was subject to completion of due diligence and receipt of financing
commitments to fund the purchase of the debentures.
On July 14, 2003, Armor delivered to Simula a term sheet offering an
enterprise value of $85 million for Simula's business, excluding the polymer
business. The offer was subject to completion of due diligence.
On July 14, 2003, Relational Advisors received an updated term sheet from
another bidder for a $22 million equity infusion in Simula with refinancing of
the remaining (debt) portion of Simula's capital structure. The offer was
subject to completion of due diligence and receipt of financing commitments.
On July 15, 2003, the Simula board of directors met by telephone conference
call, with counsel, Libra Securities and Relational Advisors participating.
Relational Advisors reported that, as a result of its six-month process, Simula
had received five final proposals. Relational Advisors informed the board of
directors that two strategic bidders and two financial bidders were interested
in a sale transaction, while one bidder was interested in an equity infusion and
refinancing. Relational Advisors noted that Armor had re-emerged in light of the
sale of Simula's automotive safety business. Relational Advisors reviewed the
details of each proposal and the bidder's ability to finance a transaction, and
the likely impact of each offer on shareholder value.
On July 16, 2003, Armor sent a letter modifying its July 14, 2003 bid. The
revised bid was for Simula's entire business, including the polymer business, at
an enterprise value of $90 million subject to completion of due diligence.
On July 16, 2003, Simula received a revised increased offer from a bidder.
On July 17, 2003, representatives of Simula and Armor spoke by telephone
regarding Armor's current offer.
On July 18, 2003, Simula informed Armor that its bid was inadequate and
that Simula would proceed with another bidder.
On July 18, 2003 through July 20, 2003, Relational Advisors and an existing
bidder negotiated an exclusivity agreement which was not executed.
On July 18, 2003, Relational Advisors received an updated bid from Armor
for a total enterprise value of $100 million for Simula's entire business,
including the polymer business, subject to completion of due diligence.
46
On July 18, 2003, Simula informed three bidders that their respective bids
were inadequate, and two bidders continued in the process.
On July 19, 2003, Simula received a draft letter of intent from Armor
offering a total enterprise value of $100 million, subject to the completion of
due diligence, the sale of Simula's automobile safety business and approval from
Armor's board of directors.
On July 20, 2003, Armor, Simula and Relational Advisors had a telephone
conference call to discuss the draft letter of intent.
On July 21, 2003, Relational Advisors informed the other remaining
potential bidder that Simula had received a bid from Armor that was superior and
that Simula's board of directors would meet on July 22, 2003 to discuss its next
steps. Relational Advisors asked, and the bidder agreed, to submit a "best and
final" offer prior to the board of directors meeting.
On July 21, 2003, Mr. Schiller of Armor spoke with three members of
Simula's board of directors (Messrs. Henry, Emerson and Withers), Relational
Advisors and Simula management regarding Armor's proposal.
Beginning July 21 2003, through telephone conference calls, Armor and its
counsel held negotiation discussions regarding a letter of intent with Simula
and its counsel.
On July 22, 2003, the Simula board of directors met by telephone conference
call, with counsel, Libra Securities and Relational Advisors participating.
Relational Advisors reported on developments since the last board of directors
meeting (July 15, 2003) and discussed the current bids offered by the two final
bidders (including Armor), the relevant terms and conditions of their offers,
and advantages and disadvantages of each of the proposed transactions.
The board of directors discussed criteria for exercising their business
judgment about selection of a buyer. The board of directors agreed that the
primary consideration would be valuation and price to shareholders, but equally
as important would be removing the risks of the transaction by focusing on the
certainty of closing and the timing to closing. Secondarily, all other things
being equal, the board of directors would consider the form of consideration
including cash or stock, and finally the board of directors would consider other
factors including the impact on Simula and its business, employees and the
community.
Relational Advisors explained that, since the board of directors meeting of
July 15, 2003, the two remaining bidders had significantly closed the gap
between their bids and noted that both had increased their valuations and both
had made efforts to increase the certainty with respect to conditions and time
to close. Although the bids were close, there remained some divergence between
the buyers. One was for slightly less value but greater certainty about closing.
The other had a slightly higher valuation but less certainty and more conditions
to closing.
Relational Advisors explained that both of the bidders were told to expect
to be contacted before or during this board of directors meeting to discuss
their best and final offers. Relational Advisors confirmed that just prior to
convening the meeting, one of the bidders increased its total enterprise
valuation, defined terms and presented a best and final offer, while Armor
abstained from submitting an increased "best and final offer" prior to the
beginning of the board of directors meeting.
The board of directors focused on the element of the first offer which
included a non-refundable security deposit if the party failed to close, coupled
with the commitment to complete final due diligence and negotiate and execute a
definitive purchase agreement within 14 days. The board of directors then
compared this offer with Armor's and instructed Relational Advisors and
management that the board of directors was prepared to accept the first offer.
Relational Advisors was instructed to entertain a competing bid from Armor only
if it matched all of the conditions including accelerated diligence, public
disclosure, timely negotiation of a definitive agreement, non-refundable
security deposit, and increased valuation.
Mr. Forst and Relational Advisors were instructed to continue discussions
with Armor, which had not presented its best and final offer. The board of
directors meeting recessed to be reconvened by telephone later in the day. Mr.
47
Forst and Relational Advisors reported on the results of their discussions with
Armor. They reported a best and final offer that, in addition to the terms
previously described, Armor had agreed to shorten the diligence, accelerate the
negotiation of the definitive purchase merger agreement, pay a non-refundable
security deposit and pay a purchase price of $110.5 million. Relational Advisors
and management noted that, after certain assumptions about cash, debt and
transaction fees and expenses projected to be outstanding at closing, this
valuation was approximately $3.00 per share to shareholders. Relational Advisors
stated that there was a commitment by Armor to set out these terms in a letter
of intent and make a press release announcing the letter of intent on the next
day, July 23, 2003.
Relational Advisors indicated that it could be expected to provide a
fairness opinion with respect to the transaction based on terms presented by
Armor and subject to satisfactory negotiation of remaining terms and conditions
and review of definitive documents. The Simula board of directors then discussed
the terms, conditions, advantages and disadvantages, risks and uncertainties in
the Armor proposal, and the board of directors voted unanimously to approve the
transaction.
On July 23, 2003, Simula and Armor executed a letter of intent to purchase
Simula for a total enterprise value of $110.5 million, or approximately $3.00
per share, and publicly announced in a press release that the parties had
executed a letter of intent. The letter of intent also provided for a period of
exclusive negotiations among Simula and Armor through August 29, 2003 to
finalize the terms of the merger.
On July 23, 2003, Simula completed the sale of its automobile safety
business.
From July 24, 2003 through August 28, 2003, Armor and Simula conducted
extensive due diligence and the parties negotiated the terms of the Agreement
and Plan of Merger.
On July 25, 2003, Armor made a good faith deposit in escrow of $3.0
million, subject to the terms of the letter of intent.
On August 7, 2003 and on August 8, 2003, Armor held internal conference
calls with its representatives where the representatives presented their
respective due diligence findings to Armor's management team.
On August 8, 2003, Armor reaffirmed its interest in the transaction in
writing as outlined in the executed letter of intent.
On August 11, 2003, Armor made a good faith deposit in escrow of $2.0
million, subject to the terms of the letter of intent.
On August 27, 2003, the Simula board of directors met by telephone
conference call, with counsel, Libra Securities and Relational Advisors
participating. The purpose of this meeting was to discuss the terms of the
negotiated merger agreement, including material adverse effects and purchase
price adjustments, receive an oral fairness opinion from Relational Advisors
and, subject to certain conditions and instructions to management, approve the
signing of the merger agreement.
On August 28, 2003, Armor held a board of directors meeting to review and
approve the transaction during which Armor's board of directors approved the
transaction.
On August 29, 2003, Simula and Armor executed the Agreement and Plan of
Merger.
48
REASONS FOR THE MERGER
Armor's Reasons for the Merger
In reaching its decision, in addition to the anticipated joint benefits
described above, the Armor board of directors consulted with Armor management,
and considered, among others, the following information and potential material
factors:
Armor's board of directors has identified the following potential benefits,
among others, that it believes will result from the merger:
o strengthens Armor's position as a leading mid-tier defense and security
industry consolidator through increased scale and scope.
o increases Armor's relevance to Department of Defense customers and
programs.
o diversifies Armor's business mix by adding fixed-wing and rotorcraft
crashworthy seating.
o adds sole source positions on attractive Department of Defense
programs, including certain small arms protective insert, or SAPI
plates, programs, and numerous rotorcraft crashworthy seating programs.
o combines body armor capabilities of Simula and PROTECH, a subsidiary of
Armor, supplementing Armor's position in the SAPI market.
o provides cross-selling opportunities by leveraging Armor's global sales
force and relationships.
o offers opportunities for cost reduction through integration savings and
rationalization of operations.
Armor's board of directors also considered a number of other factors in
reaching its decision on the merger, including:
o the potential benefits to be derived from a combination of the two
companies;
o the terms of the merger agreement;
o the current and prospective economic and competitive environment facing
Armor;
o the likely impact of the merger on Armor's employees and customers;
o Simula's obligation to pay a termination fee of up to $5,000,000 under
the circumstances described in the merger agreement;
o Simula's obligation under the circumstances described in the merger
agreement to reimburse Armor for expenses incurred in connection with
the merger up to an aggregate of $1,500,000; and
o Armor's review, based in part on the due diligence review of the
financial condition, results of operations, businesses and prospects of
each of Armor and Simula and after giving effect to the merger
transaction and the determination of the merger transaction effect on
stockholder value.
Armor's board of directors also identified and considered a variety of
risks and potentially negative factors in its deliberations concerning the
merger, including:
o the risk that the potential benefits and synergies of the merger may
not be realized;
o the possibility that the merger may not be consummated, even if
approved by Simula's shareholders;
49
o the risk that another company might make a more favorable offer for
Simula, potentially increasing the price paid by Armor if Armor were
ultimately successful in its bid to acquire Simula or otherwise causing
Armor to expend resources in pursuing the merger, especially given the
delay between the execution of the merger agreement and the completion
of the merger;
o the significant costs involved in consummating the merger;
o the possibility that key employees of Simula would not choose to remain
employed by the combined company;
o the risk of management and employee disruption associated with merging
two organizations, including the risk that despite the efforts of the
combined company, key technical, sales and management personnel might
not remain employed by the combined company, especially given the
competition for quality personnel in the industry; and
o the other risks described under the section of this documents entitled
"Risk Factors" beginning on page 22.
Armor's board of directors did not believe that the negative factors were
sufficient, individually or in the aggregate, to outweigh the potential
advantages of the merger.
Simula's Reasons for the Merger
The decision of the board of directors to approve and enter into the merger
agreement and to recommend that shareholders vote "FOR" the approval and
adoption of the merger agreement and the transactions contemplated by the merger
agreement, including approval of the merger, was the result of careful
consideration of numerous factors by the board of directors, including, without
limitation, the following:
o Independence Risks. The board of directors determined that a merger
with Armor was more favorable to Simula's shareholders than remaining
independent, based on the potential value of such alternative and the
risks associated with remaining independent. The main strategic and
operational risks associated with Simula remaining independent include:
o risks associated with refinancing its current debt at reasonable
rates. Simula's principal debt, evidenced by a $25 million senior
secured note issued to Allied Capital Corporation and borrowings
of $9.6 million at June 30, 2003 under a revolving line of credit
extended by The CIT Group, Inc., matures on or prior to
December 31, 2003;
o risks associated with Simula's current indebtedness under its
subordinated notes, estimated to be approximately $34 million, as
of June 30, 2003, which matures on dates between September 30,
2003 and May 1, 2004;
o risks associated with failing to secure new contracts and
generating organic revenue growth while attempting to refinance
indebtedness;
o risks associated with performing Simula's contracts, executing
its business plan, and maintaining and increasing profit margins;
and
o risks associated with Simula's newer business segments, including
Land & Marine and Polymer Systems.
o Conditions to Closing. The absence of a financing condition to the
merger and the perceived ability and willingness of Armor to act
quickly to complete the merger and the transactions contemplated by the
merger agreement.
50
o Ability to Accept a Superior Proposal. The provisions of the merger
agreement that permit the board of directors to consider an unsolicited
superior proposal to comply with the board of director's fiduciary
duties to Simula's shareholders.
o Deposit. The provisions of the merger agreement required Armor to
deposit $5 million into an escrow account subject to payment to Simula
if Armor fails to meet certain conditions and subject to return to
Armor in the event of Simula's failure to satisfy a material condition
to the closing of the merger agreement, and in certain other
circumstances.
o Value of Other Alternatives. A comparison of the merger consideration
and the other terms and conditions of the proposed merger agreement
with Armor and the proposals offered by the other potential transaction
parties, as well as Simula's own plans had it remained independent and
the view of the board of directors, based in part upon the limited
likelihood of a superior offer being made by any other suitor.
o Opinion. The opinion of Relational Advisors LLC regarding the fairness,
from a financial point of view, to the holders of Simula common stock,
which is described more fully under the section entitled "-- Opinion of
Simula's Financial Advisor" on page 52.
In determining that a sale to Armor was more favorable to Simula's
shareholders than remaining independent, the board of directors compared the
merger consideration offered by Armor to the range of potential values if Simula
remained independent, as well as the board of directors' perception that the
risks associated with consummating the sale to Armor was lower than the risks
associated with achieving a comparable value through Simula remaining
independent. Included in the consideration were the following factors:
o Best Alternative. Simula's high leverage, fixed costs and the financial
and other covenants in its debt instruments with near term maturities
may limit Simula's ability to fund general corporate requirements,
limit its flexibility in responding to competitive developments, limit
its ability to refinance its debt and increase its vulnerability to
adverse economic and industry conditions. Consequently, Simula's board
of directors determined that the merger is Simula's best available
alternative to preserve shareholder value.
o Strategic Fit. Simula's management advised the board of directors that
it believed the strategic fit with Armor would be strong, given the
complementary rather than the competitive nature of their respective
businesses and products. In addition, Armor expressed an interest in
each Simula product area which enabled it to offer value for Simula's
business.
o Employee and Customer Impact. Management advised the board of directors
that it believed that the operating style and culture of Armor would be
well received by Simula's employees and customers and would increase
the likelihood of a non-disruptive integration process.
o Process. The results of the thorough process conducted by Simula for
evaluating the strategic alternatives, the offers received and Simula's
efforts to make certain that all reasonable alternatives and likely
acquisition candidates were pursued.
o Proposals. The overall assessment of each of the proposals submitted by
interested parties. In considering the proposals submitted, the board
of directors took into account the value of each proposal, the form of
consideration proposed, certainty of closure, the termination fees
payable in the event that a more favorable transaction was received
following the execution of a definitive agreement and the risks
associated with the proposed transactions. The transaction risks
related primarily to the timing and the certainty that the proposed
transaction would be consummated, based upon financing contingencies,
regulatory risks and proposed conditions for consummation of the
transaction. Based on these considerations, the board of directors
believed that Armor's proposal was more favorable to Simula's
shareholders than any other proposal considered.
51
Simula's board of directors also identified and considered the following
potentially negative factors in its deliberations:
o Disruptions. The possible disruption to Simula's businesses that may
result from the announcement of the transaction and the resulting
distraction of management's attention from the day-to-day operations of
the businesses.
o Operating Restrictions. The restrictions contained in the merger
agreement on the operation of Simula's businesses during the period
between the signing of the merger agreement and the completion of the
merger.
o Integration Risks. The difficulty inherent in integrating Simula's
businesses with those of Armor.
o Regulatory. The possibility of significant costs, delays and
non-consummation of the merger resulting from seeking the regulatory
approvals necessary for the consummation of the merger.
This discussion of the information and factors considered by Armor's board
of directors and Simula's board of directors is not intended to be exhaustive.
In view of the wide variety of the material factors considered in connection
with Armor's and Simula's respective evaluations of the merger and the
complexity of these matters, Armor's board of directors and Simula's board of
directors did not find it practicable to, and did not, quantify or otherwise
attempt to assign any relative weight to the various factors considered. In
addition, neither Armor's board of directors nor Simula's board of directors
undertook to make any specific determination as to whether any particular
factor, or any aspect of any particular factor, was favorable or unfavorable to
each board of directors' ultimate determination; rather, each board of directors
conducted an overall analysis of the factors described above, including
discussions with and questioning of the respective management teams and legal
and financial advisors. In considering the factors described above, individual
members of Armor's board of directors and Simula's board of directors may have
given different weight to different factors.
There can be no assurance that any of the potential savings, synergies or
opportunities considered by Armor's board of directors or Simula's board of
directors or any increase in shareholder value actually will be achieved through
consummation of the merger. See the section of this proxy statement/prospectus
entitled "Risk Factors" beginning on page 22.
RECOMMENDATION OF SIMULA'S BOARD OF DIRECTORS
SIMULA'S BOARD OF DIRECTORS HAS UNANIMOUSLY DETERMINED THAT THE MERGER
AGREEMENT WITH ARMOR IS ADVISABLE AND FAIR TO, AND IN THE BEST INTERESTS OF,
SIMULA'S SHAREHOLDERS. ACCORDINGLY, THE BOARD OF DIRECTORS UNANIMOUSLY
RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" THE APPROVAL AND ADOPTION OF THE
MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT,
INCLUDING APPROVAL OF THE MERGER OF AHI BULLETPROOF WITH AND INTO SIMULA.
OPINION OF SIMULA'S FINANCIAL ADVISOR
The Simula board of directors retained Relational Advisors LLC to act as
the non-exclusive financial advisor to Simula and its board of directors in
connection with the merger. Relational Advisors was retained based upon its
experience and expertise in transactions similar to the merger and its
reputation in the investment community. Relational Advisors is a nationally
recognized investment banking and financial advisory firm and, as part of its
investment banking activities, is regularly engaged in the valuation of
businesses and securities in connection with merger transactions and other types
of acquisitions, dispositions, business combinations and private placements, and
for corporate and other purposes. The terms of the merger agreement, including
the merger consideration, were determined through negotiations between Simula
and Armor. Relational Advisors was not requested to, and did not recommend, the
specific consideration to be received by the holders of Simula common stock
pursuant to the merger
52
agreement. Except as described above and below, Simula imposed no limitations on
Relational Advisors with respect to the investigations made or procedures
followed in rendering its opinion.
In connection with Relational Advisors' engagement, Simula asked Relational
Advisors to advise Simula with respect to the fairness from a financial point of
view of the merger consideration to be received by the holders of Simula's
common stock pursuant to the merger agreement. On August 27, 2003, at a meeting
of the Simula board of directors, Relational Advisors delivered an oral opinion
to the board of directors, which oral opinion was subsequently confirmed in
writing, that, subject to the matters described in its written opinion, the
merger consideration was fair, from a financial point of view, to the holders of
Simula's common stock.
The full text of Relational Advisors' opinion, dated August 29, 2003, to
Simula's board of directors, which sets forth the qualifications, assumptions
made, procedures followed, matters considered and limitations on the review
undertaken, is attached as Annex C and is incorporated by reference in its
entirety in this proxy statement/prospectus. The summary of Relational Advisors'
opinion in this proxy statement/prospectus is qualified in its entirety by the
full text of its written opinion. Holders of Simula common stock are urged to
read the full written opinion carefully.
Relational Advisors' opinion was provided to the Simula board of directors
for use in connection with the board of directors' evaluation of the merger and
is not a recommendation to any shareholder as to how such shareholder should
vote with respect to the merger or otherwise. Relational Advisors' opinion
addresses only the financial fairness, as of the date of the opinion, of the
consideration to be received by the holders of Simula's common stock pursuant to
the merger agreement, and does not address any other aspect of the merger,
including, without limitation, the relative merits of the merger or the form of
consideration to be received in the merger, alternatives to the merger, or
Simula's underlying business decision to proceed with, or the effect of, the
merger.
In arriving at its opinion, Relational Advisors reviewed and analyzed:
o publicly available information concerning Simula and Armor that
Relational Advisors deemed to be relevant to its analysis, including,
without limitation, Simula's annual report on Form 10-K for the fiscal
year ended December 31, 2002, Simula's quarterly report on Form 10-Q
for the quarter ended June 30, 2003, Armor's annual report on Form 10-K
for the fiscal year ended December 31, 2002, and Armor's quarterly
report on Form 10-Q for the quarter ended June 30, 2003;
o unaudited internal interim financial statements of Simula as of and for
the period ended July 31, 2003;
o financial and operating information with respect to the business,
operations and prospects of Simula furnished to Relational Advisors by
Simula, including, without limitation, Simula's financial projections
for 2003 through 2006 prepared by Simula's management;
o financial and operating information with respect to the business,
operations and prospects of Armor furnished to Relational Advisors by
Armor, including, without limitation, Armor's financial projections for
2003 through 2007 prepared by Armor's management;
o publicly available estimates of the future financial performance of
Simula and Armor prepared by a third party research analyst that
Relational Advisors deemed relevant to its analysis;
o the merger agreement and the specific terms of the merger, including,
without limitation, the financial terms and conditions;
o publicly available information concerning the trading of, and the
trading market for, the shares of Simula common stock and Armor common
stock;
o a comparison of Simula and Armor from a financial point of view with
other publicly traded companies that Relational Advisors deemed
relevant;
53
o a comparison of the financial terms of the merger with the publicly
available financial terms of certain other transactions that Relational
Advisors deemed relevant;
o information from members of Simula's management regarding the prospects
for, and business challenges facing, Simula absent the merger;
o certain business and financial information from Simula's management,
including, without limitation potential pro forma effects of the
merger; and
o information from Simula's legal counsel regarding the merger and the
merger agreement and other related matters.
In addition, Relational Advisors had discussions with the managements of
Simula and Armor concerning their respective businesses, operations, assets,
financial conditions and prospects and undertook such other studies, analyses
and investigations as Relational Advisors deemed appropriate.
In arriving at its opinion, Relational Advisors assumed and relied upon the
accuracy and completeness of the financial and other information used by
Relational Advisors without independently verifying, or assuming any
responsibility to independently verify, the information. With respect to the
financial forecasts provided to Relational Advisors by representatives of
Simula's and Armor's managements, (i) Simula and Armor respectively advised
Relational Advisors that the forecasts provided to Relational Advisors
accurately reflected the good faith judgment of management; and (ii) upon the
respective advice of Simula and Armor, Relational Advisors assumed for purposes
of its opinion that (a) the forecasts were reasonably prepared on bases
reflecting the best currently available estimates and good faith judgments of
Simula's and Armor's respective management at the time and through August 29,
2003 as to the future financial performance of each company, and (b) these
projections provided a reasonable basis upon which Relational Advisors could
form its opinion. With respect to the consideration payable to holders of
Simula's common stock in the merger, Relational Advisors assumed Simula's actual
indebtedness and transaction costs and expenses at the closing would be the same
as the estimates of those amounts that Simula's management previously provided
to Relational Advisors. In rendering its opinion, Relational Advisors expressed
no view as to the reasonableness of the forecasts provided to Relational
Advisors by Simula and Armor or the assumptions on which such forecasts were
based. The management of Simula advised Relational Advisors that it was not
aware of any facts or circumstances that would make the information regarding
Simula reviewed by Relational Advisors inaccurate or misleading in any material
respect, and Relational Advisors relied on this assurance. Likewise, the
management of Armor advised Relational Advisors that it was not aware of any
facts or circumstances that would make the information regarding Armor reviewed
by Relational Advisors inaccurate or misleading in any material respect, and
Relational Advisors also relied on this assurance.
At the instruction of its board of directors, Simula made a public
announcement in December 2002 that it was reviewing strategic alternatives,
including a sale or merger of Simula. At the request of Simula's management,
Relational Advisors had discussions with a very large and broad group of
interested parties whom the board of directors, management and Relational
Advisors identified to be the most likely to participate in an acquisition or
other transaction with Simula. Numerous parties requested information on Simula
and met with management. In arriving at its opinion, Relational Advisors was not
requested to make, did not make, and did not assume responsibility for making,
an independent evaluation, appraisal, or physical inspection of any of the
assets or liabilities (contingent or otherwise) of Simula or Armor, nor was
Relational Advisors furnished with any appraisals relating to Simula or Armor.
In addition, Relational Advisors expressed no opinion as to the value of Armor
common stock if and when it will be issued to the shareholders of Simula or the
prices at which shares of Armor common stock will trade after the announcement
or consummation of the merger.
Relational Advisors' opinion is necessarily based on economic, monetary,
currency exchange, financial market and other conditions as they existed on, and
the information made available to Relational Advisors as of the date of its
written opinion, August 29, 2003. Although subsequent developments may affect
its opinion, Relational Advisors did not assume any obligation to update,
revise, or reaffirm its opinion.
54
In preparing its opinion to Simula's board of directors, Relational
Advisors performed a variety of financial and comparative analyses, including
those described below. The summary of Relational Advisors' analyses described
below is not a complete description of the analyses underlying its opinion. The
preparation of a fairness opinion is a complex process involving various
determinations as to the most appropriate and relevant methods of financial
analysis and the application of those methods to the particular circumstances
and, therefore, a fairness opinion is not readily susceptible to partial
analysis or summary description. In arriving at its opinion, Relational Advisors
made qualitative judgments as to the significance and relevance of each analysis
and factor that it considered. Accordingly, Relational Advisors believes that
its analyses must be considered as a whole and that selecting portions of its
analyses and factors or focusing on information presented in tabular format,
without considering all analyses and factors and the narrative description of
the analyses, could create a misleading or incomplete view of the processes
underlying its analyses and opinion.
In its analyses, Relational Advisors considered industry performance,
general business, economic, market and financial conditions and other matters,
many of which are beyond the control of Simula and Armor. No company,
transaction or business used in Relational Advisors' analyses as a comparison is
identical to Simula, Armor or the proposed merger, and an evaluation of the
results of those analyses is not entirely mathematical. Rather, the analyses
involve complex considerations and judgments concerning financial and operating
characteristics and other factors that could affect the acquisition, public
trading or other values of the companies or transactions analyzed. The estimates
contained in Relational Advisors' analyses and the ranges of valuations
resulting from any particular analysis are not necessarily indicative of actual
values or predictive of future results or values, which may be significantly
more or less favorable than those suggested by the analyses. In addition,
analyses relating to the value of businesses or securities do not purport to be
appraisals or to reflect the prices at which businesses or securities actually
may be sold. Accordingly, the estimates used in, and the results derived from,
Relational Advisors' analyses are inherently subject to substantial uncertainty.
Relational Advisors' opinion and financial analyses were only one of many
factors considered by Simula's board of directors in its evaluation of the
proposed merger and should not be viewed as determinative of the views of
Simula's board of directors or management with respect to the merger or the
merger consideration. In fact, as discussed in the section entitled "The Merger
Agreement--Merger Consideration" beginning on page 63 of this proxy
statement/prospectus, Simula's management currently estimates that a reasonable
projection of the total per share merger consideration payable to Simula
shareholders will range from approximately $2.90 to $3.25, the low end of which
projection is below the per share merger consideration price that Simula's
financial advisor determined to be fair.
As compensation for its services in connection with the merger, Simula paid
Relational Advisors a $100,000 retainer fee as well as a $300,000 fee for
rendering its fairness opinion verbally to Simula's board of directors on August
27, 2003. The fairness opinion fee was payable upon delivery of the opinion
without regard to whether the merger is completed. Simula will pay Relational
Advisors an additional $800,000 in the event the merger is completed. Simula has
also agreed to reimburse Relational Advisors for reasonable expenses and to
indemnify Relational Advisors and related parties against certain liabilities,
including liabilities under the federal securities laws, arising out of its
engagement. Relational Advisors has performed various investment banking
services for Simula in the past and has received customary fees for such
services.
The following is a summary of the report presented by Relational Advisors
to Simula's board of directors on August 27, 2003 in connection with its written
opinion dated August 29, 2003. The financial analyses summarized below include
information presented in tabular format. As described in greater detail above,
in order to fully understand Relational Advisors' financial analyses, the tables
must be read together with the text. The tables alone do not constitute a
complete description of the financial analyses. Accordingly, the analyses listed
in the tables and text described below must be considered as a whole.
Considering any portion of such analyses and of the factors considered, without
considering all analyses and factors and the text, could create a misleading or
incomplete view of the process underlying the rendering of the opinion of
Relational Advisors.
SIMULA ANALYSES
SELECTED COMPANIES ANALYSIS
Using publicly available information, Relational Advisors reviewed and
compared certain financial information relating to Simula to corresponding
financial information, ratios and implied public market trading multiples of 11
selected public companies, as follows:
55
Armor Holdings, Inc. HEICO Corp.
BE Aerospace, Inc. Hexcel Corp.
Ceradyne, Inc. LMI Aerospace, Inc.
DHB Industries, Inc. Integrated Defense Technologies
Ducommun, Inc. Transtechnology Corp.
EDO Corp.
The selected companies were chosen because they are publicly traded
companies in the aerospace and defense industries with operations that
Relational Advisors determined to be similar to Simula. Using publicly available
information and other information provided by Simula, Relational Advisors
calculated a range of implied values for Simula common stock by applying a range
of multiples relating to the selected companies to the LTM EBITDA (last twelve
months' earnings before interest, taxes, depreciation, and amortization), LTM
EBIT (last twelve months' earnings before interest and taxes) and LTM net income
(last twelve months' net income) of Simula. Relational Advisors adjusted this
information for non-recurring charges as necessary. With respect to the selected
companies, Relational Advisors calculated enterprise value (market value of
common equity plus preferred stock, plus debt, less cash) as a multiple of LTM
EBITDA and LTM EBIT, and calculated equity market capitalization as a multiple
of LTM net income. Equity market values were based on closing stock prices on
August 25, 2003. Such analysis indicated the following approximate implied per
share equity reference range for Simula, as compared to the estimated merger
consideration:
Implied Per Share Equity
Reference Range for Simula Estimated Merger Consideration
$1.08 - $3.06 $3.00
SELECTED TRANSACTIONS ANALYSIS
Using publicly available financial information, Relational Advisors
reviewed the implied enterprise value and purchase price multiples in 18
selected merger and acquisition transactions. The transactions selected by
Relational Advisors consisted of completed acquisition transactions for the
period from January 1, 2000 through August 20, 2003 for publicly traded
companies where the target was in the business of providing protective systems
and other components to military, aerospace and law enforcement, having an
enterprise value between $50 million and $750 million.
ACQUIROR TARGET
-------- ------
Precision Castparts Group SPS Technologies Inc.
DRS Technologies Integrated Defense Technologies
TriMas Corp. Highland Group Industries
DRS Technologies Paravant, Inc.
Zodiac SA ESCO Holding Corp.
Alcoa Inc. Fairchild Fasteners
General Dynamics Advanced Technical Products
Spirent plc Curtiss-Wright
L-3 Communications Corp. Spar Aerospace Limited
Christian Dalloz SA Bacou USA Inc.
Ducommun Inc. Composite Structures LLC
General Dynamics Primex Technologies
Heroux Inc. Devtek Corp.
L-3 Communications Corp. Honeywell Collision Avoidance
Britax International Hexcel Bellingham
Veritas Capital Advanced Technical Products
Autoliv Inc. OEA Inc.
AIL Technologies EDO Corp.
Using publicly available financial information, Relational Advisors
compared the consideration paid in the 18
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selected transactions as multiples of the target companies' LTM EBITDA, LTM EBIT
and LTM net income. Relational Advisors then applied a range of selected
multiples of LTM EBITDA, LTM EBIT and LTM net income from the selected
transactions to corresponding financial information of Simula. This analysis
indicated the following approximate implied per share equity reference range for
Simula, as compared to the estimated merger consideration:
Implied Per Share Equity
Reference Range for Simula Estimated Merger Consideration
-------------------------- ------------------------------
$1.11 - $1.82 $3.00
PREMIUMS PAID ANALYSIS
Relational Advisors compared the premium represented by the proposed merger
consideration over Simula's common stock trading price to premiums offered in 73
selected merger and acquisition transactions. Relational Advisors selected these
transactions based on the enterprise value of the target companies and on
transactions that were completed during the period from January 1, 2002 through
July 23, 2003 (date that the letter of intent between Armor and Simula was
executed and publicly announced) for publicly traded companies having an
enterprise value of between $100 million and $250 million. This analysis
indicated the following approximate implied per share equity reference range for
Simula, as compared to the estimated merger consideration:
Implied Per Share Equity
Reference Range for Simula Estimated Merger Consideration
-------------------------- ------------------------------
$2.59 - $3.21 $3.00
DISCOUNTED CASH FLOW ANALYSIS
In order to calculate an estimate of the value of Simula from a cash flow
perspective, Relational Advisors performed a discounted cash flow analysis using
financial forecasts for Simula for 2003 through 2006 prepared and supplied by
Simula's management. Using these financial projections, Relational Advisors
considered management's estimate of the future unleveraged free cash flows that
Simula could produce through 2006 and then calculated a range of terminal values
at the end of 2006 by applying a range of EBITDA exit multiples from 7.6x to
9.6x to Simula's estimated EBITDA in 2006. The cash flow stream and terminal
values were discounted to present values using discount rates ranging from 8.0%
to 12.0%, which were chosen to reflect reasonable ranges of Simula's estimated
weighted average cost of capital. This analysis indicated the following
approximate implied per share equity reference range for Simula as compared to
the estimated merger consideration:
Implied Per Share Equity
Reference Range for Simula Estimated Merger Consideration
-------------------------- ------------------------------
$2.09 - $3.64 $3.00
ARMOR ANALYSES
SELECTED COMPANIES ANALYSIS
Relational Advisors reviewed and compared certain financial information
relating to Armor to corresponding financial information, ratios and implied
public market trading multiples of the selected comparable companies identified
above in "Simula Analyses - Selected Companies Analysis."
Using publicly available information and other information provided by
Armor, Relational Advisors calculated a range of implied values for Armor common
stock by applying a range of multiples relating to the selected companies to the
LTM EBITDA, LTM EBIT and LTM net income of Armor. Relational Advisors adjusted
this information for non-recurring charges as necessary. With respect to the
selected companies, Relational Advisors calculated enterprise value (market
value of common equity plus preferred stock, plus debt, less cash) as a multiple
of LTM EBITDA and LTM EBIT, and calculated equity market capitalization as a
multiple of LTM net income. Equity market values were based on closing stock
prices on August 25, 2003. Such analysis indicated the following
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approximate implied per share equity reference range for Armor, as compared to
the closing price of Armor stock on August 25, 2003:
Implied Per Share Equity Closing Price of Armor Common Stock
Reference Range for Armor on August 25, 2003
------------------------- ------------------
$15.78 - $19.41 $14.97
PRO FORMA ACCRETION/DILUTION ANALYSIS
Relational Advisors analyzed the potential pro forma financial effect of
the merger on Armor's 2004 and 2005 estimated diluted earnings per share after
giving effect to potential cost savings and other synergies anticipated by
Simula's management to result from the merger. Estimated financial data for
Simula were based on internal estimates of Simula's management, and estimated
financial data for Armor were based on internal estimates of Armor's management.
Based on the merger consideration, and the final information provided by the
managements of Simula and Armor, Relational Advisors concluded that the proposed
transaction would be accretive to Armor's earnings per share after giving effect
to the potential cost savings and other synergies. The actual results achieved
by the combined company may vary from the projected results and the variations
may be material.
INTERESTS OF SIMULA DIRECTORS AND OFFICERS IN THE MERGER
In considering the recommendation of Simula's board of directors that you,
as a Simula shareholder, vote to approve and adopt the merger agreement and
approve the merger, you should be aware that some of Simula's officers and
directors have interests in the transaction that are different from, or in
addition to, your interests as a Simula shareholder. The Simula board of
directors was aware of these interests and took these interests into account in
approving the merger agreement and the merger. These interests are summarized
below.
COMMON STOCK
As of October 17, 2003, the record date of the special meeting, the
executive officers and directors of Simula and their respective affiliates
owned an aggregate of 105,011 shares, or 1%, of outstanding Simula common stock,
which will be treated in the merger in the same manner as shares of Simula
common stock held by other shareholders of Simula. The executive officers and
directors of Simula also held an aggregate of 1,302,937 options to acquire
shares of Simula common stock, of which Simula estimates 275,000 will vest and
become immediately exerciseable in connection with the merger, assuming merger
consideration of $3.00 per share. Additionally, as of the same date, Simula's
executive officers and directors and their respective affiliates beneficially
owned approximately 10.7% of all outstanding shares of Simula common stock
entitled to vote at the special meeting.
CHANGE OF CONTROL, SEVERANCE AND RETENTION AGREEMENTS
Simula is party to employment agreements with Bradley P. Forst, its
President and Chief Executive Officer, and one of its other named executive
officers, Joseph W. Coltman. Mr. Forst's employment agreement is for a
three-year term commencing October 2000 and automatically renews for an
additional three-year term unless notice of termination is given at least one
year in advance of the end of the term. Neither Simula nor Mr. Forst delivered
such notice of termination by October 1, 2002. As a result, Mr. Forst's
employment agreement will expire on September 30, 2006. Simula entered into a
similar employment agreement with Mr. Coltman commencing October 2000. The term
of the employment agreement with Mr. Coltman was two years and automatically
renewed for an additional two-year term on October 13, 2002. The term of each
agreement is subject to early termination upon the disability or death of the
executive.
During the term of the employment agreements, Simula is to pay each
executive officer his base salary, which is subject to review and adjustment by
the compensation committee of Simula's board of directors on an annual basis. In
addition to his base salary, each executive is entitled to participate in any
and all additional compensation or benefit plans of Simula now in place or later
adopted, such as annual bonus or option plans, incentive, savings and retirement
plans, and welfare benefit plans.
Each employment agreement includes provisions that are triggered upon a
change of control of Simula. For purposes of these agreements, the term "change
of control" means the occurrence of any of the following events: (i) the
acquisition, directly or indirectly, of ownership of more than 20% of Simula's
common stock; (ii) a merger or consolidation in which voting power of Simula's
securities changes or Simula is not the surviving corporation; (iii)
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the sale, transfer, or other disposition in one or more transaction(s), of all
or substantially all of the assets of Simula; or (iv) in certain circumstances,
a change in more than one-third of the membership of the board of directors. The
completion of the merger would constitute a change of control. In the event of a
change of control, if Simula terminates the executive's employment without cause
(as defined in each employment agreement), or the executive resigns for good
reason (as defined in each employment agreement), Simula will pay such executive
a termination payment. For Mr. Forst, the payment is an amount equal to three
times his then current salary plus average annual bonus. For Mr. Coltman, the
payment is an amount equal to two times his then current salary plus average
annual bonus. It is expected that upon the effective date of the merger
agreement such payments will be made to Messrs. Forst and Coltman.
Mr. Forst's employment agreement provides that in the event it is
determined that any payment under the agreement is subject to the excise tax
imposed by Section 4999 of the Internal Revenue Code or parallel state or local
tax laws, Mr. Forst is entitled to receive from Simula a "gross-up" payment in
an amount equal to the excise tax and related penalties, interest and other
charges. The employment agreement with Mr. Coltman caps all benefits such that
no excise tax will be imposed by Section 4999.
Simula is also a party to a retention and severance agreement with its
other named executive officer, John A. Jenson, Vice President and Chief
Financial Officer. The retention agreement provides that in the event Mr. Jenson
is terminated by Simula or at any time up to one year following the sale, merger
or other transfer for value of all or substantially all of Simula's stock or
assets, Mr. Jenson is entitled to receive a severance payment equivalent to
eighteen months of his salary in addition to continued health benefits coverage
for a period of 18 months. However, if Simula's successor retains Mr.
Jenson in a comparable position for a period of one year and one day, Mr. Jenson
is entitled to receive a retention bonus payment equivalent to twelve months of
his salary. The retention agreement terminates on December 31, 2003 or the date
Simula notifies Mr. Jenson of its decision not to pursue a transaction; however,
if a transaction is consummated on or before December 31, 2003, the agreement
shall not terminate until Simula's successor has made all required payments.
Mr. Forst, Mr. Coltman, and Mr. Jenson may be entitled to receive severance
benefits, including, where applicable, gross-up for excise taxes, in the amount
of approximately $1,611,156.00, $437,000.00, and $275,402.00, respectively.
Similarly, Simula has entered into retention and severance agreements with
15 other senior managers on terms similar to the terms of Mr. Jenson's
agreement, providing on average for three months retention and six months
severance.
STOCKHOLDERS AGREEMENTS
Pursuant to the merger agreement, Simula has agreed to use its reasonable
best efforts to cause the executive officers and directors of Simula to execute
and deliver to Armor stockholder agreements in which such executive officers and
directors will agree to vote the shares of common stock of Simula held by them
at the special meeting of Simula shareholders in favor of approval and adoption
of the merger agreement and approval of the merger. For a discussion of these
stockholder agreements, see the section entitled "Stockholder Agreements
Relating to the Merger" on page 85.
INDEMNIFICATION AND INSURANCE
Pursuant to the merger agreement, Armor has agreed that, after the
effective time of the merger, it will provide certain indemnification and
liability insurance benefits to present and former directors and officers of
Simula. See the section entitled "The Merger Agreement -- Director and Officer
Indemnification and Insurance" on page 78.
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material United States federal income tax
consequences of the merger to Simula and United States holders of Simula common
stock. The discussion is based on current provisions of the Internal Revenue
Code of 1986, as amended, or the Code, existing, proposed, and temporary
regulations promulgated thereunder, administrative rulings, and court decisions,
all of which are subject to change possibly with
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retroactive effect. The discussion assumes that Simula shareholders hold their
common stock as capital assets within the meaning of the Code.
The summary is for general information purposes only and does not purport
to discuss all aspects of United States federal income taxation that might be
relevant to Simula or its shareholders. In addition, it does not address all
aspects of United States federal income taxation that may be relevant to you in
light of your personal circumstances or that may be relevant if you are subject
to special treatment under United States federal income tax laws (for example,
if you are a financial institution, an insurance company, a tax-exempt entity, a
broker-dealer, or are holding the Simula common stock as part of a "straddle,"
"hedge," or "conversion" transaction) or if you hold Simula common stock
indirectly through a flow-through entity such as a partnership, limited
liability company or S corporation. The discussion does not discuss the United
States federal income tax consequences of the merger to any shareholder who
acquired Simula common stock pursuant to the exercise of employee stock options
or otherwise as compensation, or who, for United States federal income tax
purposes, is a non-resident alien individual, a foreign corporation, a foreign
partnership, or a foreign estate or trust. The discussion also does not consider
the effect of the federal alternative minimum tax to Simula shareholders or the
effects of any foreign, state, or local tax laws.
TAX CONSEQUENCES TO SIMULA
As of December 31, 2002, Simula and its subsidiaries had consolidated net
operating loss carryovers of approximately $99,584,927.00 for federal income tax
purposes. In general, net operating loss carryovers can be used to reduce or
eliminate federal income tax payable in future years. If the merger is
consummated, Simula's net operating loss carryovers will be either extinguished
or limited as discussed below.
The merger agreement allows Armor to make an election under Section 338(g)
of the Code with respect to its acquisition of Simula common stock pursuant to
the merger. The tax consequences of the merger to Simula, including the effect
of the merger on Simula's net operating loss carryovers, will depend upon
whether Armor decides to make the Section 338(g) election.
If the Section 338(g) election is made, each of Simula and its subsidiaries
will be (a) treated as if it had sold its assets for their fair market value at
the end of the effective date of the merger, and then (b) treated as being a new
corporation that purchased the same assets for their fair market value as of the
beginning of the following day. As a result, Simula and its subsidiaries will
recognize gain or loss on the deemed sale of their assets. Any gain will be
offset by the consolidated net operating loss carryovers for regular income tax
purposes; however, Simula and its subsidiaries will be subject to alternative
minimum tax, or AMT, with respect to the deemed sale of their assets. Because
Simula and its subsidiaries will be treated as new corporations for federal
income tax purposes as of the day following the effective date of the merger,
they will be stripped of their tax history, including any consolidated net
operating loss carryover or AMT credits that remain after the reduction of any
gain on the deemed sale of their assets.
If the Section 338(g) election is not made, Simula will not recognize any
gain or loss as a result of the merger. However, it is anticipated that the
merger will constitute an "ownership change" within the meaning of section 382
of the Code and Simula's use of its consolidated net operating loss carryovers
and certain other tax attributes will be subject to the annual limitation
imposed by that section. Such limitation will also apply to certain losses or
deductions that are "built-in" as of the date of the merger and are subsequently
realized. In general, the amount of the annual limitation will be equal to the
product of (a) the aggregate fair market value of all of Simula's common stock
immediately before the merger, times (b) the "long-term tax-exempt rate" in
effect for the month in which the merger occurs (as an example, the rate is
4.65% for ownership changes occurring in September 2003). Any unused portion of
the limitation may be carried over and used in a later year.
TAX CONSEQUENCES TO UNITED STATES HOLDERS OF SIMULA COMMON STOCK
The tax consequences of the merger to Simula shareholders will depend upon
the percentage of the merger consideration that is payable in cash and the
percentage that is payable in Armor common stock. It is not currently possible
to determine what these percentages will be. However, if the fair market value
of the Armor common stock (as of the effective date of the merger) given as
consideration in the merger is equal to or greater than 80% of the
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total consideration given in the merger, there is a possibility that the merger
would constitute a tax-free reorganization within the meaning of Section 368(a)
of the Code. Except under those limited circumstances, however, the merger will
be fully taxable to the Simula shareholders.
Tax Consequences if the Merger Does Not Qualify as a Tax-Free
Reorganization
If the merger does not qualify as a tax-free reorganization within the
meaning of Section 368(a) of the Code, the exchange of Simula common stock for
Armor common stock and cash pursuant to the merger will be fully taxable to
Simula shareholders for United States federal income tax purposes. In general,
you will recognize capital gain or loss equal to the difference between (a) the
sum of the amount of cash and the fair market value (as of the effective date of
the merger) of the Armor common stock you receive, and (b) your adjusted tax
basis in the Simula common stock surrendered in exchange therefor. The amount
and character of gain or loss will be calculated separately for each block of
Simula common stock you hold, with each block consisting of stock acquired at
the same cost in a single transaction.
Gain or loss realized by you will be long-term capital gain if you have
held the Simula common stock for more than one year on the effective date of the
merger, and short-term capital loss if you have held the Simula common stock for
one year or less on the effective date of the merger. If you are not a
corporation, any long-term capital gain will be subject to a maximum federal
income tax rate of 15% and any short-term capital gain will be subject to a
maximum federal income tax rate of 35%. If you are a corporation, both long-term
or short-term capital gain will be subject to a maximum federal income tax rate
of 35%. The deductibility of capital losses is subject to certain limitations.
Your tax basis in the Armor common stock received in the merger will be
equal to the fair market value of such stock on the effective date of the merger
and your holding period for such stock will begin on the day following the
effective date of the merger.
Tax Consequences if the Merger Does Qualify as a Tax-Free Reorganization
If the fair market value of the Armor common stock (as of the effective
date of the merger) given as consideration in the merger is equal to or greater
than 80% of the total consideration given in the merger, there is a possibility
(but not a certainty) that the merger would constitute a tax-free reorganization
within the meaning of Section 368(a) of the Code. If the merger does constitute
a tax-free reorganization, you will recognize capital gain (but not capital
loss) equal to the lesser of (a) the amount of cash you receive, or (b) the
difference between (i) the sum of the amount of cash and the fair market value
(as of the effective date of the merger) of the Armor common stock you receive
(including any fractional shares of Armor common stock deemed received and
exchanged for cash), and (ii) your adjusted tax basis in the Simula common stock
surrendered in exchange therefor. You will generally recognize capital gain or
loss on any cash you receive in lieu of a fractional share of Simula common
stock equal to the difference between the amount of cash received and the tax
basis allocated to such fractional share. Your aggregate tax basis in the Armor
common stock you receive in the merger (including any fractional shares you are
deemed to receive in exchange for cash) will equal your aggregate tax basis in
the Simula common stock you surrender, increased by the amount of taxable gain,
if any, you recognize in the merger and decreased by the amount of cash you
receive in the merger (excluding any cash received in lieu of a fractional share
of Simula common stock). Your holding period for the Armor common stock you
receive in the merger will include your holding period for the Simula common
stock you surrender in the exchange.
Backup Withholding
You may be subject to "backup withholding" at a rate of 28% on cash
payments you receive in connection with the merger. Backup withholding will not
apply, however, if (1) you furnish your correct taxpayer identification number
and certify under penalty of perjury that you are not subject to backup
withholding on the substitute Form W-9 that will be included as part of the
letter of transmittal that will be sent to you by the exchange agent following
the effective date of the merger, or (2) you are a corporation or are otherwise
exempt from backup withholding. Any amount withheld under the backup withholding
rules will be allowed as a refund or credit against your United States federal
income tax liability, provided you furnish the required information to the
Internal Revenue Service.
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TAX MATTERS ARE VERY COMPLICATED AND THE TAX CONSEQUENCES OF THE MERGER TO YOU
WILL DEPEND UPON YOUR PARTICULAR CIRCUMSTANCES. YOU ARE THEREFORE STRONGLY URGED
TO CONSULT YOUR OWN TAX ADVISOR WITH RESPECT TO THE FEDERAL, STATE, LOCAL, AND
FOREIGN TAX CONSEQUENCES OF THE MERGER TO YOU.
THE ACCOUNTING TREATMENT OF THE MERGER
In accordance with United States generally accepted accounting principles,
Armor will account for the merger using the purchase method of accounting. Under
this method of accounting, Armor will record the market value of its common
stock issued in connection with the merger, the amount of cash consideration to
be paid to holders of Simula common stock, and the amount of direct transaction
costs associated with the merger as the estimated purchase price of acquiring
Simula. Armor will allocate the estimated purchase price to the net tangible and
amortizable intangible assets acquired (including technology, customer
relationships, and licensing agreements), based on their respective fair values
at the date of the completion of the merger. Any excess of the estimated
purchase price over those fair values will be accounted for as goodwill.
Amortizable intangible assets, currently estimated at $35.7 million, will
generally be amortized over useful lives ranging from five to 17 years,
resulting in an estimated accounting charge for amortization attributable to
these items of approximately $3.1 million on an annual basis. Goodwill resulting
from the business combination will not be amortized but instead will be tested
for impairment at least annually (more frequently if certain indicators are
present). The amount of the estimated purchase price allocated to goodwill,
which is based on certain assumptions, is estimated to be approximately $64.8
million. If Armor's management should change the assumptions used in the
allocation of the purchase price, amounts allocated to intangible assets with
definite lives may increase significantly, which could result in a material
increase in amortization of intangible assets.
In the event that the management of the combined company determines that
the value of goodwill has become impaired, the combined company will incur an
accounting charge for the amount of impairment during the fiscal quarter in
which the determination is made. The amounts listed in the above paragraph are
only preliminary estimates, however, actual amounts may differ from these
estimates.
DISSENTERS' RIGHTS
Arizona law grants to shareholders dissenters' rights, the right to demand
payment from the corporation for the shareholders' shares, and to a judicial
appraisal of the shareholders' shares under certain circumstances, including in
the case of (i) consummation of a plan of merger to which the corporation is a
party if the shareholder is entitled to vote on the merger or the corporation is
a subsidiary that is merged with its parent, (ii) consummation of a plan of
share exchange to which the corporation is a party as the corporation whose
shares will be acquired, if the shareholder is entitled to vote on the plan,
(iii) an amendment of the articles of incorporation that materially adversely
affects rights in respect of a dissenter's shares, and (iv) any corporate action
taken pursuant to a shareholder vote to the extent the articles of
incorporation, bylaws or a resolution of the board of directors provides for
dissenter's rights. Notwithstanding the foregoing, unless the corporation's
articles of incorporation provide otherwise, the holders of shares listed on a
national securities exchange or the Nasdaq National Market or held of record by
at least 2,000 shareholders do not have the right to exercise dissenters'
rights, to demand payment from the corporation for the shareholders' shares, or
to a judicial appraisal of the shareholders' shares, as a result of such
corporate actions. Because Simula's amended and restated articles of
incorporation do not provide for dissenters' rights and Simula's common stock is
currently listed on the American Stock Exchange, dissenters' rights will not be
available under Arizona law to Simula's shareholders in connection with the
merger.
REGULATORY APPROVALS
The merger is subject to review by the United States Federal Trade
Commission, or FTC, and the Antitrust Division of the United States Department
of Justice, or DOJ, under the requirements of the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, or the HSR Act. Under the HSR Act, a
transaction may not be completed until required information and materials are
furnished to the DOJ and the FTC and the waiting period under the HSR Act
expires or is terminated. Simula and Armor each filed the required notification
and report forms on October 10, 2003, and received notification of the early
termination of the required waiting period on October 29, 2003.
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The merger may also be subject to review by the governmental authorities of
various other jurisdictions under the antitrust laws or similar laws of those
jurisdictions including, if required, the necessity of receiving a decision
under Article 6(1)(b) or 8(2) of Council Regulation No. 4064/89 of the European
Community, or EC, as amended, declaring the merger compatible with the EC Common
Market.
In addition, after the statutory waiting periods and clearance of the
merger, and even after completion of the merger, either the DOJ, the FTC or
other governmental authorities could challenge or seek to block the merger under
the antitrust laws, as it deems necessary or desirable in the public interest.
Other competition agencies with jurisdiction over the merger could also initiate
a private action under the antitrust laws challenging or seeking to enjoin the
merger, before or after it is completed. Simula and Armor cannot be sure that a
challenge to the merger will not be made or that, if a challenge is made, Simula
and Armor will prevail.
RESALE OF ARMOR COMMON STOCK BY AFFILIATES OF SIMULA
The shares of Armor common stock that may be issued in the merger will be
registered under the Securities Act of 1933, as amended, and will be freely
transferable under the Securities Act, except for shares issued to any
shareholder who may be deemed to be an "affiliate" of Simula for purposes of
Rule 145 under the Securities Act as of the date of the Simula special meeting.
Affiliates of Simula may not sell their shares of Armor common stock acquired in
the merger, if any, except pursuant to an effective registration statement under
the Securities Act covering those shares or in compliance with Rule 145 or
another applicable exemption from the registration requirements of the
Securities Act. Persons who may be deemed to be affiliates of Simula generally
include individuals who, or entities that, control, are controlled by or are
under common control with Simula, and may include certain officers, directors
and principal shareholders of Simula.
In addition, Simula has agreed to use its commercially reasonable efforts
to obtain from each person who is an affiliate of Simula a signed affiliate
letter. Pursuant to the affiliate letter, each affiliate of Simula will agree
not to sell, pledge, transfer or otherwise dispose of any shares of Armor common
stock issued to the affiliate in the merger, except in compliance with Rule 145
or an exemption from the registration requirements of the Securities Act and
shall agree to the placement of the following restrictive legends on the
certificates representing Armor common stock which the affiliate may receive in
the merger.
"The shares represented by this certificate were issued in a
transaction to which Rule 145 promulgated under the Securities Act of
1933, as amended (the "Securities Act"), applies. The shares have not
been acquired by the holder with a view to, or for resale in connection
with, any distribution thereof within the meaning of the Securities
Act. The shares may not be sold, pledged or otherwise transferred
except in compliance with the provisions of Rule 145."
The certificates representing Armor common stock that may be received in
connection with the merger by persons who may be deemed to be affiliates of
Simula prior to the merger bearing the legend set forth above may be exchanged
for certificates without such legends by the holder thereof delivering such
certificates to Armor or its transfer agent when: (i) one year elapses from the
date the affiliate acquires the Armor common stock received in the merger
(provided that the provisions of Rule 145(d)(2) under the Securities Act are
then available and applicable to the resale of such shares), (ii) two years
elapse from the date the affiliate acquires the Armor common stock received in
the merger (provided that the provisions of Rule 145(d)(3) under the Securities
Act are then available and applicable to the resale of such shares), or (iii)
Armor receives either a written opinion of counsel to such "affiliate", which
opinion of counsel shall be reasonably satisfactory to Armor, or a "no-action"
letter is obtained by such "affiliate" from the Securities and Exchange
Commission, to the effect that the restrictions imposed by Rule 145 under the
Securities Act no longer apply to such "affiliate".
LISTING OF SHARES OF ARMOR COMMON STOCK ISSUED IN THE MERGER ON THE NEW YORK
STOCK EXCHANGE
Armor shall use commercially reasonable efforts to have the shares of Armor
common stock issued in connection with the merger listed on, and it is a
condition to Simula's obligations under the merger agreement that
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the shares of Armor common stock issued in connection with the merger be
authorized for listing on, the New York Stock Exchange before the completion of
the merger, subject to official notice of issuance, unless Armor has irrevocably
elected that the consideration to be received by Simula shareholders in
connection with the merger shall be paid entirely in cash.
DELISTING AND DEREGISTRATION OF SIMULA COMMON STOCK AFTER THE MERGER
When the merger is completed, Simula common stock will be delisted from the
American Stock Exchange and deregistered under the Securities Exchange Act of
1934, as amended.
64
THE MERGER AGREEMENT
The following is a brief summary of the material provisions of the merger
agreement, a copy of which is attached as Annex A to this proxy
statement/prospectus and is incorporated by reference in this proxy
statement/prospectus. We urge you to read the merger agreement in its entirety
for a more complete description of the merger. In the event of any discrepancy
between the terms of the merger agreement and the following summary, the merger
agreement will control.
THE MERGER
AHI Bulletproof, a wholly-owned subsidiary of Armor, will merge with and
into Simula following:
o The approval and adoption of the merger agreement and the approval of
the merger by Simula shareholders; and
o The satisfaction or waiver of the other conditions to the merger.
Simula will be the surviving corporation and will become a wholly-owned
subsidiary of Armor following the merger.
EFFECTIVE TIME
As soon as practicable on or after the closing of the merger, the parties
will cause the merger to become effective by filing a certificate of merger with
the Secretary of State of the State of Arizona. Armor and Simula are working
toward completing the merger as soon as possible and hope to complete the merger
in the fourth quarter of 2003. However, because the merger is subject to
governmental and other regulatory approvals, and the satisfaction of other
conditions, we cannot predict the exact timing of the merger or whether the
merger will occur at all.
MERGER CONSIDERATION
Upon consummation of the merger, Armor will pay to Simula's shareholders
aggregate merger consideration of $110.5 million, as increased or decreased
based upon Simula's conduct of business prior to the consummation of the merger,
as follows:
o Increased by:
o the amount of any of Simula's prepaid insurance premiums (other
than with respect to directors and officers liability insurance)
which the applicable insurers agree in writing will be rebated to
Armor or AHI Bulletproof in cash following the consummation of
the merger (as of September 30, 2003, the amount of such rebate
was $0.00);
o the amount of any insurance receivables payable to Simula with
respect to claims by Simula under its business interruption
insurance policies which the applicable insurers confirm in
writing are payable to Simula (as of September 30, 2003, the
amount of such receivables was $0.00);
o the amount of any insurance receivables payable to Simula with
respect to claims by Simula under any policies of property and
casualty insurance (other than business interruption or directors
and officers liability insurance policies) which the applicable
insurers confirm in writing are payable to Simula, to the extent
that Simula had previously paid funds to repair or replace any of
its tangible assets (as of September 30, 2003, the amount of
such receivables was $0.00);
o the amount of all accounts receivable payable to Simula where the
payor is a governmental authority, or in the sole judgment of
Armor is a credit worthy prime contractor or subcontractor, which
are more than thirty (30) days past due and which the applicable
payors confirm in writing are payable and will be paid in full
without reservation of rights (as of September 30, 2003, the
amount of such receivables was $215,356.00); and
65
o the aggregate exercise price pursuant to certain options for
shares of Simula common stock and the aggregate unpaid portion of
the purchase price for certain shares issuable pursuant to
Simula's 1996 Employee Stock Purchase Plan, that are deemed
automatically exercised or issued at the effective time of the
merger, each as respectively described in "-- Treatment of Simula
Stock Options Issuable Pursuant to Option Plans" and "--
Treatment of Simula Common Stock Issuable Pursuant to the
Employee Stock Purchase Plan" below (as of September 30, 2003,
the aggregate exercise price of certain in-the-money options was
$727,395.00 and the aggregate unpaid portion of the purchase
price for certain shares issuable under the 1996 Employee Stock
Purchase Plan was $2,055.00);
o Decreased by:
o the aggregate unpaid and outstanding principal amount of, and all
accrued but unpaid interest, fees, charges, lender make-whole
payments, prepayment penalties, and other penalties on:
o the indebtedness evidenced by the Revolving Line of Credit
extended by CIT Group, Inc. to Simula, currently due
September 30, 2003 (subject to acceleration of maturity or
mandatory prepayment);
o the indebtedness evidenced by Simula's $25 million Senior
Secured Note, dated September 26, 2001, and due December 31,
2003 (subject to acceleration of maturity or mandatory
prepayment), issued to Allied Capital Corporation;
o the indebtedness evidenced by Simula's 8% Senior
Subordinated Convertible Notes due May 1, 2004 (subject to
acceleration of maturity or mandatory prepayment);
o the indebtedness evidenced by Simula's 9 1/2% Senior
Subordinated Notes due September 30, 2003 (subject to
acceleration of maturity or mandatory prepayment);
o the indebtedness evidenced by Simula's $800,000 promissory
note, dated June 13, 2000, issued to Rosestone Properties,
LLC;
o any indebtedness of Simula or its subsidiaries relating to
any refinancings of the foregoing indebtedness entered into
prior to the day that is five business days prior to the
anticipated date the merger will be completed;
o any additional indebtedness for borrowed money or capital
leases entered into by Simula or any of its Subsidiaries
after June 30, 2003, and prior to the day that is five (5)
business days prior to the anticipated date the merger will
be completed; and
o any financing of insurance premiums incurred by Simula or
any of its subsidiaries after June 30, 2003, and prior to
the day that is five business days prior to the anticipated
date the merger will be completed,
less the aggregate amount of any cash in any of Simula's bank
accounts or bank lock boxes five business days prior to the
anticipated date the merger (as of September 30, 2003, the total
amount of such indebtedness less the amount of such cash was
$59,063,411.00);
o the aggregate amount of any unpaid out-of-pocket costs, fees, or
expenses incurred by Simula and over which Simula had control in
connection with the negotiation and preparation of the merger
agreement and the consummation of the merger (as of September 30,
2003, the amount of such unpaid fees and expenses was
$4,145,817.00);
o the aggregate amount of any unpaid salary, and all out-of-pocket
costs, fees, or expenses incurred by Simula for management change
of control payments and retention payments (including tax
gross-up amounts and excise taxes), associated with the
termination of all employment agreements with Simula's President
and Chief Executive Officer, Executive Vice President and Chief
Development
66
Officer, and Vice President and Chief Financial Officer, without
cause, and retention agreements with 14 other employees
totaling $2,650,924.00;
o an amount equal to the difference between (a) $1,100,000 (if the
merger will be completed before November 30, 2003) or $1,375,000
(if the merger will be completed on or after November 30, 2003)
and (b) aggregate amount of all of Simula's capital expenditures
and bid and proposal expenditures paid beginning on July 1, 2003,
and ending on the last day of the month ending prior to the
effective date of the merger (as of September 30, 2003, the
amount of such difference was $371,638.00);
o the aggregate amount of certain planned restructuring costs of
Simula which have either not been incurred as anticipated
pursuant to Simula's restructuring plan or have not been paid by
Simula (as of September 30, 2003, the maximum amount of such
planned restructuring costs remaining unpaid was $365,385.00);
o the aggregate amount of any license or other fees or payments
payable to Simula pursuant to any new or extended license entered
into by Simula after August 29, 2003 (as of September 30, 2003,
the aggregate amount of such fees or payments received by Simula
was $0.00);
o the amount of Simula's accounts payable overage (if such accounts
payable overage is a positive number as of September 30, 2003,
the amount of Simula's accounts payable over 45 days past due as
so calculated was $0.00);
o the invoice amounts of any of Simula's account or trade
receivables outstanding at any time after August 29, 2003 that
are collected as a result of (a) a demand for the acceleration of
payment thereof by Simula when such invoice is not in default, or
(b) an acceptance of an accelerated payment of less than the
amount of the original invoice therefor as a result of a discount
granted by Simula, in either case not in the ordinary course of
business consistent with past practice (as of September 30,
2003, the amount of such receivables was $0.00);
o an amount equal to the difference between $3,150,000 and the
aggregate value of the customary and usable commercial inventory,
net of any slow moving or obsolete inventory provision, of Simula
determined and valued as of last day of the month preceding the
effective date of the merger (as of September 30, 2003, such
amount was $658,968.00);
o the amount of any due but unpaid tax liabilities of Simula
(including due but unpaid estimated tax payments, but excluding
the amount of any alternative minimum taxes arising as a result
of the consummation of the merger or any value added tax
liabilities relating to Simula's sale of its automotive safety
devices businesses in 2003) which were due to be paid prior to
the effective date of the merger (as of September 30, 2003, such
amount was $127,927.00);
o the amount of any due but unpaid insurance premiums of Simula
other than premiums with respect to directors and officers
liability insurance and customary accruals for employee health
insurance benefits premiums, including for long term disability,
vision, dental, group health, workers compensation and
supplemental life, which are outstanding (as of September 30,
2003, such amount was $0.00);
o the net proceeds received by Simula from any sale of the
outstanding capital stock or assets having an aggregate value in
excess of $10,000 of Simula's International Center for Safety
Education (as of September 30, 2003, such amount was $0.00); and
o the amount of any insurance proceeds received by or for the
benefit of Simula with respect to any claims by Simula under any
of their property and casualty insurance policies (but not
business interruption insurance proceeds) after August 29, 2003,
which are not used by Simula or its subsidiaries to repair or
replace any of their tangible assets or to make payments to any
third parties
67
with respect to a loss relating to such insurance proceeds (as
of September 30, 2003, the amount of such insurance proceeds was
$0.00).
For the purposes of illustration only and as indicated in the following
chart, Simula's management estimates that if the merger consideration was
calculated as of September 30, 2003, taking into account the foregoing
adjustments, the total merger consideration payable by Armor to Simula's
shareholders would have been approximately $44,060,736.00 and the per share
merger consideration payable to Simula's shareholders would have been
approximately $3.27 per share. In addition, based on Simula's internal
projections as indicated in the following chart, which are subject to numerous
variables, Simula's management currently estimates that if the merger
consideration is calculated as of December 1, 2003, the total merger
consideration payable by Armor to Simula's shareholders will be approximately
$42,169,575.00 and the per share merger consideration payable to Simula's
shareholders will be approximately $3.13 per share.
VARIABLES AFFECTING CALCULATION OF ACTUAL VALUE OF VARIABLE AS OF ESTIMATED VALUE OF VARIABLE AS OF
MERGER CONSIDERATION SEPTEMBER 30, 2003 DECEMBER 1, 2003
INCREASED BY:
Prepaid Insurance Premiums Excluding $0.00 $51,950.00
Directors and Officers Liability
Insurance
Business Interruptions Insurance $0.00 $0.00
Receivables
Property and Casualty Insurance $0.00 $0.00
Receivables
Receivables from Governmental $215,356.00 $100,000.00
Authority
Aggregate Exercise Price for $727,395.00 $652,895.00
In-the-Money Options
Aggregate Unpaid Portion of Purchase $2,055.00 $2,055.00
Price for Certain ESPP Shares
SUBTOTAL: $944,806.00 $806,900.00
DECREASED BY:
Outstanding Indebtedness and Cash $59,063,411.00 $61,082,360.00
Transaction Costs $4,145,817.00 $4,145,761.00
Termination and Severance Expenses $2,698,011.00 $2,698,011.00
Difference Between $371,638.00 $175,000.00
[$1,100,000.00/$1,375,000.00] and
Capital Expenditures and Bid and
Proposal Expenditures
Restructuring Costs that Were Not $365,385.00 $365,385.00
Incurred or Paid as Anticipated
License or Other Fees Payable to Simula $0.00 $0.00
Accounts Payable Overage $0.00 $0.00
Acceptance of Discounted Account or $0.00 $0.00
Trade Receivables
Difference Between $3,150,000.00 and $658,968.00 $658,968.00
Customary and Useable Commercial
Inventory
Unpaid Tax Liabilities $127,927.00 $58,927.00
Certain Unpaid Insurance Premiums $0.00 $0.00
Net Proceeds from Sale of Stock or $0.00 $0.00
Assets
Insurance Proceeds Not Used to Replace $0.00 $0.00
or Repair Simula's Tangible Assets or
Paid to Third Parties
SUBTOTAL: $67,431,154.00 $69,184,417.00
PURCHASE PRICE ADJUSTMENT TOTAL: $66,486,351.00 $68,377,512.00
DIFFERENCE BETWEEN 110,500,000.00 AND $44,013,649.00 $42,122,488.00
PURCHASE PRICE ADJUSTMENT:
PER SHARE CONSIDERATION(1): $3.27 $3.13
(1) The per share consideration as of September 30, 2003 is based on
13,472,460 outstanding shares and/or in-the-money options. The
December 1, 2003 estimated per share consideration is based on
13,449,460 expected outstanding shares and/or in-the-money options.
As a result of the foregoing estimates, and provided that the closing of
the merger occurs prior to December 1, 2003, Simula's management currently
estimates that a reasonable projection of the total merger consideration payable
by Armor to Simula's shareholders will range from approximately $39 million to
$44 million, or from approximately $2.90 per share to $3.25 per share. This
projected range is based on Simula's estimate that, as of December 1, 2003,
there will be approximately 13,449,460 outstanding shares and/or in-the-money
options. Please note, however, that there is no floor, or minimum, on the merger
consideration to be paid by Armor for each share of Simula common stock under
the merger agreement. This is only an estimate for the purposes of illustration
and the actual final per share merger consideration payable to Simula's
shareholders is subject to numerous factors and variables, including Simula's
financial performance and cash flow through the date of the calculation of the
per share merger consideration, and many of such factors and variables are
outside of the control of Simula.
CONVERSION OF SIMULA COMMON STOCK IN THE MERGER
Upon completion of the merger, each share of Simula common stock
outstanding immediately prior to the effective time of the merger (other than
shares issuable upon the exercise of certain Simula options and certain shares
issuable pursuant to Simula's 1996 Employee Stock Purchase Plan, which will each
be treated as respectively described in "-- Treatment of Simula Stock Options
Issuable Pursuant to Option Plans" and "-- Treatment of Simula Common Stock
Issuable Pursuant to the Employee Stock Purchase Plan" below) will be canceled
and extinguished and automatically converted into the right to receive cash
and/or shares of Armor common stock as follows upon surrender of the certificate
representing such share of Simula common stock in the manner provided in the
merger agreement:
o An amount in cash equal to:
o the cash portion of the total dollar amount of the merger
consideration payable by Armor in connection with the merger
(which cash portion remains to be determined by and will be
determined by Armor prior to the effective time of the merger,
but which cash portion shall be not less than 20% and not greater
than 100% of the total dollar amount of the merger
consideration);
divided by
----------
o the total number of shares of Simula common stock outstanding
immediately prior to the effective time of the merger (including
shares issuable upon the exercise of certain Simula options and
certain shares issuable pursuant to Simula's 1996 Employee Stock
Purchase Plan, which will each be treated as respectively
described in "-- Treatment of Simula Stock Options Issuable
Pursuant to Option Plans" and "-- Treatment of Simula Common
Stock Issuable Pursuant to the Employee Stock Purchase Plan"
below);
plus
----
o That number of shares of Armor common stock equal to:
o the remainder of the total dollar amount of the merger
consideration payable by Armor in connection with the merger
after deducting that portion of the merger consideration payable
in cash by Armor;
divided by
----------
o the total number of shares of Simula common stock outstanding
immediately prior to the effective time of the merger (including
shares issuable upon the exercise of certain Simula options and
certain shares issuable pursuant to Simula's 1996 Employee Stock
Purchase Plan, which will each be treated as respectively
described in "--Treatment of Simula Stock Options Issuable
Pursuant to Option Plans" and "-- Treatment of Simula Common
Stock Issuable Pursuant to the Employee Stock Purchase Plan"
below);
68
and further divided by
----------------------
o the mean of the average between the bid and the ask price of
Armor common stock on the NYSE, as reported on the NYSE Composite
Tape at the close of the market for the 20 consecutive trading
days ending 10 trading days prior to the date the merger is
completed, or the Parent Average Trading Price.
The per share amount of merger consideration to be received by Simula's
shareholders (a minimum of 20% of which must be paid in cash, with the balance
to be paid in shares of Armor's common stock, at Armor's discretion) in exchange
for outstanding shares of Simula common stock will be determined five business
days prior to the closing of the merger, and the price of Armor's common stock
to be used to calculate the number of shares of Armor common stock to be
received by Simula's shareholders in exchange for Simula common stock will be
determined ten business days prior to the closing of the merger. Accordingly,
fluctuations in the price of Armor's common stock between the date the merger
agreement was signed and the date of this proxy statement/prospectus will not
affect the value of the merger consideration received by Simula's shareholders.
However, fluctuations in the price of Armor's common stock between the date
of this proxy statement/prospectus and the date of the closing of the merger
will have an effect on the merger consideration received by Simula's
shareholders, as described immediately below.
The number of shares of Armor common stock received by Simula's
shareholders will be based, in part, upon the mean of the average between the
bid and ask price of Armor common stock on the New York Stock Exchange, as
reported on the composite tape at the close of the market for the 20 consecutive
trading days ending 10 trading days prior to the date the merger is completed.
Fluctuations in the price of Armor's common stock during these 20 trading days
will have an impact on the value of the merger consideration received by
Simula's shareholders. The following chart sets forth two examples of the effect
that fluctuations in the price of Armor's common stock during such 20 trading
day period would have on the value of the merger consideration received in
exchange for each share of Simula common stock:
CLOSING PRICE OF ASSUMED VALUE OF THE CASH AND SHARES OF ACTUAL MARKET VALUE OF
ARMOR COMMON STOCK ARMOR COMMON STOCK TO BE RECEIVED CASH AND SHARES OF ARMOR
ON LAST DAY OF 20 MEAN OF THE IN EXCHANGE FOR EACH SHARE OF COMMON STOCK RECEIVED IN
TRADING-DAY PERIOD AVERAGE OF THE BID SIMULA COMMON STOCK (CALCULATED EXCHANGE FOR EACH SHARE
CLOSING PRICE OF (I.E., 10 AND ASK PRICES OF USING THE MEAN OF THE AVERAGE OF OF SIMULA COMMON STOCK
ARMOR COMMON STOCK TRADING DAYS PRIOR ARMOR COMMON STOCK THE BID AND ASK PRICES OF ARMOR (AS OF THE LAST DAY OF
ON FIRST DAY OF 20- TO THE CLOSING OF DURING SUCH 20- COMMON STOCK DURING SUCH 20- THE 20-TRADING-DAY
TRADING-DAY PERIOD THE MERGER) TRADING-DAY PERIOD TRADING-DAY PERIOD)(1) PERIOD)(1)
------------------ ------------------ ------------------ --------------------------------- -----------------------
$15.00 $18.00 $16.00 $3.25 $3.58
$18.00 $15.00 $16.00 $3.25 $3.05
(1) Assumes Armor elects to pay 20% of the merger consideration in cash and
80% of the merger consideration in shares of Armor's common stock.
In addition, fluctuations in the price of Armor's common stock between the
time the number of shares of Armor common stock to be received by Simula's
shareholders is determined (i.e., 10 trading days prior to the closing of the
merger) and the date of the closing of the merger will effect the value of the
merger consideration each Simula shareholder receives. The following chart sets
forth two examples of the effect such fluctuations would have on the value of
the merger consideration received in exchange for each share of Simula common
stock:
ACTUAL MARKET VALUE OF CASH AND SHARES
ASSUMED MARKET VALUE OF CASH AND SHARES OF ARMOR OF ARMOR COMMON STOCK RECEIVED IN
COMMON STOCK RECEIVED IN EXCHANGE FOR EXCHANGE FOR EACH SHARE OF SIMULA
EACH SHARE OF SIMULA COMMON STOCK (AS OF CLOSING PRICE OF ARMOR COMMON COMMON STOCK (BASED ON THE CLOSING
THE LAST DAY OF THE 20-TRADING-DAY STOCK ON THE DAY THE MERGER IS PRICE OF ARMOR COMMON STOCK ON THE DAY
PERIOD)(1) COMPLETED THE MERGER IS COMPLETED)(1)
------------------------------------------------ -------------------------------- ------------------------------------------
$3.58 $19.00 $3.74
$3.58 $17.00 $3.41
(1) Assumes Armor elects to pay 20% of the merger consideration in cash and
80% of the merger consideration in shares of Armor's common stock.
The following table summarizes the estimates of the effect of a change in
the price of Armor common stock on the number of shares of Armor common stock
that will be received by Simula's shareholders in exchange for each outstanding
share of Simula common stock (assuming 20% of the merger consideration is paid
in cash and the balance is paid in shares of Armor common stock), based on
Simula management's current estimate that the per share merger consideration
payable to Simula's shareholders as a result of the merger will range from
approximately $2.90 per share to $3.25 per share. The following table does not
set forth the effect of such fluctuations on the market value of the merger
consideration after the date of determination of the price of Armor's common
stock for purposes of determining the exchange ratio.
ESTIMATED NUMBER OF SHARES OF
ESTIMATED CASH CONSIDERATION TO ARMOR COMMON STOCK TO BE PAID PER
ASSUMED MARKET PRICE PER SHARE OF BE PAID PER SHARE OF SIMULA SHARE OF
ARMOR COMMON STOCK COMMON STOCK (1) SIMULA COMMON STOCK (1)
--------------------------------- ------------------------------- ---------------------------------
$15.00 $0.58-$0.65 .155-.173
$15.20 $0.58-$0.65 .152-.171
$15.40 $0.58-$0.65 .150-.169
$15.60 $0.58-$0.65 .149-.167
$15.80 $0.58-$0.65 .147-.165
$16.00 $0.58-$0.65 .145-.163
$16.20 $0.58-$0.65 .143-.160
$16.40 $0.58-$0.65 .141-.159
$16.60 $0.58-$0.65 .140-.157
$16.80 $0.58-$0.65 .138-.155
$17.00 $0.58-$0.65 .136-.153
$17.20 $0.58-$0.65 .135-.151
$17.40 $0.58-$0.65 .133-.149
$17.60 $0.58-$0.65 .132-.148
$17.80 $0.58-$0.65 .130-.146
$18.00 $0.58-$0.65 .129-.144
$18.20 $0.58-$0.65 .127-.143
$18.40 $0.58-$0.65 .126-.141
$18.60 $0.58-$0.65 .125-.140
$18.80 $0.58-$0.65 .123-.138
$19.00 $0.58-$0.65 .122-.137
$19.20 $0.58-$0.65 .121-.135
$19.40 $0.58-$0.65 .120-.134
$19.60 $0.58-$0.65 .118-.133
$19.80 $0.58-$0.65 .117-.131
$20.00 $0.58-$0.65 .116-.130
(1) Assumes Armor elects to pay 20% of the merger consideration in cash and
80% of the merger consideration in shares of Armor's common stock.
From July 1, 2003 to October 20, 2003, the per share closing price of Armor
common stock on the New York Stock Exchange fluctuated from a low of $12.98 to a
high of $18.25. On August 29, 2003 (the date the merger agreement was signed),
the per share closing price of Armor common stock on the New York Stock Exchange
was $15.16. We encourage you to consider the market price of Armor common stock
before you make your voting decision regarding the merger.
It is anticipated that the closing of the merger will occur no later than
two business days after the Simula shareholders' meeting, subject to the
satisfaction or waiver of the closing conditions described herein. See the
section entitled "-- Conditions to the Merger" on page 80 of this proxy
statement/prospectus.
Pursuant to the terms of the merger agreement, Armor is required to elect
the ratio of cash and stock to be received by the Simula shareholders at least
five business days prior to the closing of the merger. However, Armor has agreed
to make and inform Simula of this determination at least one business day prior
to the date of the Simula shareholders' meeting.
Armor will elect the amount of the merger consideration to pay in cash and
the amount to pay in stock after considering the following factors: (i) the
relationship between the closing price of Armor's common stock on the date Armor
makes its decision and the mean of the average of the bid and ask prices of
Armor common stock as reported at the close of the market for the 20 consecutive
trading days ending 10 trading days prior to the anticipated closing date and
(ii) alternative uses for Armor's available cash at the time the election is
made.
For example, if the closing price of Armor's common stock on the date Armor
makes it decision is lower than the mean of the average of the bid and ask
prices of Armor common stock at the close of the market during such 20-
trading-day period (i.e. $15.00 vs. $16.00), Armor's board of directors would be
more inclined to elect to pay the merger consideration using its common stock.
Alternatively, if the closing price of Armor's common stock on the date Armor
makes its decision is higher than the mean of the average of the bid and ask
prices of Armor common stock at the close of the market during such
20-trading-day period (i.e. $18.00 vs. $16.00), Armor's board of directors would
be more inclined to elect to pay the merger consideration using its available
cash.
However, in making its decision, Armor will also consider the amount of
cash available to it at such time and alternative uses of such cash. For
example, Armor's board of directors would be more inclined not to pay more than
20% of merger consideration in cash, if it determines that its available cash
would be better used for other purposes, such as to fund future acquisitions, to
take advantage of business development opportunities, and for general corporate
and working capital purposes, including the funding of capital expenditures.
Upon completion of the merger, shares issuable upon the exercise of certain
Simula options and certain shares issuable pursuant to Simula's 1996 Employee
Stock Purchase Plan will be canceled and extinguished and automatically
converted into the right to receive cash and/or shares of Armor common stock as
respectively described in the sections entitled "-- Treatment of Simula Stock
Options Issuable Pursuant to Option Plans" and "-- Treatment of Simula Common
Stock Issuable Pursuant to the Employee Stock Purchase Plan" beginning on pages
70 and 71 of this proxy statement/prospectus, respectively.
The number of outstanding shares of Simula common stock (including those
shares issuable upon the exercise of certain Simula options and certain shares
issuable pursuant to Simula's 1996 Employee Stock Purchase Plan at the effective
time of the merger) will be adjusted to reflect the effect of any stock split,
reverse stock split, stock dividend, reorganization, recapitalization,
reclassification or other like change with respect to Simula common stock prior
to completion of the merger.
Following the effective time of the merger, Simula (as the surviving
company of the merger) shall remain obligated to pay any dividends or make any
other distributions with a record date prior to the effective time of the merger
which may have been declared or made by Simula on shares of Simula common stock
in accordance with the terms of the merger agreement and which remain unpaid at
the effective time of the merger.
69
Each share of Simula common stock held by Simula or owned by Armor or any
of their direct or indirect wholly-owned subsidiaries immediately prior to the
merger will be automatically canceled and extinguished, and none of Simula,
Armor or any of their direct or indirect subsidiaries will receive any
securities of Armor or other consideration in exchange for those shares.
TREATMENT OF SIMULA STOCK OPTIONS AND SIMULA STOCK OPTION PLANS
TREATMENT OF SIMULA COMMON STOCK ISSUABLE PURSUANT TO OPTION PLANS
At the effective time of the merger, each outstanding option to purchase
Simula common stock granted under Simula's 1992 Stock Option Plan, 1994 Stock
Option Plan, and 1999 Stock Option Plan which has not previously expired or been
exercised in full and has an exercise price less than the total dollar value of
the merger consideration per share of Simula common stock payable by Armor in
connection with the merger, whether or not vested or exercisable on the date the
merger is completed, shall be deemed to have been automatically exercised by a
"cashless exercise" immediately prior to the effective time of the merger for
the number of shares of Simula common stock issuable upon exercise of such
option and shall have the right to receive the merger consideration for each
resulting share of Simula common stock, less an amount of cash and a number of
shares of Armor common stock equal, in the aggregate, to the amount of the
applicable exercise price for such option and subject to the deduction of
applicable withholding taxes.
As it is not currently possible to determine the actual amount of merger
consideration payable by Armor in connection with the merger per share of Simula
common stock, it is also not currently possible to determine those Simula
options which will be eligible to be automatically exercised by a "cashless
exercise" immediately prior to the effective time of the merger for the number
of shares of Simula common stock issuable upon exercise of such option and which
will have the right to receive the merger consideration for each resulting share
of Simula common stock (less the amount of the applicable exercise price for
such option and subject to the deduction of applicable withholding taxes).
However, based on the number of outstanding Simula options on September 30,
2003, if the merger took place on September 30, 2003, and for the purposes of
illustration only, the total dollar value of the merger consideration per share
of Simula common stock payable by Armor in connection with the merger as
adjusted was approximately $3.27, approximately 435,000 of such outstanding
options would have been eligible to be automatically exercised by a "cashless
exercise" immediately prior to the effective time of the merger for the number
of shares of Simula common stock issuable upon exercise of such option and shall
have the right to receive the merger consideration for each resulting share of
Simula common stock, less an amount of cash and a number of shares of Armor
common stock equal, in the aggregate, to the amount of the applicable exercise
price for such option and subject to the deduction of applicable withholding
taxes.
At the effective time of the merger, Simula's 1992 Stock Option Plan, 1994
Stock Option Plan, and 1999 Stock Option Plan shall be terminated by Simula and
all options and certificates representing options, if any, shall no longer be
outstanding and shall automatically be canceled and retired and shall cease to
exist, and each holder of an option (and of a certificate representing an
option, if any) shall cease to have any rights with respect thereto, other than
and subject to the rights of holders of options which will be eligible to be
automatically exercised by a "cashless exercise" immediately prior to the
effective time of the merger for the number of shares of Simula common stock
issuable upon exercise of such option and which will have the right to receive
the merger consideration for each resulting share of Simula common stock (less
the amount of the applicable exercise price for such option and subject to the
deduction of applicable withholding taxes).
Prior to the effective time of the merger, Simula shall, if necessary,
amend Simula's 1992 Stock Option Plan, 1994 Stock Option Plan, and 1999 Stock
Option Plan in order to allow and provide for acceleration of the vesting of
such eligible options and termination of Simula's 1992 Stock Option Plan, 1994
Stock Option Plan, and 1999 Stock Option Plan.
TREATMENT OF SIMULA COMMON STOCK ISSUABLE PURSUANT TO THE EMPLOYEE STOCK
PURCHASE PLAN
At the effective time of the merger, Simula's 1996 Employee Stock Purchase
Plan shall be terminated and/or liquidated and all outstanding rights to
purchase shares of Simula common stock granted or awarded thereunder, if any,
shall no longer be outstanding and shall automatically be canceled and shall
cease to exist, other than and
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subject to the rights of holders of outstanding rights to purchase shares of
Simula common stock granted or awarded under the 1996 Employee Stock Purchase
Plan which will, whether or not vested or exercisable immediately prior to the
effective time of the merger, become fully vested and automatically exercised
immediately prior to the effective time of the merger and shall each be deemed
to be a share of Simula common stock retired and converted at the effective time
of the merger into the right to receive the merger consideration for each
resulting share of Simula common stock, subject to Simula's right (as the
surviving corporation in the merger) to withhold by payroll deduction any unpaid
amount of the purchase price therefor pursuant to the terms and conditions of
the 1996 Employee Stock Purchase Plan and subject to the deduction of applicable
withholding taxes. Prior to the effective time of the merger, Simula shall, if
necessary, amend Simula's 1996 Employee Stock Purchase Plan in order to allow
and provide for acceleration of the vesting and the automatic exercise of such
outstanding rights to purchase shares of Simula common stock granted or awarded
under the 1996 Employee Stock Purchase Plan.
FRACTIONAL SHARES
No fractional shares of Armor common stock, if any, will be issued to
Simula shareholders in the merger. Instead, each fractional share of Armor
common stock which would have been otherwise issued shall be rounded down to the
nearest whole number of shares of Armor common stock and, if so rounded down,
any holder of Simula common stock shall receive, in lieu of the fractional
shares not delivered due to such rounding, a cash payment equal the product
obtained by multiplying (A) the fractional share interest to which such former
holder would otherwise be entitled by (B) the Parent Average Trading Price.
EXCHANGE OF CERTIFICATES
Armor will appoint Bank of America, N.A., or another bank or trust company
reasonably acceptable to Simula, as exchange agent for the exchange of the
merger consideration upon surrender of certificates representing the outstanding
shares of Simula common stock. On or before the effective time of the merger,
Armor will deposit with the exchange agent, cash and/or certificates
representing the Armor common stock constituting the merger consideration to be
exchanged in the merger.
As soon as reasonably practicable after the effective time of the merger,
the exchange agent will deliver to Simula shareholders of record immediately
prior to the effective time of the merger, transmittal materials for use in
exchanging their certificates representing Simula common stock for cash and/or
certificates representing the Armor common stock constituting the merger
consideration. SIMULA SHAREHOLDERS SHOULD NOT FORWARD THEIR SIMULA CERTIFICATES
UNTIL THEY RECEIVE THE TRANSMITTAL MATERIALS. Upon delivery to the exchange
agent of Simula certificates (or indemnity reasonably satisfactory to Armor and
the exchange agent for any lost, stolen or destroyed certificates), the exchange
agent will deliver cash and/or certificates representing shares of Armor common
stock into which shares of Simula common stock are converted in the merger.
Until Simula certificates are surrendered, and subject to applicable law,
they will, as of the merger, represent the right to receive cash and/or
ownership of the number of shares of Armor common stock into which the shares of
Simula common stock represented by Simula certificates were converted in the
merger. To the extent shares of Armor common stock constitute all or a portion
of the merger consideration, the holders of Simula certificates will be entitled
to all rights and privileges of holders of Armor common stock, except that
holders of Simula certificates will not be entitled to receive any dividends or
other distributions declared by Armor until Simula certificates are surrendered.
After Simula certificates are surrendered, the holders of newly issued Armor
certificates will be paid, without interest, any dividends or other
distributions with respect to the shares of Armor common stock the record date
for which is after the merger.
After the effective time of the merger, there will be no further transfers
on Simula's records of Simula common stock. If Simula certificates are presented
to Armor or the exchange agent for transfer, then they will be cancelled against
delivery of Armor certificates. If any Simula certificate has not been
surrendered within five years after the effective date of the merger, then any
shares of Armor common stock, dividends or other distributions in respect of
such certificate will, to the extent permitted by applicable law, become the
property of Simula as the surviving corporation in the merger.
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MANAGEMENT AND BOARDS OF DIRECTORS AFTER THE MERGER
MANAGEMENT OF ARMOR AND SIMULA
If the merger is completed, then the officers of Armor prior to the merger
will continue to serve as officers of Armor after the merger, and the officers
of Simula prior to the merger shall be replaced after the merger by the officers
of AHI Bulletproof, the wholly-owned subsidiary of Armor which will be merged
with and into Simula. Currently, Mr. Robert R. Schiller serves as President and
Mr. Todd Smith serves as Secretary and Treasurer of AHI Bulletproof, and after
the merger, shall serve in such positions as officers of Simula, as the
surviving corporation.
ARMOR'S BOARD OF DIRECTORS
If the merger is completed, then the directors of Armor prior to the merger
will continue to serve as directors of Armor after the merger. Biographies of
the current directors of Armor are set forth below.
WARREN B. KANDERS, age 45, has served as Chairman of Armor's board since
January 1996 and as Armor's Chief Executive Officer since April 9, 2003. Mr.
Kanders has served as a member of the board of directors of Clarus Corporation
since June 2002 and as Executive Chairman of Clarus Corporation's board of
directors since December 2002. From October 1992 to May 1996, Mr. Kanders served
as Vice Chairman of the board of directors of Benson Eyecare Corporation. From
June 1992 to March 1993, Mr. Kanders served as President and a director of
Pembridge Holdings, Inc. Since 1990, Mr. Kanders has served as President of
Kanders & Company, Inc., a private investment company.
BURTT R. EHRLICH, age 64, has served as one of Armor's directors since
January 1996. Mr. Ehrlich has served as a member of the board of directors of
Clarus Corporation since June 2002 and as Chairman of the board of directors of
Langer, Inc. since February 2001. Mr. Ehrlich served as Chairman and Chief
Operating Officer of Ehrlich Bober Financial Corp. (the predecessor of Benson
Eyecare Corporation) from December 1986 until October 1992, and as a director of
Benson Eyecare Corporation from October 1992 until November 1995.
NICHOLAS SOKOLOW, age 53, has served as one of Armor's directors since
January 1996. Mr. Sokolow has served as a member of the board of directors of
Clarus Corporation since June 2002. Mr. Sokolow has been a partner in the law
firm of Sokolow, Dunaud, Mercadier & Carreras since 1994. From June 1973 until
October 1994, Mr. Sokolow was an associate and partner in the law firm of
Coudert Brothers.
THOMAS W. STRAUSS, age 61, has served as one of Armor's directors since May
1996. Mr. Strauss has served as a member of the board of directors of Langer,
Inc. since June 2002. Since 1995, Mr. Strauss has been a principal with Ramius
Capital Group, a privately held investment management firm. From June 1993 until
July 1995, Mr. Strauss was co-chairman of Granite Capital International Group,
an investment banking firm. From 1963 to 1991, Mr. Strauss served in various
capacities with Salomon Brothers Inc., an investment banking and brokerage firm,
including President and Vice-Chairman.
ALAIR A. TOWNSEND, age 61, has served as one of Armor's directors since
December 1996. Since February 1989, Ms. Townsend has been publisher of Crain's
New York Business, a business periodical. Ms. Townsend was a former governor of
the American Stock Exchange. Ms. Townsend served as New York City's Deputy Mayor
for Finance and Economic Development from February 1985 to January 1989.
DEBORAH ZOULLAS, age 50, has served as one of Armor's directors since July
2002. Ms. Zoullas is a private investor. From December 1998 until December 2000,
Ms. Zoullas served as the Executive Vice President of Sotheby's Holdings, Inc.
and during 2000 served on its board of directors. From 1974 until 1996, Ms.
Zoullas worked in various capacities within the Investment Banking Division of
Morgan Stanley & Co. Incorporated. Ms. Zoullas is an Advisory Director of Morgan
Stanley, a member of the Advisory Board of The Stanford Business School, a
Director of the Helena Rubinstein Foundation and a member of the Executive
Committee of The Projects Committee of Memorial Sloan Kettering.
There are no material relationships between Armor or its directors and
officers and Simula or its directors and officers except as contemplated by the
merger agreement or as described in this proxy statement/prospectus. In the
ordinary course of business and from time to time Armor, Simula and their
affiliates and subsidiaries may do business with each other.
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To the best of Armor's knowledge, (i) there are no material proceedings to
which any director of Armor is a party, or has a material interest, adverse to
Armor, and (ii) there have been no events under any bankruptcy act, no criminal
proceedings and no judgments or injunctions that are material to the evaluation
of the ability or integrity of any of these people during the past five years.
SIMULA'S BOARD OF DIRECTORS
If the merger is completed, then Simula will become a wholly-owned
subsidiary of Armor, and Simula's board of directors will be replaced by the
members of the board of directors of AHI Bulletproof. Mr. Robert R. Schiller,
Armor's Chief Operating Officer, Chief Financial Officer and Secretary, together
with Mr. Todd Smith, Armor's Vice President of Legal Affairs, each currently
serve as the only members of the board of directors of AHI Bulletproof, and
after the merger, shall serve as the only directors of Simula as the surviving
corporation.
REPRESENTATIONS AND WARRANTIES
Armor and Simula each made a number of representations and warranties in
the merger agreement about their respective authority to enter into the merger
agreement and to consummate the other transactions contemplated by the merger
agreement and about aspects of their respective business, financial condition,
structure and other facts pertinent to the merger.
Simula made a number of representations and warranties to Armor in the
merger agreement, including representations and warranties relating to the
following topics:
o corporate organization, qualification to do business, good standing and
corporate power of Simula and its subsidiaries;
o Simula's corporate authorization to enter into the merger agreement and
consummate the transactions under the merger agreement and the
enforceability of the merger agreement;
o Simula's compliance with applicable laws, rules and regulations;
o Simula's capital structure;
o absence of any conflict with or violation of the charter and bylaws of
Simula and equivalent organizational documents of its subsidiaries, or
any applicable legal requirements resulting from the execution of the
merger agreement or the completion of the merger;
o Simula's Securities and Exchange Commission filings and financial
statements;
o Simula's financial statements;
o litigation involving Simula;
o absence of certain changes and events relating to Simula since June 30,
2003;
o Simula's taxes;
o Simula's employee benefit plans and labor relations;
o Simula's intellectual property;
o Simula's possession of and compliance with all permits required for the
operation of business;
o compliance with environmental laws applicable to Simula;
73
o the effect of entering into and carrying out the obligations of the
merger agreement on Simula's material contracts;
o agreements relating to Simula's sale of assets or subsidiaries;
o Simula's title or leasehold interests in all material tangible
properties and assets used in its business;
o Simula's brokers' and finders' fees in connection with the merger;
o receipt of a fairness opinion from Relational Advisors relating to the
merger;
o applicability of state takeover statutes to the merger during the
pendency of the merger agreement;
o lack of undisclosed liabilities;
o Simula's products; and
o accuracy of information supplied by Simula in this proxy
statement/prospectus and the related registration statement filed by
Armor with the Securities and Exchange Commission.
Armor and AHI Bulletproof each made a number of representations and
warranties to Simula in the merger agreement, including representations and
warranties relating to the following topics:
o corporate organization, qualification to do business, good standing and
corporate power of Armor and its subsidiaries;
o Armor's corporate authorization to enter into the merger agreement and
consummate the transactions under the merger agreement and the
enforceability of the merger agreement;
o Armor's compliance with applicable laws, rules and regulations;
o Armor's capital structure;
o absence of any material violation of the charter and bylaws of Armor
and AHI Bulletproof or any applicable legal requirements resulting from
the execution of the merger agreement and the completion of the merger;
o Armor's Securities and Exchange Commission filings and financial
statements;
o litigation involving Armor;
o absence of certain changes and events relating to Armor since August
18, 2003;
o Armor's brokers' and finders' fees in connection with the merger;
o lack of undisclosed liabilities; and
o accuracy of information supplied by Armor in this proxy
statement/prospectus and the related registration statement filed by
Armor with the Securities and Exchange Commission.
The representations and warranties contained in the merger agreement are
complicated and not easily summarized. You are urged to read carefully Articles
II and III of the merger agreement entitled "Representations and Warranties of
the Company " and "Representations and Warranties of Parent and Purchaser"
attached to this proxy statement/prospectus as Annex A.
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SIMULA'S CONDUCT OF BUSINESS BEFORE COMPLETION OF THE MERGER
Simula has agreed that until the completion of the merger or the
termination of the merger agreement, or unless Armor consents in writing, Simula
and its subsidiaries will:
o conduct their business, financial, and other operations in the ordinary
course of business consistent with past practice;
o preserve intact its business organizations and goodwill, keep available
the services of its officers and employees, and maintain satisfactory
relationships with those persons having business relationships with
Simula or its subsidiaries;
o promptly notify Armor of Simula's intent to pay any indebtedness for
borrowed money, other than repayments of principal and interest as they
become due;
o provide Armor with an itemized schedule of fees incurred by Simula in
connection with the merger;
o provide Armor with monthly financial statements, statements of accounts
receivable, and other operational reports; and
o use the proceeds of the sale of Simula's automotive services business
only for general corporate purposes.
Simula has also agreed that until the completion of the merger or the
termination of the merger agreement, or unless Armor consents in writing, Simula
and its subsidiaries will not:
o amend their respective certificates of incorporation, bylaws, or other
organizational documents;
o except as required by Simula's option plans, stock purchase plans, or
outstanding debt, issue, sell, pledge, dispose of, or encumber any
shares of capital stock, or securities convertible into capital stock,
of Simula or its subsidiaries;
o except as required by Simula's option plans, stock purchase plan, or
outstanding debt, split, combine or reclassify its capital stock, or
otherwise change its capitalization;
o grant any option, warrant, or convertible security, create any new
option plans, or cause any currently unexercisable options to become
exercisable, except as required by any unexercisable options
outstanding on the date hereof, to newly hired non-executive employees,
consistent with past practice, or as may be required by Simula's option
plans, stock purchase plan, or outstanding debt;
o declare or pay dividends or make any other distributions in respect of
any capital stock;
o redeem, repurchase or otherwise acquire any shares of capital stock of
Simula or its subsidiaries;
o transfer, license, mortgage, encumber, sell, lease, or otherwise
dispose of any of material assets, subject to certain exceptions;
o enter into a new, or extend an existing, license with respect to
Simula's Clearguard(R) transparent polyurethane polymers;
o acquire any business, entity or division, or make any capital
expenditures or otherwise acquire material property or assets;
o incur indebtedness for borrowed money, subject to normal operating and
minimum amount thresholds;
o guaranty certain obligations in excess of $10,000, individually, or
$50,000 in the aggregate;
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o make or forgive any loans, advances, or capital contributions to, or
investments in, any third party;
o modify, amend, terminate or waive any rights under any confidentiality
agreement entered into in connection with an alternative transaction as
defined in the merger agreement, unless such modification, amendment,
termination, or waiver would not make such agreement less restrictive
than the confidentiality agreement between Armor and Simula;
o enter into any agreement which requires the payment by Simula or its
subsidiaries, after the effective time of the merger, of more than
$150,000, individually, or $500,000, in the aggregate;
o modify, amend, terminate or waive any rights under any material
contracts to which Simula or its subsidiaries is a party;
o except as required by any plan, agreement, or applicable law, increase
the compensation, severance, bonus, or other benefits payable to any of
the directors, officers, or employees of Simula or its subsidiaries,
grant any severance or termination pay to, or enter into any new
employment, consulting, retention, salary continuation, or severance
agreement with any officer or directors of Simula or its subsidiaries,
or establish, adopt, enter into, amend, or modify in any material
respect any collective bargaining agreement, employee benefit plan,
trust, fund, policy, or arrangement for the benefit of current or
former officers, directors or employees of Simula or any of its
subsidiaries;
o change any accounting policies, procedures or practices, except as
required by U.S. generally accepted accounting principles or applicable
law;
o approve or authorize any action to be submitted to Simula's
shareholders, other than pursuant to the merger agreement, the
submission of a superior transaction, as defined in the merger
agreement, in accordance with the terms of the merger agreement, or the
election of directors in the ordinary course at Simula's annual meeting
of shareholders;
o materially change any method of reporting income, deductions, or other
material items for income tax purposes, make or change any material
election with respect to taxes, agree to or settle any material claim
or assessment in respect of taxes, or agree to an extension or waiver
of the limitation period to any material claim or assessment in respect
of taxes, except in the ordinary course of business;
o settle or compromise any material litigation, or other pending or
threatened suit, action or claim involving Simula or any of its
subsidiaries;
o demand the acceleration of payment of any account receivable or trade
receivable when such invoice is not in default, or accept an
accelerated payment of less than the amount of the original invoice of
any accounts receivable or trade receivables as a result of a discount
granted by Simula, in either case not in the ordinary course of
business; or
o enter into a binding oral or written agreement to do any of the
foregoing.
SIMULA IS PROHIBITED FROM SOLICITING OTHER OFFERS
Under the terms of the merger agreement, subject to certain exceptions
described below, Simula agreed that it will not, and each of its subsidiaries,
officers, directors, and representatives, and the officers, directors, and
representative of its subsidiaries will not, directly or indirectly:
o encourage, invite, initiate, or solicit any inquiries relating to a
proposal from a third party for an alternative transaction; or
o participate in or encourage, invite, initiate, or solicit negotiations
or discussions with, or furnish or cause to be furnished any
information to, any third party relating to an alternative transaction.
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An alternative transaction is any offer or proposal relating to any
transaction or series of related transactions (other than the merger) involving:
o any merger, consolidation, business combination or similar transaction
involving Simula or any of its subsidiaries;
o any acquisition involving all or a significant part of the capital
stock or assets of Simula or any of its subsidiaries; or
o material debt or equity investment in Simula or any of its
subsidiaries.
Under the merger agreement, Simula agreed to cease, as of August 29, 2003,
all then-existing activities, discussions or negotiations by Simula and its
subsidiaries with any third parties with respect to any alternative transaction.
Simula is obligated to promptly notify Armor orally and in writing upon
receipt of any type of acquisition proposal, request or inquiry. The notice must
include a summary of the principal terms of the acquisition proposal, request or
inquiry, the identity of the person or group making the acquisition proposal,
request or inquiry and a copy of all written materials provided in connection
with the acquisition proposal, request or inquiry, with certain exceptions.
Notwithstanding the prohibitions contained in the merger agreement with
respect to the type of acquisition proposals described above, if Simula receives
an unsolicited bona fide written acquisition proposal, Simula may review,
negotiate, and provide information to a third party with respect to such offer
if:
o Simula's board of directors, in the exercise of its fiduciary duties,
concludes in good faith, after considering applicable law, on the
advice of counsel, that such actions are not inconsistent with its
fiduciary duties to Simula's shareholders under applicable law;
o Simula's board of directors determines in good faith after consultation
with its financial advisors that the acquiring party is capable of
consummating such alternative transaction;
o if the alternative transaction proposal includes cash consideration,
payment of such cash consideration shall not be subject to a financing
contingency; and
o Simula's board of directors determines that such alternative
transaction is superior to the merger from a financial point of view to
Simula's shareholders.
In the event that Simula furnishes nonpublic information to a third party
making an acquisition proposal, it is required to promptly furnish Armor with
written notice of such action and a copy of the information furnished to the
potential third party acquirer.
OBLIGATION OF SIMULA'S BOARD OF DIRECTORS WITH RESPECT TO ITS RECOMMENDATION AND
HOLDING A MEETING OF ITS SHAREHOLDERS
Simula agreed to call, hold and convene a meeting of its shareholders as
promptly as practicable after the registration statement of which this proxy
statement/prospectus forms a part is declared effective by the Securities and
Exchange Commission, and to use its best efforts to solicit from its
shareholders proxies in favor of the approval and adoption of the merger
agreement and approval of the merger, and to take all other action necessary or
advisable to secure the vote of its shareholders required by American Stock
Exchange rules or the Arizona Business Corporation Act to obtain such approvals.
Simula's board of directors agreed to recommend the approval and adoption of the
merger agreement and approval of the merger to its shareholders. Simula may not
withdraw, revoke or change its recommendation of approval and adoption of the
merger agreement and approval of the merger unless Simula's board of directors,
after complying with the conditions described in the section entitled "-- Simula
Is Prohibited from Soliciting Other Offers" on page 76 of this proxy
statement/prospectus, has publicly announced or notified Armor that it has
approved a binding agreement for a superior transaction. If Simula changes its
recommendation to its shareholders
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to approve the merger agreement, Simula shall not be obligated to solicit from
its shareholders proxies in favor of adoption of the merger agreement.
Notwithstanding the obligations described in the preceding paragraphs,
Simula's board of directors is permitted to take such actions so as to comply,
solely to the extent required to comply, with its duties of disclosure and
candor to its shareholders under applicable law. In addition, Simula and its
board of directors may take and disclose to its shareholders a position
contemplated by Rules 14d-9 and 14e-2(a) under the Exchange Act; provided,
however, that the content of the disclosure is governed by the terms of the
merger agreement and Simula's board of directors may not change its
recommendation to shareholders to vote in favor of approval and adoption of the
merger agreement and approval of the merger except in accordance with the
procedures described in the preceding paragraphs.
DIRECTOR AND OFFICER INDEMNIFICATION AND INSURANCE
Armor has agreed to cause the company surviving the merger to honor all of
the indemnification obligations of Simula to its directors, officers and
employees that exist immediately prior to completion of the merger, whether
pursuant to Simula's articles of incorporation, Simula's bylaws or an
indemnification agreement previously disclosed to Armor. For seven years and one
day after the completion of the merger, the articles of incorporation and bylaws
of the company surviving the merger will contain provisions with respect to
exculpation and indemnification that are at least as favorable to the directors,
officers and employees who were indemnified by Simula immediately prior to
completion of the merger as the exculpation and indemnification provisions that
were contained in the restated articles of incorporation and bylaws of Simula in
effect at the time the merger agreement was executed.
For a period of six years and one day after the completion of the merger,
Armor also will cause the company surviving the merger to use all commercially
reasonable efforts to maintain directors' and officers' liability insurance
covering those directors and officers of Simula who are currently covered by
Simula's directors' and officers' liability insurance on terms comparable to
those applicable to the current directors and officers.
REGULATORY FILINGS; ANTITRUST MATTERS; COMMERCIALLY REASONABLE EFFORTS TO OBTAIN
REGULATORY APPROVALS
Each of Armor, AHI Bulletproof and Simula agreed to coordinate and
cooperate with one another and use all commercially reasonable efforts to comply
with, and refrain from actions that would impede compliance with, applicable
laws, regulations and any other requirements of any governmental entity. Armor,
AHI Bulletproof and Simula also agreed to make all filings and submissions
required by any governmental entity in connection with the merger and the other
transactions contemplated by the merger agreement including the following:
o those filings or submissions required under the HSR Act, as well as any
other comparable merger notification or control laws of any applicable
jurisdiction, as agreed by the parties;
o the filing of this proxy statement/prospectus and the Armor
registration statement with the Securities and Exchange Commission of
which this proxy statement/prospectus forms a part, and any other
filings required under the Securities Act and the Exchange Act;
o the filing of the certificate of merger with the Corporation Commission
of the State of Arizona and appropriate documents with the relevant
authorities from other states in which it is qualified to do business;
and
o any other consents, approvals, orders, authorizations, registrations,
declarations and filings as may be required under applicable foreign
and state securities or related laws.
Except as prohibited or restricted by applicable law, each of Armor, AHI
Bulletproof and Simula generally agreed to do the following:
o consult with the other party with respect to the filings or submissions
described above, and provide the other party an opportunity to review
and discuss the filings or submissions in advance and coordinate with
the other with respect to the filings or submissions;
o promptly notify the other party upon the receipt of any comments from
any governmental entity or requests by any governmental entity for
amendments or supplements to any filings or submissions made pursuant
to,
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or information provided to comply with any applicable laws,
regulations and any other requirements of any governmental entity; and
o promptly provide the other party with copies of any filing,
presentation or submission made with any governmental entity.
Subject to the provisions described in the sections entitled "-- Simula Is
Prohibited from Soliciting Other Offers" beginning on page 76 of this proxy
statement/prospectus and "-- Obligations of Simula's Board of Directors with
Respect to its Recommendation and Holding a Meeting of its Shareholders"
beginning on page 77 of this proxy statement/prospectus, each of Armor and
Simula have agreed to use all commercially reasonable efforts to take, or cause
to be taken, all actions, and to do, or cause to be done, all things necessary,
proper or advisable to complete and make effective the merger and the other
transactions contemplated by the merger agreement in the most expeditious manner
practicable.
DEFINITION OF MATERIAL ADVERSE CHANGE AND MATERIAL ADVERSE EFFECT
SIMULA MATERIAL ADVERSE CHANGE
Under the terms of the merger agreement, a material adverse change with
respect to Simula is defined to mean any change in the condition (financial or
otherwise), results of operations, assets, liabilities, properties or business
of Simula or any of its subsidiaries, which individually or in the aggregate
(taking into account all other such changes), materially and adversely affects,
or is reasonably likely to materially and adversely affect, the condition
(financial or otherwise), results of operations, assets, liabilities, properties
or business of Simula and its subsidiaries, taken as a whole, including, but not
limited to:
o the termination or amendment of any written contract, purchase order,
or customer order to which Simula or any of its subsidiaries is a party
(including the failure to obtain, prior to the consummation of the
merger, the consent of any party thereto which is required to be
obtained by the terms of such contract as a result of the consummation
of the merger), (excluding a governmental authority's failure to
appropriate sufficient funds to perform such contract, purchase order,
or customer order), if such terminations or amendments, individually or
in the aggregate, are reasonably likely to result in a loss of
anticipated revenues between August 29, 2003 and December 31, 2004 in
excess of $10,000,000 (excluding anticipated aggregate amount of
revenues between August 29, 2003 and December 31, 2004, that are
reasonably likely to result from any new written contracts, purchase
orders, or customer orders entered into or received by Simula or any of
its subsidiaries between August 29, 2003 and the consummation of the
merger (but excluding spare parts and the Army SAPI Bid described
below), which revenues were not included in Simula's budget and
forecast for the period beginning on August 29, 2003 and continuing
through December 31, 2004); or
o Simula's failure, for reasons within its control, to timely and
accurately ship specified products, as required by the merger
agreement, during any relevant measuring period; or
o receipt by Simula, Armor, or any of their subsidiaries prior to the
consummation of the merger of official notice from the Army SAPI
Contracting Organization that, for any reason, the bid of both Armor
and Simula is not in the competitive range and neither Armor nor Simula
receives any portion of an award with respect to the Army's current bid
for SAPI plates, subject to a period for Simula to contest such notice.
ARMOR MATERIAL ADVERSE CHANGE
Under the terms of the merger agreement, a material adverse change with
respect Armor or its subsidiaries is defined to mean any change in the condition
(financial or otherwise), results of operations, assets, liabilities, properties
or business of Armor or its subsidiaries, which individually or in the aggregate
(taking into account all other such changes), materially and adversely affects,
or is reasonably likely to materially and adversely affect, the condition
(financial or otherwise), results of operations, assets, liabilities, properties
or business of Armor and its subsidiaries, taken as a whole.
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A material adverse change will not be deemed to have occurred with respect
to either Armor or Simula arising solely out of or attributable to:
o any decrease in the market price of securities of Armor or Simula in
and of itself;
o changes, effects, conditions, events or circumstances that generally
affect any of the defense, aviation (military, public safety, civilian,
or commercial), aerospace (military, public safety, civilian, or
commercial), marine (military, public safety, civilian, or commercial),
automotive or ground vehicle (military, public safety, civilian, or
commercial) or personnel (military, public safety, civilian, or
commercial) safety systems industries of which Armor or Simula is a
member (including legal and regulatory changes) (provided that any such
change, effect or circumstance does not affect Armor or Simula in a
materially disproportionate manner);
o general economic conditions or changes, effects, conditions, or
circumstances affecting the financial markets (provided that any such
change, effect or circumstance does not affect Armor or Simula in a
materially disproportionate manner);
o general economic conditions or changes, effects, conditions, or
circumstances arising from an Act of God and which are not primarily
limited in their effect to Armor's or Simula's operations, assets,
liabilities, properties or business (provided that any such change,
effect or circumstance does not affect Armor or Simula in a materially
disproportionate manner);
o changes to Armor or Simula which arose from the announcement or
performance of the merger agreement if such change was the result of
the announcement or performance of the merger agreement ; or
o the actions of Armor or Simula (or their subsidiaries, affiliates, or
any of their respective representatives), who is a party to the merger
agreement and who claims that a material adverse change has occurred
with respect to any other party to the merger agreement (who is not a
subsidiary or affiliate of the party claiming that a material adverse
change has occurred but who is also a party to the merger agreement),
which leads to or precipitates any such change, effect, condition,
event or circumstance, directly or indirectly, that would constitute a
material adverse change (excluding, generally, fair and lawful
competition in the ordinary course of its business.
Under the terms of the merger agreement, a material adverse effect with
respect to either Armor or Simula means any event or condition of any character
which results in, has resulted in, or could reasonably be expected to result in,
a material adverse change on the condition (financial or otherwise), results of
operations, assets, liabilities, properties, or business of such company and its
subsidiaries, taken as a whole, or would prevent or unreasonably delay
consummation of the transactions contemplated by the merger agreement.
CONDITIONS TO THE MERGER
MUTUAL CONDITIONS
The respective obligations of Simula and Armor to complete the merger are
subject to the satisfaction of the following conditions, any of which, except as
prohibited by applicable law, Armor or Simula may waive:
o Simula's shareholders shall have approved and adopted the merger
agreement and approved the merger;
o no temporary or permanent order, injunction, or judgment issued by any
court of competent jurisdiction or other law preventing the completion
of the merger shall be in effect;
o the registration statement registering the shares of Armor common stock
to be issued in the merger, if any, shall have been declared effective
by the Securities and Exchange Commission, no stop order suspending the
effectiveness shall have been issued and remain in effect, and no
proceeding for that purpose shall have been instituted by the
Securities and Exchange Commission or any state regulatory authorities;
and
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o any waiting period, approvals, and actions of, filings with, and
notices to any governmental authority, including, without limitation,
the HSR Act, required with respect to the consummation of the merger
(other than the filing of the certificate of merger) shall have been
obtained or waived.
ARMOR'S CONDITIONS
Armor's obligation to consummate the merger is subject to the satisfaction
of the following conditions, any of which Armor may waive:
o the representations or warranties of Simula set forth in the merger
agreement and any ancillary agreements were true and correct both when
made and as of the consummation of the merger, except where the failure
of such representations and warranties to be true, complete, and
accurate would not, in the aggregate, result in a Simula material
adverse effect (as defined below);
o Simula shall have performed and complied in all material respects with
all obligations, agreements, and covenants required by the merger
agreement to be performed or complied with prior to the consummation of
the merger, except where such non-performance or non-compliance follows
Armor's breach of the merger agreement, unless such failure to perform
or comply would not have a material adverse effect on Simula, or unless
such failure to perform or comply results in a decrease in the merger
consideration pursuant to the terms of the merger agreement;
o each of the executive officers and directors of Simula has agreed to
vote in favor of the merger agreement and the merger;
o Simula has not changed its recommendation to its shareholders to vote
in favor of the merger agreement and the merger;
o Simula shall have delivered to Armor a letter instructing the escrow
agent to release to Armor the funds held in escrow; and
o consents of specified third parties shall have been obtained.
SIMULA'S CONDITIONS
Simula's obligation to consummate the merger is subject to the following
conditions, any of which Simula may waive:
o the representations of warranties of Armor and AHI Bulletproof in the
merger agreement and in any ancillary agreement were true and correct
both when made and as of the consummation of the merger, except where
the failure of such representations and warranties to be true, complete
and correct would not, in the aggregate, result in an Armor material
adverse change;
o Armor and AHI Bulletproof shall have complied in all material respects
with all obligations, agreements, and covenants required by the merger
agreement to be performed and complied with prior to the consummation
of the merger, except where such non-performance or non-compliance
follows Simula's breach of the merger agreement or unless such failure
to perform or comply would not have a material adverse effect on Armor;
o the shares of Armor common stock issuable to the shareholders of Simula
as a portion of the merger consideration shall have been approved for
listing on the New York Stock Exchange, subject to official notice of
issuance, unless Armor shall have irrevocably informed Simula that it
will pay all of the merger consideration in cash; and
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o Armor shall have obtained officer and director tail insurance for the
benefit of Simula's officers and directors.
There can be no assurance that the conditions to the completion of the
merger will be satisfied or waived. If the conditions to either party's
obligations are not satisfied in any material respect, then the other party may
terminate the merger agreement. See the section of this proxy statement/
prospectus entitled "-- Termination of the Merger Agreement" beginning on page
82.
TERMINATION OF THE MERGER AGREEMENT
TERMINATION BY MUTUAL CONSENT
The merger agreement may be terminated and the merger abandoned at any time
prior to the consummation of the merger by the mutual written consent of Armor
and Simula, even after Simula's shareholders have approved the merger.
TERMINATION BY EITHER ARMOR OR SIMULA
The merger agreement may be terminated and the merger abandoned at any time
prior to the consummation of the merger by either of Armor and Simula as
follows:
o if the merger is not completed by December 31, 2003 (provided that
neither party may terminate the merger agreement if such party's
failure to fulfill any obligation under the merger agreement was the
principal cause of the failure of the merger to be consummated on or
prior to December 31, 2003);
o if any governmental entity takes any action permanently enjoining or
otherwise prohibiting the merger, and the action shall have become
final and nonappealable;
o if Simula's shareholders do not approve the adoption of the merger
agreement and the merger at the Simula special meeting; or
o if prior to the approval of the merger agreement and the merger by the
shareholders of Simula, the board of directors of Simula changes its
recommendation that Simula's shareholders approve the merger or the
board of directors of Simula publicly announces or gives notice to
Armor that Simula has agreed to a superior transaction. In such
circumstances, Simula may terminate the merger only if:
o Simula has not solicited such alternative transaction;
o Simula notifies Armor at least two business days prior to the
vote of Simula's board of directors to approve such change in its
recommendation or such superior transaction that the board
intends to take such action and the material terms and conditions
of such alternative transaction;
o within two days after Armor receives such notices, Armor does not
make an offer that the board of directors of Simula concludes in
good faith (after consultation with its financial advisors and
outside legal counsel) is at least as favorable to the
shareholders of Simula as such superior transaction; and
o Simula pays the termination fees and expenses specified below.
TERMINATION BY ARMOR
The merger agreement may be terminated and the merger abandoned at any time
prior to the consummation of the merger by Armor as follows:
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o if Simula breaches or fails to perform in any material respect any of
its representations, warranties or covenants under the merger
agreement, and the breach or failure to perform remains uncured
following a cure period of up to 30 days;
o if an alternative transaction is publicly announced or becomes publicly
known, and the board of directors of Simula:
o fails to recommend to Simula's shareholders against acceptance of
such alternative transaction,
o fails to reconfirm its approval and recommendation of the merger
within five business days after Armor requests that such
recommendation be reconfirmed; or
o determines that such alternative transaction is a superior
transaction (as described above); or
o if a material adverse change occurs with respect to Simula.
TERMINATION BY SIMULA
The merger agreement may be terminated and the merger abandoned at any time
prior to the consummation of the merger by Simula if Armor breaches or fails to
perform in any material respect any of its representations, warranties or
covenants under the merger agreement, and the breach or failure to perform
remains uncured following a cure period of up to 30 days.
EFFECT OF TERMINATION
In the event of termination of the merger agreement, the agreement shall
become void and the only remaining liabilities shall be those related to the
termination fees and expenses discussed below.
TERMINATION FEES AND EXPENSES
Under the terms of the merger agreement, Simula has agreed to pay to Armor
a termination fee and related expenses in certain circumstances. If the merger
agreement is terminated because Simula enters into a binding agreement for a
superior transaction as a result of an unsolicited offer or a change in Simula's
recommendation to approve the merger, then Simula will:
pay the expenses incurred by Armor in connection with the merger;
o instruct the escrow agent to release to Armor the amounts held in
escrow; and
o in the event such superior transaction is consummated within one year
after Simula approves such superior transaction or if any alternative
transaction is completed within 180 days after termination of the
merger agreement following a change in Simula's recommendation to
approve the merger, then Simula shall pay Armor $5,000,000, less the
amount of any expenses previously paid to Armor.
If the merger agreement is terminated as a result of Simula's solicitation
of an alternative transaction, then Simula will:
o promptly pay $1,500,000 to Armor;
o instruct the escrow agent to release to Armor the amounts held in
escrow; and
o if an alternative transaction is consummated by Simula within one year
after such termination, Simula shall pay to Armor an additional
$3,500,000.
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Payment of the termination fee is the sole remedy of Armor and AHI
Bulletproof with respect to the termination of the merger agreement and the
abandonment of the merger.
WAIVER AND AMENDMENT
The merger agreement may be amended by the parties at any time before or
after the receipt of the approval of Simula shareholders of the adoption of the
merger agreement and approval of the merger, except that after the receipt of
such approval, no amendment shall be made that by law requires further approval
of Simula shareholders without their further approval. All amendments to the
merger agreement must be in writing signed by each party.
At any time prior to the effective time of the merger, any party to the
merger agreement may:
o extend the time for performance of any obligation of the other parties
to the merger;
o waive compliance with any agreements or conditions in the merger
agreement; or
o waive any inaccuracies in the representations and warranties contained
in the merger agreement or in any related document.
COVENANTS PENDING CLOSING
Armor and Simula have agreed to use commercially reasonable efforts to take
all actions and to do all things necessary, proper, desirable or advisable to
complete the merger and the related transactions as soon as practicable.
ADDITIONAL AGREEMENTS
LISTING OF MERGER CONSIDERATION
Armor common stock is currently quoted on the New York Stock Exchange under
the symbol "AH." Armor has agreed to effect the authorization for listing of the
shares of Armor common stock to be issued to the shareholders of Simula pursuant
to the merger agreement.
MISCELLANEOUS
In addition to agreeing to use reasonable efforts in good faith to take all
actions and to do all things necessary to complete the merger and the other
transactions contemplated by the merger agreement as soon as practicable, the
merger agreement also contains additional agreements relating to the preparation
and filing of the registration statement and the required regulatory filings and
the submission of the merger agreement for approval and adoption by Simula
shareholders. Armor and Simula have also agreed to consult each other prior to
issuing any public statements and to provide prompt notice to each other upon
the occurrence of certain events.
EXPENSES
All expenses incurred in connection with the merger agreement and the
transactions it contemplates will be paid by the party incurring them, except
that Armor and Simula will share equally all expenses associated with filings
pursuant to the HSR Act and except for such expenses for which each party is
obligated to reimburse the other for as set forth above.
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STOCKHOLDER AGREEMENTS RELATING TO THE MERGER
Under the terms of the merger agreement, Simula has agreed to use its
reasonable best efforts to cause the executive officers and directors of Simula
to execute and deliver to Armor a stockholder agreement, a form of which is
attached as Annex B to this proxy statement/prospectus and is incorporated by
reference into this proxy statement/prospectus. In such stockholder agreement,
Simula's executive officers and directors will agree to vote the shares held by
them at the special meeting of Simula shareholders in favor of approval and
adoption of the merger agreement and approval of the terms thereof, including
the merger. In addition, each such executive officer and director will grant to
an irrevocable proxy and irrevocably appoint the members of Armor's board of
directors such shareholder's attorney and proxy to vote the shares held by them
with regard to the foregoing matters at the special meeting. The shares held by
Simula's executive officers and directors represent approximately 1% of the
outstanding shares of Simula common stock.
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INFORMATION ABOUT ARMOR
GENERAL
Armor is a leading manufacturer and provider of specialized security
products, training and support services related to these products, and vehicle
armor systems. Armor's products and systems are used domestically and
internationally by military, law enforcement, security and corrections
personnel, as well as governmental agencies, multinational corporations and
individuals. Armor is organized and operated under two business divisions: Armor
Holdings Products, also referred to as its Products Division, and Armor Mobile
Security, also referred to as its Mobile Security Division.
Products. Armor's Products Division manufactures and sells a broad range of
high quality security products, equipment and related consumable items, such as
concealable and tactical body armor, hard armor, duty gear, less-lethal
munitions, anti-riot products, police batons, emergency lighting products,
forensic products, firearms accessories and weapon maintenance products. Armor's
products are marketed under brand names that are well established in the
military and law enforcement communities such as AMERICAN BODY ARMOR(TM),
B-SQUARE(R), BREAK FREE(R), CLP(R), DEFENSE TECHNOLOGY/FEDERAL LABORATORIES(R),
DEF-TEC PRODUCTS(R), DISTRACTION DEVICE(R), FEDERAL LABORATORIES(R), FERRET(R),
FIRST DEFENSE(R), IDENTICATOR(R), IDENTIDRUG(R), IMPAK(TM), LIGHTNING POWDER(R),
MONADNOCK(R), NIK(R), O'GARA-HESS & EISENHARDT ARMORING COMPANY(R), PROTECH(TM),
QUIKSTEP LADDERS(TM), SAFARILAND DESIGN(R), SPEEDFEED(R), and 911EP and
DESIGN(TM). Armor sells its products through a network of over 350 distributors
and sales agents, including approximately 200 in the United States. Armor's
extensive distribution capabilities and commitment to customer service and
training have enabled it to become a leading provider of security equipment to
law enforcement agencies.
Mobile Security. Armor's Mobile Security Division manufactures and installs
ballistic and blast protected armoring systems for military, government and
privately owned vehicles. Under the brand name O'Gara-Hess & Eisenhardt, Armor
is the sole-source provider to the U.S. military of the armor and blast
protection systems for HMMWVs. Armor is also under contract with the U.S. Army
to provide spare parts, logistics and ongoing field support services for the
current installed base of approximately 3,900 Up-Armored HMMWVs. Additionally,
the Mobile Security Division has been subcontracted to develop a ballistic and
blast protected armored and sealed truck cab for the HIMARS, a program recently
transitioned by the U.S. Army and U.S. Marine Corps from developmental to a low
rate of initial production, with deliveries scheduled to begin in late 2003.
This division also supplies armor sub-systems for other tactical wheeled
vehicles. Armor armors a variety of government and privately owned commercial
vehicles, including limousines, sedans, sport utility vehicles, commercial
trucks and cash-in-transit vehicles, to protect against varying degrees of
ballistic and blast threats. Armor's customers in this business include U.S.
federal law enforcement and intelligence agencies, foreign heads of state,
international corporations and high net worth individuals.
ADDITIONAL INFORMATION
You can find additional information about Armor in Armor's Annual Report on
Form 10-K for the fiscal year ended December 31, 2002 filed on March 31, 2003,
as amended on July 29, 2003; Quarterly Reports for the quarters ended March 31,
2003 and June 30, 2003; Current Reports on Form 8-K filed on May 5, 2003, July
24, 2003, August 8, 2003, August 13, 2003 and November 5, 2003; which are each
incorporated by reference in this proxy statement/prospectus. See "Where You Can
Find More Information" on page 99.
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INFORMATION ABOUT SIMULA
SIMULA
Simula is a safety technology company and supplier of human safety and
survivability systems. Simula provides high-technology products and services to
all branches of the U.S. military, major aerospace and defense prime
contractors, international military forces and consumer markets. Simula has
served the defense industry for almost 30 years. Simula is a provider of
military helicopter seating systems, aircraft and land vehicle armor systems,
protective equipment for military personnel and other technologies used to
protect soldiers in a variety of life-threatening or catastrophic situations.
Simula's products are deployed on a wide range of high-profile military
platforms such as the AH-64 Apache and the UH-60 Black Hawk helicopters, the
C-17 Globemaster III Transport Aircraft, the M1117 Guardian Armored Security
Vehicle, the M998 High Mobility Multipurpose Wheeled Vehicle, or HMMWV, and
body-worn equipment for personal protection of the U.S. Army, Marine Corps, and
Air Force Special Operations Forces. Primary aerospace and defense customers
include Boeing, Sikorsky, Bell Helicopter, the U.S. military services and the
U.S. Coast Guard.
Simula operates in one primary business segment: Aerospace and Defense. The
Aerospace and Defense segment includes technology development and manufacturing
operations for military aircraft seating, armor and crew safety systems sold
principally for branches of the U.S. armed forces and foreign armed forces.
MARKET AREAS
Simula develops, manufactures, licenses, and sell products and technologies
for a number of different applications for military and commercial customers.
Simula aligns these applications with its customers' needs in the following
markets:
o Aerospace Safety Systems
o Land and Marine Safety Systems
o Military Personnel Safety Systems
o Technology Development and Licensing
AEROSPACE SAFETY SYSTEMS
Simula's core capabilities and technologies in the aircraft safety market
include protective seating, inflatable restraints and armor.
Simula has been a major supplier of crash-resistant, energy-absorbing
seating systems for military helicopters and other military aircraft to various
branches of the U.S. military and their prime defense contractors, and foreign
customers for over 25 years. Simula currently supplies approximately 75% of the
new and replacement crew seating systems for U.S. military helicopters. The
seating systems focus on reducing injury and increasing survivability in
aircraft crashes.
As an outgrowth of its military aircraft seating systems, Simula has
developed an expertise in high performance, lightweight armor systems.
Typically, crew armor on aircraft is located on, or adjacent to, the crewmember
seat to minimize weight. Thus, many of Simula's seating systems incorporate its
advanced armor systems.
As a result of its crash-resistant, energy-absorbing technologies, coupled
with our high-strength, lightweight armor capability, Simula is the leading
provider of energy-absorbing helicopter seats purchased by the U.S. and foreign
militaries. Simula is the sole supplier of crew seats for 13 different
helicopter models and other variants of
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these aircraft. Military helicopters for which Simula has designed and
manufactured crew seat assemblies include the AH-64 Apache attack helicopter;
UH-60 Black Hawk utility helicopter; SH-60 Sea Hawk ASW helicopter; SH/UH-3 Sea
King ASW/utility helicopter; CH-53 Super Sea Stallion transport and cargo
helicopter; V-22 Osprey tilt-rotor aircraft; AH-1Z Cobra Venom Attack
helicopter; UH-1Y Super Huey utility helicopter; C/MH-47 Chinook Transport
Helicopter; Japan's OH-1 Observation helicopter; Australia's SH-2G (A)
Shipboard/ASW helicopter; England's EH101 Merlin Mk1 and Merlin Mk3 ASW and
Transport helicopters; Italy's EH101 MMI ASW and Transport helicopters; Canada's
CH-149 Cormorant Search-and-Rescue helicopter; and Norway's Sea King Multi-role
helicopters. Aircraft manufacturers in our customer base include Boeing
Helicopters, Sikorsky Aircraft Corporation, Bell Helicopter Textron, Inc., and
Kaman Aerospace, Kawasaki Heavy Industries, Mitsubishi Heavy Industries,
Hindustan Aeronautics, and Agusta Westland. Simula also supplies crew seats
directly to various agencies of the U.S. Department of Defense and various
foreign militaries.
Simula's expertise in military seating systems also extends to troop seats
for both helicopters and fixed-wing aircraft. Simula has produced or is
currently producing troop seats for the UH-60 Black Hawk, CH-47 Chinook, SH-60
Seahawk, and the C-130 and C-17 transport aircraft. In 2001, Simula was the sole
supplier selected by the U.S. Air Force to develop a common wall-mounted troop
seat for its C-130, C-141, and KC-135 aircraft. The common troop seat also has
application to a range of transport helicopters and various fixed-wing aircraft
flown by other U.S. services and foreign militaries.
Simula's expertise in helicopter crash safety led to the development of
cockpit airbag systems with U.S. Army funding over the last five years. Simula's
role has evolved into the position as a system integrator incorporating airbags,
gas generators, and complex three-dimensional crash sensors into helicopter
cockpits. In 2001, Simula was awarded the first ever production contracts for
aircraft airbag systems. These are currently being produced for the U.S. Army's
UH-60 Black Hawk and OH-58 Kiowa Warrior helicopters.
LAND AND MARINE SAFETY SYSTEMS
Simula's expertise in military vehicle safety systems focuses on two areas:
armor protection for the vehicle and crew and crash-safety systems.
Simula's experience in high-performance, lightweight armor for aircraft has
enabled it to build a business around armoring thin-skinned vehicles for
priority missions during peacekeeping operations. Work in this area includes
ballistic and mine-blast kits for HMMWVs, 5-ton trucks, and large off-road
trucks such as the HEMTT. Simula has responded to urgent armor requirements in
most major conflicts involving U.S. peacekeepers in the last 10 years. For
example, Simula supplied approximately 186 HEMTT kits for U.S. troops in Bosnia
conducting resupply and humanitarian missions.
In 2001, Simula's ground vehicle armor business continued to mature as it
completed the initial contracts for production armor kits for the M1117 Guardian
Armored Security Vehicle for the U.S. Army. The U.S. Army subsequently awarded
Simula a follow-on contract for the Guardian. In 2002, Simula provided armor for
the U.S. Army's new Stryker IAV.
In the area of ground vehicle crash safety, Simula has worked closely with
the U.S. Army to analyze vehicular accidents within its combat vehicle fleet.
This work has led to safety improvements in the vehicle cabs to delethalize the
interiors and to install improved restraints.
MILITARY PERSONNEL SAFETY SYSTEMS
Simula's core competencies and technologies in personnel safety include
ballistic vest body armor, pilot and crew bailout parachutes, flotation collars,
survival vests and integrated ensembles incorporating multiple capabilities.
Simula supplies numerous products to protect military and police personnel,
including armor protection, parachutes, and flotation collars. Simula's armor
business includes a range of body armors designed to minimize injury from
handgun bullets, rifle bullets and fragments from explosive warheads. Over the
past several years,
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Simula has been awarded multiple contracts to produce Small Arms Protective
Inserts for the U.S. Army and U.S. Marine Corps.
Under contract with the U.S. Navy, Simula has applied its technologies and
overall knowledge of materials and structures to develop a parachute system that
solves numerous functional problems attendant to traditional military bailout
parachutes. Simula Thin-Pack Parachute, or TPP, 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. Simula's patented environmental sealing technology
reduces repackaging and maintenance costs, and extends the service life of the
parachute without jeopardizing user safety. To date, Simula has supplied over
5,000 TPPs to the U.S. Navy. In 2001, Simula laid the groundwork for supply of
the TPP to U.S. Air Force and foreign military sales, or FMS, customers. At the
same time as the business base with the U.S. military has increased, Simula's
Durachute parachute system, the commercial configuration of the TPP, has
completed certification testing with the Federal Aviation Administration and
Simula has made its first commercial sales.
Simula also has developed a line of flotation collars that are designed to
provide additional buoyancy for a person that enters water in an emergency. The
basic configuration of the product, called the Low Profile Flotation Collar, can
fit a wide range of applications. For example, it can be used by aviators that
eject or bailout over water, rescue swimmers, divers and naval personnel. In
addition, it can be worn with a wide range of other equipment and clothing for
ground troops being ferried over water and also by commercial personnel who work
around water.
There are variations in the basic configuration including automatic
inflation and face covers. Simula's system has been adopted by the U.S. Navy and
U.S. Air Force. To date, Simula has supplied over 20,000 collars.
TECHNOLOGY DEVELOPMENT AND LICENSING
An important part of Simula's business is a growing portfolio of licensed
technologies. Simula's principal licenses include soft armor and a patented
family of transparent polymers.
Simula has developed 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 and dye compatible, while possessing the ability to
withstand extreme temperatures and chemical attack. 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, medical products and sun, sport and ophthalmic
lenses. Simula has taken significant steps to commercialize the transparent
polymer material through its own products and through licenses in other markets.
Simula has licensed its optical polymer for use in ophthalmic lenses with PPG
Industries, Inc. and for sun and sport lenses and motorcycle helmets with
Intercast Europe. PPG introduced Simula's polymer in 2001 under the tradename of
Trivex. Intercast introduced a product tradenamed NXT(TM) to the sunglass market
in early 2002.
In 2002, Simula completed a license with the prime contractor for the Joint
Services General Purpose Gas Mask, or JSGPM, to develop a lens with chemical
agent resistance and ballistic properties. The design will utilize Simula's
patented transparent urethane technology. Simula expects that several million
units of the JSGPM will be built over the next 10 years for U.S. and foreign
military customers as well as first responders (police, firemen, etc.).
Simula currently licenses its patented SimuLITE(TM) material to Second
Chance Body Armor, Inc., the nation's largest manufacturer of soft, concealable
personal body armor used by police forces. Sales of Second Chance Body Armor
incorporating Simula's technology have grown rapidly over the last year.
Simula benefits from these licenses in the form of technology transfer fees
and ongoing royalties.
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MATERIAL DISPOSITION OF ASSETS
On July 22, 2003, Simula completed the sale of all of the assets of its
automotive safety business with Zodiac, S.A. at a selling price of $14.3
million in cash, subject to certain closing and purchase price adjustments.
After deducting estimated closing costs and purchase price adjustments, Simula
anticipates net proceeds of approximately $10.5 million. Currently included in
the closing costs is approximately $1.0 million related to two separate escrow
accounts, from which Simula can potentially recover a maximum of $0.5 million
within three months and a maximum of $0.5 million in 18 months. Simula has
applied the net proceeds of the sale to repay a portion of its outstanding debt.
ADDITIONAL INFORMATION
You can find additional information about Simula in the following reports,
all of which are incorporated by reference into this proxy statement/prospectus:
annual report on Form 10-K of Simula, Inc. for the fiscal year ended December
31, 2002, attached hereto as Annex D; quarterly report on Form 10-Q of Simula,
Inc. for the quarter ended March 31, 2003, attached hereto as Annex E; quarterly
report on Form 10-Q of Simula, Inc. for the quarter ended June 30, 2003,
attached hereto as Annex F; and current reports on Form 8-K filed on February
18, 2003, March 31, 2003, May 15, 2003, June 17, 2003, July 28, 2003 (as amended
on September 26, 2003), August 13, 2003, September 11, 2003 and November 6,
2003. See "Where You Can Find More Information" on page 99.
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DESCRIPTION OF ARMOR CAPITAL STOCK
GENERAL
The authorized capital stock of Armor consists of 50,000,000 shares of
Armor common stock, $.01 par value, and 5,000,000 shares of preferred stock,
$.01 par value. As of October 10, 2003, there were 34,198,044 shares of Armor
common stock issued and outstanding. There were no shares of Armor preferred
stock issued and outstanding as of such date. In the event Armor elects to pay
the entire merger consideration with its common stock, based on the number of
shares of Simula common stock outstanding at the record date, it is estimated
that approximately 2,229,754 shares of Armor common stock would be issued in the
merger.
ARMOR COMMON STOCK
Holders of shares of Armor common stock are entitled to one vote for each
share held of record on all matters submitted to a vote of stockholders. There
are no cumulative voting rights with respect to the election of directors.
Accordingly, the holder or holders of a majority of the outstanding shares of
Armor common stock will be able to elect Armor's entire board of directors.
Holders of Armor's common stock have no preemptive rights and are entitled to
such dividends as may be declared by the board of directors out of legally
available funds. Armor common stock is not entitled to any sinking fund,
redemption or conversion provisions. If Armor liquidates, dissolves or winds up
its business, the holders of Armor common stock will be entitled to share
ratably in Armor's net assets remaining after the payment of all creditors, if
any, and the liquidation preferences of any preferred shareholders. In the event
Armor elects to pay the entire merger consideration with its common stock, when
issued to Simula shareholders pursuant to the merger agreement, the shares of
Armor common stock will be fully paid and non-assessable. The common stock is
currently listed on the New York Stock Exchange. The transfer agent and
registrar for the common stock is American Stock Transfer and Trust Company.
ARMOR PREFERRED STOCK
The issuance of shares of Armor preferred stock, or the issuance of rights
to purchase shares, could be used to discourage an unsolicited acquisition
proposal. For instance, the issuance of a series of preferred stock might impede
a business combination by including class or series voting rights that would
enable the holders to block such a transaction, or might facilitate a business
combination by including voting rights that would provide a required percentage
vote of the shareholders. In addition, under certain circumstances, the issuance
of Armor preferred stock could adversely affect the voting power of the holders
of Armor common stock. Although Armor's board of directors is required to make
any determination to issue such stock based on its judgment as to the best
interests of Armor's stockholders, the board could act in a manner that would
discourage an acquisition attempt or other transaction that some or even a
majority of the shareholders might believe to be in their best interests or in
which stockholders might receive a premium for their stock over the then market
price of such stock. The board of directors does not at present intend to seek
stockholder approval prior to any issuance of currently authorized stock, unless
otherwise required by law or the rules of any market on which Armor's securities
are traded.
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COMPARISON OF THE RIGHTS OF SIMULA SHAREHOLDERS AND ARMOR
STOCKHOLDERS
The following is a summary of the material differences between the rights
of Simula shareholders and Armor stockholders under the articles of
incorporation and bylaws of Simula and the certificate of incorporation and
bylaws of Armor, and under Arizona law and Delaware law.
The following summary does not purport to be a complete statement of the
provisions affecting, and differences between, the rights of holders of Simula
common stock and holders of Armor common stock. This summary is qualified in its
entirety by reference to the governing corporate instruments of Armor and
Simula, to which the shareholders of Simula are referred.
SIMULA SHAREHOLDERS ARMOR STOCKHOLDERS
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Governing Law
The Arizona Business Corporation Act, or ABCA. The Delaware General Corporation Law, or DGCL.
Capitalization
Simula has authority to issue a total of 100,000,000 Armor has authority to issue a total of 55,000,000
shares of capital stock, consisting of: shares of capital stock, consisting of:
o 50,000,000 shares of common stock, par value o 50,000,000 shares of common stock, par
$0.01 per share, and value $.01 per share, and
o 50,000,000 shares of preferred stock, par o 5,000,000 shares of preferred stock, par
value $0.05 per share. value $.01 per share.
Sale, Lease or Exchange of Assets and Mergers
The ABCA requires approval of a merger by the holders The DGCL generally requires that a majority of the
of a majority of the outstanding shares of the stockholders of the merging corporations approve
corporation entitled to vote on the plan of merger. statutory mergers. The DGCL does not require a
The ABCA does not require a shareholder vote of the stockholder vote of the surviving corporation in a
surviving corporation in a merger, unless the merger, unless the corporation provides otherwise
corporation provides otherwise in its articles of in its certificate of incorporation, if:
incorporation, if:
o the merger agreement does not amend the
o the merger agreement does not amend the existing certificate of incorporation;
existing articles of incorporation; o each share of the corporation outstanding
o each share of the corporation outstanding before the merger is an identical
before the merger is an identical outstanding outstanding or treasury share of the
or treasury share of the surviving corporation surviving corporation after the merger; and
after the merger; and o the number of shares to be issued by the
o the number of shares to be issued by the surviving corporation in the merger does not
surviving corporation in the merger does not exceed 20% of the shares of the corporation
exceed 20% of the shares of the corporation outstanding immediately prior to the merger.
outstanding immediately prior to the merger.
For a sale, lease or exchange of all or substantially
all of a corporation's property in the usual and
regular course of its business, the ABCA does not
require shareholder approval. However, where such a
sale, lease or exchange is not in the usual and the
regular course of business, the ABCA requires approval
by holders of a majority of the outstanding shares of
the corporation entitled to vote.
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SIMULA SHAREHOLDERS ARMOR STOCKHOLDERS
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Interested Shareholder Business Combinations
Pursuant to its amended and restated articles of Section 203 of the DGCL prohibits a Delaware
incorporation, Simula has elected to be governed by corporation from engaging in certain transactions with
Article III of the Arizona Corporate Takeover Act, an "interested stockholder" for three years following
which restricts the ability of certain persons to the date that the person becomes an interested
acquire control of a corporation. stockholder. With certain exceptions, an interested
stockholder is a person or group who or which owns 15%
The ABCA prohibits an Arizona public corporation from or more of the corporation's outstanding voting stock,
engaging in certain transactions with an "interested including rights to acquire stock, or is an affiliate
shareholder" or for a period of three years following or associate of the corporation and was the owner of
the date that the person becomes an interested 15% or more of the corporation's voting stock at any
shareholder. With certain exceptions, an interested time within the previous three years. Section 203 of
shareholder is a person or group that owns 10% or more the DGCL includes certain exceptions to this
of the corporation's voting stock or is an affiliate prohibition; for example, (i) if the board of
or associate of the corporation and was the owner of directors approves the acquisition of stock or the
10% or more of the corporation's voting stock at any transaction prior to the time that the person became
time within the previous three years. The ABCA an interested shareholder, or (ii) if the interested
includes certain exemptions to this prohibition; for stockholder acquires 85% of the voting stock of the
example, if the interested shareholder became an corporation (excluding voting stock owned by directors
interested shareholder inadvertently (as described in who are also officers and certain employee stock
the ABCA). plans) in one transaction, or (iii) if the transaction
is approved by the board of directors and by the
affirmative vote of two-thirds of the outstanding
voting stock which is not owned by the interested
stockholder.
Control Share Acquisition
Pursuant to the provisions of the ABCA and Simula's Delaware does not have a control share acquisition
amended and restated articles of incorporation, Simula statute.
has elected to be governed by Article II of the
Arizona Corporate Takeover Act, which restricts the
ability of certain persons to acquire controlling
amounts of shares of a corporation in the open
market. Specifically, the ABCA prohibits an acquiring
person from voting shares acquired when the
acquisition of such shares entitles the acquiring
person, immediately after the acquisition, to exercise
or direct the exercise of a new range of voting power
within any of the ranges specified in the ABCA. The
ABCA includes certain exceptions to prohibition; for
example (1) acquisitions pursuant to certain security
agreements, or (2) acquisitions from the issuing
public company.
Number of Directors; Vacancies
Simula's board of directors may consist of not less Armor's board of directors may consist of not less
than two and not more than 15 members. Currently, than three and not more than 15 members. Currently,
there are __ members of Simula's board of directors. there are six members of Armor's board of directors.
Vacancies on Simula's board of directors, including Vacancies on Armor's board of directors for any cause,
vacancies resulting from an increase in the number of including vacancies resulting from an increase in the
directors, may be filled either by the affirmative number of directors, may be filled by the affirmative
vote of a
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SIMULA SHAREHOLDERS ARMOR STOCKHOLDERS
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vote of a majority of the remaining directors, though, majority of Armor's board of directors, even
not less than a quorum, or by a sole remaining if the majority is less than a quorum, or by a
director. plurality of the votes cast at a meeting of Armor's
stockholders.
The term of a director elected to fill a vacancy
expires at the next election of directors when a The term of a director elected to fill a vacancy
successor is elected and qualified. continues until the next annual election of directors
and until a successor is duly elected and qualified.
Classification of Directors
As permitted by the ABCA, Simula's board of directors Armor's certificate of incorporation does not provide
is divided into three classes, with each director for a classified board of directors.
elected to a three year term.
Election of Directors
Simula's bylaws provide that, in any election of Armor's bylaws do not provide for cumulative voting at
directors, each shareholder is entitled to cumulative any election of directors.
voting at such election. This means that each
shareholder may cast, in person or by proxy, as many
votes in the aggregate as that shareholder is entitled
to vote, multiplied by the number of directors to be
elected. A shareholder is thus entitled to cast all of
his or her votes for any director or for any two or
more as the shareholder chooses.
Removal of Directors
Simula's bylaws provide that the shareholders of The DGCL provides that any director or the entire
Simula may remove one or more directors at a meeting board of directors may be removed, with or without
called for that purpose, provided certain notice cause, by the holders of a majority of the shares
requirements are satisfied. Such removal may be with then entitled to vote at an election of directors,
or without cause. If less than the entire Simula except as follows:
board of directors is to be removed, a director may
not be removed if the number of votes sufficient to o unless the certificate of incorporation
elect the director under cumulative voting are voted provides otherwise, in the case of a
against the director's removal. corporation whose board is classified, such
stockholders may effect such removal only
for cause; or
o in the case of a corporation having
cumulative voting, if less than the entire
board is to be removed, no director may be
removed without cause if the number of votes
cast against such director's removal would
be sufficient to elect such director if then
cumulatively voted at an election of the
entire board of directors, or if there are
classes of directors, at an election of the
class of directors of which such director is
a part.
Armor's bylaws allow for the removal of a director,
with or without cause, by the affirmative vote of the
holders of a majority of the shares entitled to vote
at an election of directors, at a meeting called for
that purpose.
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SIMULA SHAREHOLDERS ARMOR STOCKHOLDERS
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Indemnification of Directors
Simula's bylaws provide for the indemnification to the Armor's certificate of incorporation provides for
fullest extent permitted by the ABCA of any person the indemnification of any present or former
made or threatened to be made a party to an action or directors, officers, employees or agents of Armor
proceeding by reason of the fact that such person is against damages or expenses incurred by them by
or was a director, officer, employee, trustee, or reason of their position with the corporation.
agent of or for Simula, or acting at the request of
Simula. The DGCL generally permits indemnification of
directors and officers for damages and expenses
The ABCA generally permits indemnification of incurred by them by reason of their position with
directors and officers for damages and expenses the corporation, if the director or officer has
incurred by them by reason of their position with the acted in good faith with the reasonable belief that
corporation, if the director or officer has acted in his or her conduct was in, or not opposed to, the
good faith with the reasonable belief that his or her best interest of the corporation and, with respect
conduct was in the best interest of the corporation to any criminal action or proceeding, not unlawful,
and not unlawful. except that no indemnification shall be made in
respect of any matter as to which the director or
The ABCA permits a corporation to indemnify its officer was adjudged liable to the corporation
directors and officers for reasonable expenses unless and only to the extent that the Court of
incurred in connection with proceedings brought by or Chancery or the court in which such action or suit
in the right of the corporation, except where the was brought deems that such person is fairly and
director or officer is held to be liable to the reasonably entitled to indemnity.
corporation.
Limitation of Liability for Directors
Simula's articles of incorporation limit the liability Armor's certificate of incorporation limits the
of Simula's directors and former directors to the liability of Armor's directors to the fullest extent
corporation or its shareholders to the fullest extent permitted by paragraph (7) of subsection (b) of
permitted by the ABCA. Section 102 of the DGCL.
The ABCA permits a corporation to include in its The DGCL permits a corporation to include in its
articles of incorporation a provision eliminating or articles of incorporation a provision limiting the
limiting the liability of a director to the personal liability of directors. However, a director
corporation or its shareholders for money damages for will be liable for:
any action taken or for any failure to take action as
a director, except with respect to liability for: o a breach of the director's duty of loyalty to the
corporation or its stockholders;
o the amount of a financial benefit received by a o acts or omissions not in good faith or which involve
director to which the director is not entitled; intentional misconduct or a knowing violation of
o an intentional infliction of harm on the corporation law;
or its shareholders; o violations of DGCL section 174 (unlawful
o unlawful distributions to shareholders; and distributions to stockholders, etc.); and
o an intentional violation of criminal law. o any transaction from which the director derived an improper
personal benefit.
Shareholder Action
Pursuant to Simula's bylaws, Simula's shareholders may Pursuant to Armor's bylaws, Armor's stockholders may
take action by written consent if one or more consents take action by written consent if a consent in
in writing, setting forth the action so taken, are writing, setting forth the action so taken, is signed
signed by all of the shareholders entitled to vote by the holders of all of the outstanding stock of
with respect to the subject matter of the action. Armor.
In addition, any action required by the DGCL to be
95
SIMULA SHAREHOLDERS ARMOR STOCKHOLDERS
-------------------------------------------------------- -----------------------------------------------------
taken at any annual or special meeting of
stockholders, or any action which may be taken at any
annual or special meeting of stockholders, may be
taken without a meeting, without prior notice and
without a vote, if a consent in writing, setting forth
the action so taken, shall be signed by the holders of
outstanding stock having not less than the minimum
number of votes that would be necessary to authorize
or take such action at a meeting at which all shares
entitled to vote thereon were present and voted.
Prompt notice of the taking of the corporate action
without a meeting by less than unanimous written
consent shall be given to those stockholders who have
not consented in writing.
Appraisal/Dissenters Rights
The ABCA allows dissenting shareholders to obtain the Under the DGCL, appraisal rights may be available in
fair value of their shares by statute for a statutory connection with a statutory merger or consolidation in
merger, a sale or exchange of all or substantially all certain specific situations.
of the property of the corporation other than in the
usual and regular course of business and for some Appraisal rights are not available under the DGCL when
amendments to the articles of incorporation. a corporation is to be the surviving corporation and
no vote of its stockholders is required to approve the
Unless the issuing company provides otherwise in its merger.
articles of incorporation, the ABCA does not provide
for dissenters' rights where the corporation's shares In addition, unless otherwise provided in the
are either (i) listed on a national securities certificate of incorporation, no appraisal rights are
exchange or are listed on a national market system of available under the DGCL to holders of shares of any
the National Association of Securities Dealers, or class of stock which is either (i) listed on a
(ii) held of record by at least 2,000 shareholders on national securities exchange or designated as a
the date fixed to determine the shareholders entitled national market system security on an interdealer
to vote on the proposed corporate action. quotation system by the National Association of
Securities Dealers, Inc., or (ii) held of record by
The articles of incorporation of Simula do not provide more than 2,000 stockholders, unless such stockholders
for such dissenters' rights. are required by the terms of the merger to accept
anything other than:
o shares of stock of the surviving corporation;
o shares of stock of another corporation which are so
listed on a national securities exchange or
designated as a national market system
security on an interdealer quotation system
by the National Association of Securities
Dealers or held of record by more than 2,000
stockholders as of the effective date of the
merger or consolidation;
o cash in lieu of fractional shares of such stock; or
o any combination thereof.
Appraisal rights are not available under the DGCL in the
event of a sale, lease or exchange of all or
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SIMULA SHAREHOLDERS ARMOR STOCKHOLDERS
-------------------------------------------------------- -----------------------------------------------------
substantially all of Armor's assets or the adoption of an
amendment to its certificate of incorporation.
The certificate of incorporation of Armor does not
provide for such appraisal rights.
Share Repurchases
The ABCA authorizes a corporation to acquire its own Under the DGCL, a corporation may generally redeem
shares, unless restricted by its articles of or repurchase shares of its stock if such
incorporation, so long as the corporation is able to redemption or repurchase will not impair the
pay its debts as they become due and the corporation's capital of the corporation.
total assets are not less than the sum of its
liabilities and the amount of shareholder
preferential rights upon liquidation.
Dividends
The ABCA permits the directors of every corporation, The DGCL permits the directors of every corporation,
subject to restriction by the articles of subject to any restrictions contained in its
incorporation, to authorize distributions to the certificate of incorporation, to declare and pay
shareholders unless, after giving effect to such a dividends upon the shares of its capital stock either
distribution, the corporation would not be able to pay out of its surplus or, in case there is no such
its debts as they become due in the usual course of surplus, out of the corporation's net profits for the
business, or the corporation's total assets would be fiscal year in which the dividend is declared and/or
less than the sum of its total liabilities plus the the preceding fiscal year.
amount that would be needed to satisfy the dissolution
rights of shareholders whose preferential rights are
superior to those receiving the distribution.
Pursuant to the ABCA and Simula's bylaws, Simula's
board of directors may from time to time declare, and
the corporation may pay or make, dividends or other
distributions to its shareholders.
Special Shareholder Meetings
Simula's bylaws provide that a special meeting of Armor's bylaws provide that a special meeting of
shareholders may only be called by any of the stockholders may only be called by any of the
following, subject to compliance with specified following:
procedures:
o the president;
o the president and the secretary of the o the chairman of the board;
corporation, acting together; o the majority of the board of directors; and
o the board of directors; and o a majority of the stockholders of record of
o written demand of holders of not less than all shares entitled to vote.
10% of all shares entitled to vote at the
meeting.
Advance Notice Requirements
Simula's bylaws provide that shareholders proposals Armor's bylaws do not contain specific stockholder
will be included in proxy solicitation materials and proposal requirements.
considered and submitted to a vote at an annual
meeting only if the proponents of such proposal Section 14(a) of the Exchange Act requires that
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SIMULA SHAREHOLDERS ARMOR STOCKHOLDERS
-------------------------------------------------------- -----------------------------------------------------
comply with the rules of Section 14(a) of the stockholder proposals be submitted not less than 120
Securities Exchange Act of 1934, as amended. calendar days before the date of the company's proxy
statement released to stockholders in connection with
Section 14(a) of the Securities Exchange Act requires the previous year's annual meeting. However, if the
that shareholder proposals be submitted not less than company did not hold an annual meeting the previous
120 calendar days before the date of the company's year, or if the date of this year's annual meeting has
proxy statement released to shareholders in connection been changed by more than 30 days from the date of the
with the previous year's annual meeting. However, if previous year's meeting, then the deadline is a
the company did not hold an annual meeting the reasonable time before the company begins to print and
previous year, or if the date of this year's annual mail its proxy materials.
meeting has been changed by more than 30 days from the
date of the previous year's meeting, then the deadline
is a reasonable time before the company begins to
print and mail its proxy materials.
Amendments to Bylaws
Simula's bylaws may be amended only by a resolution Armor's bylaws may be amended by either the holders of
duly adopted by a majority of the entire board of a majority of the outstanding capital stock entitled
directors, subject to repeal or change of action of to vote or by a majority of the entire board of
the shareholders. directors.
98
FUTURE SIMULA SHAREHOLDER PROPOSALS
Simula intends to hold a 2003 annual meeting of shareholders only if
the merger is not completed. If such a meeting is held, shareholder proposals
will only be considered for inclusion in Simula's proxy statement for the 2003
annual meeting if they (1) are submitted to the Corporate Secretary of Simula in
writing at Simula's principal executive offices, 7822 South 46th Street,
Phoenix, Arizona 85044-5354, within a reasonable time before Simula begins to
print and mail its proxy materials, and (2) concern a matter that may properly
be considered and acted upon at the annual meeting in accordance with law and
the rules of the Securities and Exchange Commission, including Rule 14a-8 of the
Securities Exchange Act of 1934, as amended.
LEGAL MATTERS
The validity of the shares of Armor common stock offered by this proxy
statement/prospectus will be passed upon by Kane Kessler, P.C., New York, New
York, as counsel to Armor. Robert L. Lawrence, Esq., a member of Kane Kessler,
P.C., owns 5,000 shares of Armor common stock.
EXPERTS
The financial statements incorporated in this proxy statement/prospectus by
reference from Simula's Annual Report on Form 10-K for the year ended December
31, 2002 have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report (which report expressed an unqualified opinion and
includes an explanatory paragraph relating to Simula's ability to continue as a
going concern) which is incorporated herein by reference and has been so
incorporated in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
The consolidated financial statements of Armor incorporated in this proxy
statement/prospectus by reference to Armor's annual report on Form 10-K for the
year ended December 31, 2002, have been so incorporated in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
This proxy statement/prospectus incorporates documents by reference which
are not presented in or delivered with this proxy statement/prospectus. As
allowed by the Securities and Exchange Commission's rules, this proxy
statement/prospectus does not contain all information required herein. You
should rely only on the information contained in or incorporated by reference
into this proxy statement/prospectus. We have not authorized anyone to provide
you with information that is different from or in addition to the information
contained in or incorporated by reference into this proxy statement/prospectus.
The following documents, which were filed by Simula with the Securities and
Exchange Commission, are incorporated by reference into this proxy
statement/prospectus:
o Simula's annual report on Form 10-K for the fiscal year ended December
31, 2002, filed with the Securities and Exchange Commission on April
15, 2003;
o Simula's quarterly report on Form 10-Q/A for the quarter ended March
31, 2003, filed with the Securities and Exchange Commission on
November 6, 2003;
o Simula's quarterly report on Form 10-Q/A for the quarter ended June 30,
2003, filed with the Securities and Exchange Commission on November 6,
2003; and
o Simula's current reports on Form 8-K filed on February 18, 2003, March
31, 2003, May 15, 2003, June 17, 2003, July 28, 2003 (as amended on
September 26, 2003), August 13, 2003, September 11, 2003 and November
6, 2003.
The following documents, which were filed by Armor with the Securities and
Exchange Commission, are incorporated by reference into this proxy
statement/prospectus:
99
o Armor's annual report on Form 10-K for the fiscal year ended December
31, 2002, filed with the Securities and Exchange Commission on March
31, 2003, as amended on July 29, 2003;
o Armor's quarterly report on Form 10-Q for the quarter ended March 31,
2003, filed with the Securities and Exchange Commission on May 15,
2003;
o Armor's quarterly report on Form 10-Q for the quarter ended June 30,
2003, filed with the Securities and Exchange Commission on August 18,
2003;
o Armor's current reports on Form 8-K filed on May 5, 2003, July 24,
2003, August 8, 2003, August 13, 2003 and November 5, 2003;
o Armor's definitive proxy statement on Schedule 14A filed with the
Securities and Exchange Commission on April 30, 2003; and
o The description of Armor's common stock set forth in Armor's
registration statement on Form 8-A, filed with the Securities and
Exchange Commission on April 29, 1999 and any amendments or reports
filed thereafter for the purpose of updating such description.
In addition, all documents filed by Simula and Armor pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this proxy
statement/prospectus and before the date of the Simula special meeting are
deemed to be incorporated by reference into, and to be a part of, this proxy
statement/prospectus from the date of filing of those documents.
Any statement contained in this proxy statement/prospectus or in a document
incorporated or deemed to be incorporated by reference into this proxy
statement/prospectus will be deemed to be modified or superseded for purposes of
this proxy statement/prospectus to the extent that a statement contained in this
proxy statement/prospectus or any other subsequently filed document that is
deemed to be incorporated by reference into this proxy statement/prospectus
modifies or supersedes the statement. Any statement so modified or superseded
will not be deemed, except as so modified or superseded, to constitute a part of
this proxy statement/prospectus.
Simula has supplied all information contained or incorporated by reference
in this proxy statement/prospectus about Simula, and Armor has supplied all
information contained or incorporated by reference in this proxy
statement/prospectus about Armor.
The documents incorporated by reference into this proxy statement/
prospectus by Simula are attached hereto as Annexes D to F or, with respect to
the current reports on Form 8-K filed on February 18, 2003, March 31, 2003, May
15, 2003, June 17, 2003, July 28, 2003 (as amended on September 26, 2003),
August 13, 2003, September 11, 2003 and November 6, 2003, will be delivered to
Simula shareholders with this proxy statement/prospectus. The documents
incorporated by reference into this proxy statement/prospectus by Armor will be
delivered to Simula shareholders with this proxy statement/prospectus. The
documents incorporated by reference into this proxy statement/prospectus by
Simula and Armor also are available from us upon request. We also will provide a
copy of any and all of the information that is incorporated by reference in this
proxy statement/prospectus (not including exhibits to the information unless
those exhibits are specifically incorporated by reference into this proxy
statement/prospectus) to any person, without charge, upon written or oral
request.
Simula shareholders may request a copy of information incorporated by
reference into this proxy statement/prospectus by contacting the appropriate
company at:
For information relating to Simula: For information relating to Armor:
Corporate Secretary Corporate Secretary
Simula, Inc. Armor Holdings, Inc.
7822 South 46th Street 1400 Marsh Landing Parkway
Phoenix, AZ 85044 Suite 112
Phone: (602) 631-4005 Jacksonville, Florida 32250
Fax: (602) 631-9005 Phone: (904) 741-5400
Fax: (904) 741-5403
Simula and Armor file annual, quarterly and current reports, proxy and
information statements and other information with the Securities and Exchange
Commission. Copies of the reports, proxy and information statements and other
information filed by Simula and Armor with the Securities and Exchange
Commission may be inspected and copied at the public reference facilities
maintained by the Securities and Exchange Commission at 450 Fifth
100
Street, N.W., Washington, D.C. 20549. Copies of these materials also can be
obtained by mail at prescribed rates from the Public Reference Section of the
Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C.
20549 or by calling the Securities and Exchange Commission at 1-800-SEC-0330.
The Securities and Exchange Commission maintains a Website that contains
reports, proxy statements and other information regarding each of us. The
address of the Securities and Exchange Commission Web site is
http://www.sec.gov.
Armor has filed a registration statement on Form S-4 under the Securities
Act of 1933, as amended, with the Securities and Exchange Commission with
respect to Armor's common stock to be issued to Simula shareholders in
connection with the merger. This proxy statement/prospectus constitutes the
prospectus of Armor filed as part of the registration statement. This proxy
statement/prospectus does not contain all of the information set forth in the
registration statement because certain parts of the registration statement are
omitted in accordance with the rules and regulations of the Securities and
Exchange Commission. The registration statement and its exhibits are available
for inspection and copying as set forth above.
Simula shareholders with questions about the merger should contact:
Simula, Inc.
7822 South 46th Street
Phoenix, Arizona 85044
Attention: Mari I. Valenzuela
Telephone: (602) 631-4005
Any Simula shareholder who has questions about the merger
or needs additional copies of this proxy statement/prospectus or voting
materials should contact the Corporate Secretary of Simula as described above.
THIS PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO PURCHASE, THE SECURITIES OFFERED BY THIS PROXY
STATEMENT/PROSPECTUS, OR THE SOLICITATION OF A PROXY, IN ANY JURISDICTION TO OR
FROM ANY PERSON TO WHOM OR FROM WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER,
SOLICITATION OF AN OFFER OR PROXY SOLICITATION IN SUCH JURISDICTION. NEITHER THE
DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES
PURSUANT TO THIS PROXY STATEMENT/PROSPECTUS SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION SET
FORTH OR INCORPORATED INTO THIS PROXY STATEMENT/PROSPECTUS BY REFERENCE OR IN
OUR AFFAIRS SINCE THE DATE OF THIS PROXY STATEMENT/PROSPECTUS.
101
INDEX TO ANNEXES
Annex A Agreement and Plan of Merger dated as of August 29, 2003 by and
among Armor Holdings, Inc., AHI Bulletproof Acquisition, Corp.,
and Simula, Inc.
Annex B Form of Stockholder Agreement
Annex C Opinion of Relational Advisors LLC, dated August 29, 2003
Annex D Annual Report on Form 10-K of Simula, Inc. for the year ended
December 31, 2002
Annex E Quarterly Report on Form 10-Q/A of Simula, Inc. for the quarter
ended March 31, 2003, filed with the Securities and Exchange
Commission on November 6, 2003
Annex F Quarterly Report on Form 10-Q/A of Simula, Inc. for the quarter
ended June 30, 2003, filed with the Securities and Exchange
Commission on November 6, 2003
102
ANNEX A
================================================================================
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
ARMOR HOLDINGS, INC.
AHI BULLETPROOF ACQUISITION CORP.
AND
SIMULA, INC.
DATED AS OF AUGUST 29, 2003
================================================================================
TABLE OF CONTENTS
Page
----
Article I Definitions......................................................A-6
1.1 Definitions..............................................A-6
1.2 Interpretation..........................................A-23
Article II The Merger.....................................................A-24
2.1 The Merger..............................................A-24
2.2 The Closing.............................................A-24
2.3 Effective Time..........................................A-24
2.4 Articles of Incorporation, Bylaws, Directors and
Officers of the Surviving Corporation...................A-24
2.5 Section 338(g) Election.................................A-25
Article III Effect of the Merger on Securities of Purchaser and
the Company...................................................A-25
3.1 Parent Securities.......................................A-25
3.2 Purchaser Securities....................................A-25
3.3 Company Common Stock....................................A-26
3.4 Exchange of Certificates Representing
Company Common Stock....................................A-28
3.5 Adjustment of Merger Consideration......................A-32
3.6 Effect of Parent Election Of All Cash Merger
Consideration; Automatic Amendment of Certain
Provisions of Agreement.................................A-32
Article IV Representations and Warranties of the Company..................A-33
4.1 Existence; Good Standing;
Corporate Authority.....................................A-35
4.2 Authorization, Validity and Effect of Agreements........A-36
4.3 Compliance with Laws....................................A-37
4.4 Capitalization..........................................A-37
4.5 Subsidiaries............................................A-39
4.6 No Violation; Consents..................................A-39
4.7 Company Reports; Financial Statements...................A-40
4.8 Company Litigation......................................A-40
4.9 Absence of Certain Changes..............................A-41
4.10 Taxes...................................................A-41
4.11 Company Employee Benefit Plans..........................A-43
4.12 Labor and Employment Matters............................A-45
4.13 Intellectual Property Rights............................A-45
4.14 Permits.................................................A-46
4.15 Environmental Compliance................................A-46
4.16 Material Contracts......................................A-47
4.17 Divestiture Agreements..................................A-49
4.18 Real Property...........................................A-49
4.19 Brokers.................................................A-51
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Page
----
4.20 Opinion of Financial Advisor............................A-51
4.21 State Takeover Statutes.................................A-51
4.22 No Undisclosed Liabilities..............................A-51
4.23 Certain Business Practices..............................A-51
4.24 Affiliates..............................................A-52
4.25 Products................................................A-52
4.26 Form S-4; Proxy Statement...............................A-52
Article V Representations and Warranties of Parent
and Purchaser...................................................A-52
5.1 Existence; Good Standing;
Corporate Authority.....................................A-54
5.2 Authorization, Validity and Effect of Agreements........A-54
5.3 Compliance with Laws....................................A-55
5.4 Capitalization..........................................A-56
5.5 No Violation; Consents..................................A-56
5.6 Parent Reports; Financial Statements....................A-57
5.7 Parent Litigation.......................................A-58
5.8 Absence of Certain Changes..............................A-58
5.9 Brokers.................................................A-58
5.10 No Undisclosed Liabilities..............................A-58
5.11 Certain Business Practices..............................A-58
5.12 Form S-4; Proxy Statement...............................A-58
5.13 Disclosure Materials....................................A-59
Article VI Covenants .....................................................A-59
6.1 Alternative Proposals...................................A-59
6.2 Interim Operations......................................A-61
6.3 Preparation of the Form S-4 and the Proxy Statement;
Company Shareholder Approval............................A-65
6.4 Filings; Other Action...................................A-67
6.5 Access to Information...................................A-69
6.6 Publicity...............................................A-69
6.7 Further Action..........................................A-69
6.8 Indemnification of Company Directors and Officers,
O&D Tail Insurance, Insurance...........................A-70
6.9 Conveyance Taxes........................................A-71
6.10 Certain Tax Matters.....................................A-72
6.11 Benefit Plans and Option Plans..........................A-72
6.12 Stock Exchange Listing..................................A-73
6.13 Affiliates; Shareholder Agreement.......................A-73
6.14 Escrow Agreement........................................A-73
6.15 Liquidation of Subsidiaries.............................A-73
6.16 Certain Benefit Plans...................................A-74
6.17 Company Litigation......................................A-74
6.18 Control of Operations...................................A-74
6.19 Pro Forma Financial Statements..........................A-74
6.20 Termination of Certain Company Executive Officers.......A-75
A-3
Page
----
Article VII Conditions....................................................A-75
7.1 Conditions to Each Party's
Obligation to Consummate the Merger.....................A-75
7.2 Conditions to Obligation of Parent and Purchaser to
Consummate the Merger...................................A-76
7.3 Conditions to Obligations of the Company to Consummate
the Merger subject to Section 3.6.......................A-77
Article VIII Termination..................................................A-78
8.1 Termination by Mutual Consent...........................A-78
8.2 Termination by Either Parent or Company.................A-78
8.3 Termination by the Company..............................A-79
8.4 Termination by Parent...................................A-79
8.5 Right to Terminate......................................A-80
8.6 Effect of Termination and Abandonment; Termination Fee..A-80
8.7 Termination Fees and Expenses...........................A-81
8.8 Extension; Waiver.......................................A-82
Article IX General Provisions.............................................A-83
9.1 Nonsurvival of Representations and Warranties...........A-83
9.2 Notices.................................................A-83
9.3 Assignment; Binding Effect; No Third-Party
Beneficiaries.........................................A-84
9.4 Entire Agreement........................................A-84
9.5 Governing Law...........................................A-84
9.6 Jurisdiction and Venue..................................A-84
9.7 Waiver of Jury Trial....................................A-85
9.8 Fee and Expenses........................................A-85
9.9 Headings; Interpretation................................A-85
9.10 Amendment; Waivers......................................A-85
9.11 Severability............................................A-85
9.12 Parent Actions..........................................A-86
9.13 Remedies................................................A-86
9.14 Execution...............................................A-86
9.15 Date for Any Action.....................................A-86
9.16 Counterparts............................................A-86
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INDEX OF SCHEDULES AND EXHIBITS
Schedule I Total Consideration
Adjustments
Schedule II Schedule of Production
Company Disclosure Schedule
Parent Disclosure Schedule
Schedule III Material Consents
Schedule 6.15 Subsidiaries to be Liquidated
Exhibit A Form of Affiliate Letter
Exhibit B Holders of Eligible Options
Exhibit C Form of Shareholder Agreement
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AGREEMENT AND PLAN OF MERGER
Agreement and Plan of Merger (this "Agreement"), dated as of August 29,
2003, by and among Armor Holdings, Inc., a Delaware corporation ("Parent"), AHI
Bulletproof Acquisition Corp., an Arizona corporation and a wholly-owned
subsidiary of Parent ("Purchaser"), and Simula, Inc., an Arizona corporation
(the "Company").
RECITALS
WHEREAS, the Company is engaged in the businesses of designing,
manufacturing, marketing, selling and licensing various military, public safety,
civilian and/or commercial safety systems products and technologies to, and
providing related services to, various industries, including but not limited to
the defense, aviation, aerospace, marine and automotive industries; and
WHEREAS, the respective boards of directors of Parent, Purchaser and
the Company each have approved and declared advisable this Agreement and the
merger of Purchaser with and into the Company (the "Merger"), upon the terms and
subject to the conditions set forth in this Agreement, whereby each issued and
outstanding share of common stock, par value US$.01 per share, of the Company
(the "Company Common Stock"), other than shares of Company Common Stock owned by
Parent, Purchaser or the Company, will be converted into the right to receive
common stock, par value US$.01 per share, of Parent ("Parent Common Stock")
and/or cash as provided herein; and
WHEREAS, Parent, Purchaser and the Company desire to make certain
representations, warranties, covenants and agreements in connection with the
Merger and also to prescribe various conditions to the Merger; and
NOW, THEREFORE, in consideration of the foregoing, and of the
representations, warranties, covenants and agreements contained herein, the
parties hereto hereby agree as follows:
ARTICLE I
DEFINITIONS
1.1 Definitions. In addition to terms defined elsewhere in this
Agreement, the following terms when used in this Agreement shall have the
meanings indicated below.
"Affiliate" shall mean, with respect to any Person, a Person that
directly or indirectly, through one or more intermediaries, controls, is
controlled by, or is under common control with such Person. For the purposes of
this definition and this Agreement, neither the Company nor any of its
Subsidiaries shall be deemed to be an Affiliate of Parent, Purchaser, or any of
their Subsidiaries, and none of the Parent, Purchaser, or any of their
respective Subsidiaries, shall be deemed to be an Affiliate of the Company or
any of its Subsidiaries.
"Affiliate Letter" shall have the meaning set forth in Section 3.4(b).
A-6
"Agreement" shall have the meaning set forth in the Preamble to this
Agreement.
"Allied Debt" shall mean the indebtedness evidenced by the Company's
US$25 million Senior Secured Note, dated September 26, 2001, and due December
31, 2003 (subject to acceleration of maturity or mandatory prepayment), issued
to Allied Capital Corporation.
"Alternative Transaction" shall mean a transaction involving a merger,
consolidation, recapitalization, reorganization or other business combination of
the Company or any material Subsidiary of the Company with any Person (other
than the Parent or the Purchaser), an acquisition involving all or a significant
part of the capital stock or assets of the Company or any material Subsidiary of
the Company by any Person (other than the Parent or the Purchaser), or a
material debt or equity investment (including debt convertible into equity) in
the Company or any material Subsidiary of Company, other than relating to the
sale, monetization or licensing of rights to use the Company's Cleargard(R)
transparent polyurethane polymer (and/or related technologies or products) that
is entered into in compliance with Section 6.2 of this Agreement. An
"Alternative Transaction" shall not include any refinancing permitted by Section
6.1(d)(i).
"AMEX" shall mean the American Stock Exchange, or any successor
exchange.
"Ancillary Document" shall mean any agreement or document executed and
delivered by the Company, on the one hand, or either of Parent or Purchaser (or
both), on the other, in connection with or pursuant to the provisions of this
Agreement or in connection with the consummation of the Merger.
"Applicable Law" shall mean, with respect to any Person, any
international, national, regional, state or local treaty, statute, law,
ordinance, rule, administrative action, regulation, order, writ, injunction,
judgment, decree or other requirement of any Governmental Authority and any
requirements imposed by common law or case law, applicable, through the date of
this Agreement or through the Closing Date, as applicable, to such Person or any
of its properties, assets, officers, directors, employees, consultants or agents
(in connection with their activities on behalf of such Person or any of its
Affiliates). Applicable Law includes, without limitation, Environmental Laws.
"Arizona Code" shall have the meaning set forth in Section 2.1.
"Arizona Real Estate" shall mean Company Owned Property consisting of
parcel(s) of vacant land adjacent to the Simula Technology Center and identified
as being currently subject to a contract of sale and in escrow in Section
4.18(a) of the Company Disclosure Schedule.
"Articles of Merger" shall have the meaning set forth in Section 2.3.
"ASD Transaction" shall mean the transactions contemplated by that
certain Asset Purchase Agreement, made as of June 11, 2003, by and among Zodiac
US Corporation, a Delaware corporation ("Zodiac"), the Company, and Simula
Automotive Safety Devices, Inc., an Arizona corporation ("ASD"), in which the
Company caused to be sold and transferred to Zodiac and certain Affiliates of
Zodiac, and Zodiac and certain Affiliates of Zodiac purchased and assumed,
substantially all of the assets and certain liabilities of ASD and Simula
Automotive
A-7
Safety Devices, Limited, a limited liability company incorporated in England and
Wales ("ASD UK").
"best efforts", "reasonable best efforts", "commercially reasonable
best efforts" and "commercially reasonable efforts", and any variations of such
terms, when utilized in this Agreement or in any of the Ancillary Documents,
shall mean, with respect to any Person obligated to fulfill, perform or satisfy
a related covenant, duty or obligation, that the level of effort required of
such obligated Person with respect to fulfilling, performing or satisfying such
related covenant, duty or obligation is the lawful efforts that a reasonable
business entity would undertake or make in good faith under similar
circumstances in light of commonly accepted commercial practices which afford
all parties to the transaction or agreement fair treatment, but shall require
such obligated Person to expend only that amount of funds that a reasonable
business Person would expend to achieve the desired result or effect.
"Budget and Forecast" shall mean the Company's budget and forecast
provided to the Parent on August 29, 2003.
"Business Day" shall mean any day on which the principal offices of the
SEC in Washington, D.C. are open to accept filings, or, in the case of
determining a date when any payment is due, any day on which banks are not
required or authorized by Applicable Law or executive order to close in the
state of New York.
"Cash Consideration Percentage" shall mean a percentage designated by
the Parent in a written notice to the Company, given not later than the Merger
Consideration Calculation Time, which percentage shall not be less than 20%;
provided, however, that the Parent may at any time prior to the Effective Time
revoke any prior written notice to the Company designating such percentage as
the Cash Consideration Percentage provided that the Parent, pursuant to such
written notice of revocation to the Company, designates the Cash Consideration
Percentage to be one hundred percent (100%), which such subsequent designation
shall be irrevocable.
"Change in the Company Recommendation" shall have the meaning set forth
in Section 6.3(b).
"CIT Debt" shall mean the indebtedness evidenced by the Revolving Line
of Credit extended by CIT Group, Inc. to the Company, currently due September
30, 2003 (subject to acceleration of maturity or mandatory prepayment).
"Closing" shall have the meaning set forth in Section 2.2.
"Closing Date" shall have the meaning set forth in Section 2.2.
"Closing Date Payments" shall mean the Debt Pay-Off Amount plus the
amount of any Company's Transaction Fees.
"COBRA" shall mean the Consolidated Omnibus Reconciliation Act of 1985.
"Code" shall mean the Internal Revenue Code of 1986.
A-8
"Company Benefit Plan" shall have the meaning set forth in Section
4.11.
"Company Common Stock" shall have the meaning set forth in the recitals
to this Agreement.
"Company Common Stock Certificates" shall have the meaning set forth in
Section 3.4(a).
"Company Disclosure Schedule" shall have the meaning set forth in the
preamble to Article IV.
"Company's Failure to Ship" shall mean the failure of the Company to
ship Monitored Products due to circumstances that are reasonably under the
Company's control, such as manufacturing delays and the failure to procure
sufficient raw materials from suppliers (other than suppliers which are the sole
suppliers of such raw materials or with whom the Company is contractually
obligated to exclusively purchase such raw materials), but, for the avoidance of
doubt, excluding any circumstances that constitute a Force Majeure.
"Company Intellectual Property" shall have the meaning set forth in
Section 4.13(b).
"Company Leased Property" shall have the meaning set forth in Section
4.18(a).
"Company Leases" shall have the meaning set forth in Section 4.18(a).
"Company MAC" shall have the meaning set forth in the preamble to
Article IV.
"Company Owned Property" shall have the meaning set forth in Section
4.18(a).
"Company Real Property" shall have the meaning set forth in Section
4.18(a).
"Company Permits" shall have the meaning set forth in Section 4.14.
"Company Preferred Stock" shall have the meaning set forth in Section
4.4(a).
"Company Reports" shall have the meaning set forth in Section 4.7(a).
"Company" shall have the meaning set forth in the Preamble to this
Agreement.
"Company Litigation" shall have the meaning set forth in Section 4.8.
"Company Material Contracts" shall have the meaning set forth in
Section 4.16.
"Company Shareholder Approval" shall have the meaning set forth in
Section 4.2.
"Company Termination Notice" shall have the meaning set forth in the
preamble to Article V.
"Company's Transaction Fees" shall mean the aggregate amount of any
(without duplication) out-of-pocket costs, fees, or expenses incurred by the
Company in connection with
A-9
the negotiation and preparation of this Agreement and the consummation of the
Merger with respect to which the Company has control over such costs, fees or
expenses but which remain unpaid by the Company as of the Merger Consideration
Calculation Time, including, but not limited to:
(i) all fees and expenses payable by the Company to the Company's
Financial Advisors;
(ii) all of the Company's proxy solicitation fees and expenses, SEC
filing fees, and printing costs;
(iii) all of the Company's legal fees and expenses (including any
filing fees relating to the HSR Act or any Non-US Anti-Trust Law to the
extent the Company is required to pay such fees pursuant to Section
6.4(g));
(iv) all of the Company's management change of control contract
payments, retention bonuses (with respect to agreements in effect at
the Merger Consideration Calculation Time, whether or not due and
payable before or after the Closing Date) and severance payments (other
than any amounts related to the Omitted Restructuring Costs), including
any Tax gross-up amounts and excise Taxes payable by the Company
resulting from such payments (other than any amounts related to the
Omitted Restructuring Costs), in each case where such payments were
initiated as a result of the Company's actions prior to the Merger
Consideration Calculation Time at the Company's sole discretion
(excluding any severance payments or charges relating to the
termination of any employees of the Company resulting from the Merger
or after the Merger Consideration Calculation Time);
(v) all of the Company's fees and expenses relating to the Company's
due diligence investigation of the Parent and Purchaser;
(vi) all of the Company's accounting fees and expenses; and
(vii) all of the fees and expenses of the Company's Tax advisors and
consultants (but not including any liability for Taxes nor any fees and
expenses incurred by the Company in connection with the 338(g) Election
and the preparation and filing of the 338(g) Election Form).
The fees and expenses set forth in items (i), (ii) (except with respect
to SEC filing fees), (iii), (v) (with respect to fees and expenses in excess of
US$10,000, individually, or US$50,000 in the aggregate), (vi) and (vii) of this
definition shall be as set forth on a final invoice or invoices submitted by the
Company to the Parent immediately prior to the Merger Consideration Calculation
Time, which invoice or invoices shall set forth all of the Company's Transaction
Fees (a) actually incurred through the close of business on such date and which
remain unpaid by the Company through the close of business on such date, (b)
reasonably estimated by the Company to be incurred by the Company following the
Merger Consideration Calculation Time and prior to the Effective Time, and (c)
reasonably estimated by the Company to be incurred by the Company after the
Effective Time, all of which shall have been reviewed and approved by the
Company at the time of delivery of such invoice or invoices.
A-10
"Company Updates" shall have the meaning set forth in the preamble to
Article IV.
"Copyright" shall have the meaning set forth in the definition of
"Intellectual Property".
"Deadline Date" shall have the meaning set forth in Section 8.2(a).
"Debt Pay-Off Amount" shall mean, without duplication of any amounts
which will reduce the Total Consideration pursuant to Sections 3.3(a) or 3.3(b)
and as described in Part B of Schedule I hereto, an amount equal to the
aggregate outstanding principal of the Funded Indebtedness, and all accrued, but
unpaid (x) interest, fees, charges, lender make-whole payments, prepayment
penalties, and other penalties on the Funded Indebtedness, and (y) costs, fees,
and expenses incurred (after the date of this Agreement and prior to the Merger
Consideration Calculation Time) in connection with any refinancing of the Funded
Indebtedness, calculated as of the Merger Consideration Calculation Time and as
reasonably estimated through the Closing Date in accordance with Section 3.3(b),
less the aggregate amount of any cash in any bank accounts or bank lock boxes of
the Company or any of its Subsidiaries as of the close of business at the Merger
Consideration Calculation Time.
"Disclosure Materials" shall have the meaning set forth in Section
5.13.
"Divestiture Agreements" shall have the meaning set forth in Section
4.16(a).
"DOJ" shall mean the Department of Justice of the United States, or any
successor department thereto.
"Effective Time" shall have the meaning set forth in Section 2.3.
"8% Notes" shall mean the Company's 8% Senior Subordinated Convertible
Notes due May 1, 2004 (subject to acceleration of maturity or mandatory
prepayment).
"8% Notes Debt" shall mean the indebtedness evidenced by the 8% Notes.
"Eligible Option" shall have the meaning set forth in Section
3.3(a)(ii).
"Eligible Option Exercise Proceeds" shall mean the aggregate exercise
price of all Eligible Options plus the aggregate unpaid purchase price for any
shares of Company Common Stock issuable pursuant to the terms and conditions of
the ESPP pursuant to Section 3.3(d)(ii).
"Encumbrance" shall mean any claim, lien, charge, security interest,
pledge, mortgage, or any other restriction or encumbrance of any kind or nature.
"Environmental Claim" means any claim, order, investigation, action,
suit, proceeding, injunction, demand, citation, summons, directive, fine,
penalty, assessment or violation of or under any Environmental Laws or relating
to any Environmental Matters, including, without limitation, any claim, order,
investigation, action, suit, proceeding, injunction, demand, citation, summons,
directive, fine, penalty, assessment or violation brought or issued by any
Governmental Authority, and any notice, whether oral or written, advising the
applicable Person
A-11
of any of the foregoing or of any fact, event or condition which could
reasonably be the basis for the assertion of any of the foregoing.
"Environmental Law" shall mean all applicable laws, statutes,
enactments, orders, regulations, rules and ordinances of any Governmental
Authority relating to Environmental Matters, including, without limitation (as
applicable), the Comprehensive Environmental Response, Compensation and
Liability Act (42 U.S.C.(Section)9601 et seq.), the Hazardous Materials
Transportation Act (49 U.S.C. App. (Section)1801 et seq.), the Resource
Conservation and Recovery Act (42 U.S.C.(Section)6901 et seq.), the Clean Water
Act (33 U.S.C. (Section)1251 et seq.), the Clean Air Act (42 U.S.C.(Section)7401
et seq.), the Toxic Substances Control Act (15 U.S.C.(Section)2601 et seq.) and
the Occupational Safety and Health Act, 29 U.S.C.(Section)653 et seq.
"Environmental Lien" shall mean any Encumbrances (except for Permitted
Encumbrances), whether recorded or unrecorded, in favor of any Governmental
Authority, relating to any liability of the Company or any of its Subsidiaries
with respect to an Environmental Claim.
"Environmental Matters" means any matter arising out of or relating to
pollution or protection of human health, safety, the environment, natural
resources or laws relating to releases or threatened releases of Hazardous
Substances into the indoor or outdoor environment (including, without
limitation, ambient air, surface water, groundwater, land, surface and
subsurface strata) or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, release, transport or handling of
Hazardous Substances.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974.
"ERISA Affiliate" shall mean any Person which is a member of the same
"controlled group of corporations," under "common control" or an "affiliated
service group" with any other Person within the meanings of Sections 414(b), (c)
or (m) of the Code, or required to be aggregated with such Person under Section
414(o) of the Code, or is under "common control" with such Person, within the
meaning of Section 400l(a)(14) of ERISA.
"Escrow Agent" shall mean The Bank of New York, in its capacity as
escrow agent pursuant to the Escrow Agreement.
"Escrow Agreement" shall mean that certain Escrow Agreement, dated July
23, 2003, by and among the Parent, the Company, and The Bank of New York.
"Escrow Release Letter" shall have the meaning set forth in Section
6.14.
"ESPP" shall have the meaning set forth in Section 3.3(d)(ii).
"Exchange Act" shall mean the Securities Exchange Act of 1934.
"Exchange Agent" shall have the meaning set forth in Section 3.4(a).
"Exchange Fund" shall have the meaning set forth in Section 3.4(a).
A-12
"Failure Rate" shall mean the quotient of (a) the total number of units
of such Monitored Product delinquent due to the Company's Failure to Ship within
any Production Period during the Total Production Period in accordance with the
Schedule of Production divided by (b) the total number of units of such
Monitored Product scheduled to be shipped during the Total Production Period,
with the resulting quotient multiplied by 100 and expressed as a percentage.
"Financial Advisor" shall have the meaning set forth in Section 4.19.
"Force Majeure" shall mean, with respect to any Person, changes,
effects, circumstances or delays arising from war, riots, embargo, acts of God,
insurrections, floods, common carrier transportation disruptions (for which no
other commercially reasonable transportation is available), fires, explosions,
acts of terrorism or other catastrophes beyond the control of and without the
fault of such Person.
"Form S-4" shall have the meaning set forth in Section 4.26.
"FTC" shall have the meaning set forth in Section 6.4(c).
"Funded Indebtedness" shall mean, collectively: (a) the CIT Debt, the
Allied Debt, the 8% Notes Debt, the 9 1/2% Notes Debt, and the Rosestone Debt,
together with any refinancings thereof entered into by the Company or any of its
Subsidiaries prior to the Merger Consideration Calculation Time; (b) any
additional indebtedness for borrowed money or capital leases entered into by the
Company or any of its Subsidiaries after June 30, 2003, and prior to the Merger
Consideration Calculation Time; and (c) any financing of insurance premiums
incurred by the Company or any of its Subsidiaries after June 30, 2003, and
prior to the Merger Consideration Calculation Time (without duplication of any
amounts which will reduce the Total Consideration pursuant to Section 3.3(a) and
as described in Part B of Schedule I hereto).
"GAAP" shall mean United States generally accepted accounting
principles, as in effect from time to time.
"Governmental Authority" shall mean any domestic, international,
national, territorial, regional, state or local governmental authority,
quasi-governmental authority, instrumentality, court, commission, arbitrator or
arbitration panel, or tribunal, or any regulatory, administrative or other
agency, or any political or other subdivision, department or branch of any of
the foregoing.
"Governmental Contract" shall mean any contract with any Governmental
Authority, any branch of the U.S. or foreign military, or any police or fire
department or other first responder, and any contractor, subcontractor, or
supplier of any of the foregoing.
"Hazardous Substances" means any chemicals, materials or substances
which are defined or regulated as dangerous, toxic, explosive, corrosive,
flammable, infectious, radioactive, carcinogenic, mutagenic or otherwise
hazardous or as a pollutant or contaminant under any Environmental Law,
including but not limited to urea-formaldehyde, polychlorinated biphenyls,
asbestos or asbestos-containing materials, petroleum and petroleum products.
"HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements Act
of 1976.
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"Indemnified Person" shall have the meaning set forth in Section
6.8(a).
"Indemnified Losses" shall have the meaning set forth in Section
6.8(a).
"Intellectual Property" shall mean any United States, foreign,
international and state patents and patent applications, industrial design
registrations, certificates of invention and utility models (collectively,
"Patents"); material unregistered trademarks and service marks, trademark and
service mark registrations and applications, material trade names and general
intangibles of like nature, together with all goodwill related to the foregoing
(collectively, "Trademarks"); material Internet domain names; material
unregistered copyrights, and copyright registrations and applications
(collectively, "Copyrights"); Software, technology, trade secrets and other
confidential information, know-how, proprietary processes, formulae, algorithms,
models and methodologies (collectively, "Trade Secrets").
"Knowledge", "know", "known", "to the knowledge of", and all variations
thereof and other words of similar meaning, whether or not capitalized, when
used with respect to:
(a) the Company or any of its Subsidiaries, shall be deemed to refer to
the (i) actual knowledge and/or awareness of Bradley P. Forst, Joseph
W. Coltman and John Jenson, after due inquiry; and (ii) the actual
knowledge and/or awareness of the following officers and employees of
the Company and its Subsidiaries, after due inquiry of any current
employees of the Company and its Subsidiaries who report to any of the
following officers and employees of the Company and its Subsidiaries:
Larry Noble, Tom Riggs, Michael Haerle, Donald Dutton, Val Horvatich,
Ken Bauman, William H. Rogers, John P. Olson, Joe Shane, Mick Horton,
and Mark Cavanaugh; provided that in each case, with respect to the
directors, officers and employees of the Company and its Subsidiaries
listed in this item (a), any knowledge acquired by any such Person
following termination of employment shall not be deemed to be actual
knowledge of any remaining director, officer, or employee of the
Company or its Subsidiaries, or the Company.
(b) the Parent, Purchaser, or any of their respective Subsidiaries,
shall be deemed to refer to the (i) actual knowledge and/or awareness
of Warren B. Kanders and Robert R. Schiller and after due inquiry; and
(ii) actual knowledge and/or awareness of the following officers and
employees of the Parent and its Subsidiaries, after due inquiry of any
current employees of the Parent and its Subsidiaries who report to any
of the following officers and employees of the Parent and its
Subsidiaries: Phil Baratelli, Steven Croskrey, Gary Allen, Glenn Heiar,
Dennis Lang, David Rummell, Tony Russell, Robert Mecredy, and Tony
Crayden and the following consultant to the Parent and its
Subsidiaries: Gary Julien; provided that in each case, with respect to
the directors, officers and employees of the Parent and its
Subsidiaries listed in this item (b), any knowledge acquired by any
such Person following termination of employment shall not be deemed to
be actual knowledge of any remaining director, officer, or employee of
the Parent or its Subsidiaries, or the Parent.
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"Material Adverse Change" shall mean, when used with respect to:
(a) the Company or any of its Subsidiaries, any change in the condition
(financial or otherwise), results of operations, assets, liabilities,
properties or business of the Company, or any of its Subsidiaries,
which individually or in the aggregate (taking into account all other
such changes), materially and adversely affects, or is reasonably
likely to materially and adversely affect, the condition (financial or
otherwise), results of operations, assets, liabilities, properties or
business of the Company and its Subsidiaries, taken as a whole,
including, but not limited to:
(i) the termination or amendment of any written contract,
purchase order, or customer order to which the Company or any
of its Subsidiaries is a party as of the date hereof for any
reason (including the failure to obtain, prior to the
Effective Time, the consent of any party thereto other than
the Company or any of its Subsidiaries which is required to be
obtained by the terms of such contract as a result of the
consummation by the Company of the transactions contemplated
by this Agreement or the Ancillary Documents, including the
Merger), but excluding a Governmental Authority's exercise of
a non-appropriation clause contained in any such contract for
products (other than spare parts) to be provided by or
services to be rendered by the Company or any of its
Subsidiaries after the date hereof, which terminations or
amendments, individually or in the aggregate, are reasonably
likely to result in a loss of anticipated Company revenues
from the date hereof through December 31, 2004, (net of the
anticipated aggregate amount of Company revenues from the date
hereof through December 31, 2004, that are reasonably likely
to result from any new written contracts, purchase orders, or
customer orders entered into or received by the Company or any
of its Subsidiaries from the date hereof through the Effective
Time (but excluding spare parts and the Army SAPI Bid), which
revenues were not included in the Budget and Forecast for the
period beginning on the date hereof and continuing through
December 31, 2004), in excess of US$10,000,000; or
(ii) The Failure Rate with respect to any Monitored Product
scheduled for shipment during the Total Production Period
shall exceed twenty five percent (25%), determined as of the
last day of the Total Production Period; or
(iii) Army SAPI MAC shall mean the occurrence of all of the
following prior to the Closing Date:
(A) receipt by the Company or any of its Subsidiaries
prior to the Closing Date of official notice
("Company Non-Selection Notice", a copy of which
shall promptly be delivered to Parent) from the Army
SAPI Contracting Organization pursuant to FAR 15.506
that, for any reason, the bid of the Company or any
of its Subsidiaries is not in the competitive range
and has received no portion of an award with respect
to Army SAPI Bid (DSCP Solicitation Number
SP0100-03-R-0007, such Solicitation being referred to
as the "Army SAPI Bid"); and
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(B) receipt by Parent or any of its Subsidiaries
prior to the Closing Date of official notice ("Parent
Non-Selection Notice", a copy of which shall promptly
be delivered to Company) from the Army SAPI
Contracting Organization pursuant to FAR 15.506 that,
for any reason, the bid of the Parent or any of its
Subsidiaries is not in the competitive range and has
received no portion of an award with respect to the
Army SAPI Bid; and
(C) in the event that (A) and (B) above occur, the
Parent shall have the right to declare a Material
Adverse Change and terminate the Merger Agreement by
written notice to the Company ("MAC Termination
Notice"), given within three Business Days following
the later of receipt by Parent of a copy of the
Company Non-Selection Notice and the Parent
Non-Selection Notice, such termination to be
effective on the third Business Day following the
date the MAC Termination Notice is given to the
Company; provided, however, (i) the Company may
deliver to Parent a notice in writing that the Parent
shall delay the effective date of the MAC Termination
Notice for a period of fifteen (15) days, without
prejudice of the rights of the Parent hereunder, in
order to allow the Company to investigate the
official reason for the Army SAPI Contracting
Organization issuance of the Company Non-Selection
Notice; and (ii) within such fifteen (15) day period
the Company shall provide to the Parent information
provided by the Army SAPI Contracting Organization
obtained by the Company at the formal debriefing, as
well as actions proposed by the Company intended to
remedy the determination of the Army SAPI Contracting
Activity that the Company was not in the competitive
range, and/or to obtain future awards from the Army.
The Parent may, upon review of the information
provided by the Company, in Parent's sole discretion,
either a) waive the Material Adverse Change and
withdraw its MAC Termination Notice and consummate
the Merger in accordance with the Merger Agreement,
b) reaffirm its MAC Termination Notice and terminate
the Merger Agreement forthwith, or c) if acceptable
to the Company delay the effective date of the MAC
Termination Notice for such additional period as
Parent, in it's sole discretion, may determine to
allow the Company to remedy the Company
Non-Selection, and
(D) notwithstanding (A), (B), or (C), any delay in
making an award with respect to the Army SAPI Bid
beyond the Closing Date, any expiration of the Army
SAPI Bid prior to the Closing Date, or any
re-solicitation of the Army SAPI Bid prior to the
Closing Date, shall not, of itself, constitute a
Material Adverse Change.
or
(b) the Parent, Purchaser, or any of their respective Subsidiaries, any
change in the condition (financial or otherwise), results of
operations, assets, liabilities, properties or business of the Parent,
Purchaser, or any of their respective Subsidiaries, which individually
or in the aggregate (taking into account all other such changes),
materially
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and adversely affects, or is reasonably likely to materially and
adversely affect, the condition (financial or otherwise), results of
operations, assets, liabilities, properties or business of the Parent,
Purchaser, and their respective Subsidiaries, taken as a whole;
provided that a Material Adverse Change:
(1) shall not be deemed to have occurred with respect to the Company or
any of its Subsidiaries with respect to or relating to any matter which
is the subject of paragraphs (a)(i), (a)(ii) or (a)(iii) above unless
and until the specific circumstances outlined above in paragraphs
(a)(i), (a)(ii) or (a)(iii) occur and constitute a Material Adverse
Change or when aggregated together with any other breach of any
representation, warranty, covenant, or agreement by the Company,
otherwise constitutes a Material Adverse Change with respect to the
Company; and
(2) shall not (with respect to any Person or any of its Subsidiaries)
include any change, effect, condition, event or circumstance occurring
after the date hereof arising out of or attributable to:
(aa) any decrease in the market price of a Person's securities
in and of itself (but not any change, effect, conditions,
event or circumstance underlying such decrease to the extent
that it would otherwise constitute a Material Adverse Change);
(bb) changes, effects, conditions, events or circumstances
that generally affect any of the defense, aviation (military,
public safety, civilian, or commercial), aerospace (military,
public safety, civilian, or commercial), marine (military,
public safety, civilian, or commercial), automotive or ground
vehicle (military, public safety, civilian, or commercial) or
personnel (military, public safety, civilian, or commercial)
safety systems industries of which the Person is a member
(including legal and regulatory changes) (provided that any
such change, effect or circumstance does not affect the
affected Person in a materially disproportionate manner);
(cc) general economic conditions or changes, effects,
conditions, or circumstances affecting the financial markets
(provided that any such change, effect or circumstance does
not affect the affected Person in a materially
disproportionate manner);
(dd) general economic conditions or changes, effects,
conditions, or circumstances arising from a Force Majeure and
which are not primarily limited in their effect to such
Person's operations, assets, liabilities, properties or
business (provided that any such change, effect or
circumstance does not affect the affected Person in a
materially disproportionate manner);
(ee) changes to the affected Person which the affected Person
successfully bears the burden of demonstrating arose primarily
(or with respect to paragraph (a) (iii), solely) from the
announcement or performance of this Agreement; or
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(ff) the actions of any Person (or their Subsidiaries,
Affiliates, or any of their respective Representatives), who
is a party to this Agreement and who claims that a Material
Adverse Change has occurred with respect to any other Person
(who is not a Subsidiary or Affiliate of the Person claiming
that a Material Adverse Change has occurred but who is also a
party to this Agreement), which leads to or precipitates any
such change, effect, condition, event or circumstance,
directly or indirectly, that would constitute a Material
Adverse Change ("Precipitating Conduct"), provided however,
that Precipitating Conduct shall not include fair and lawful
competition in the ordinary course of its business unless the
affected Person successfully bears the burden of demonstrating
that such competition by the non-affected Person was unfair,
unlawful or materially violated any agreement between the
affected Person (or any of its Subsidiaries) and the
non-affected Person (or any of its Subsidiaries);
provided, however, the foregoing provisos (2)(aa) - (2)(ee), inclusive, shall
not apply to paragraph (a)(ii) of this definition and the foregoing provisos
(2)(aa) - (2)(dd), inclusive, shall not apply to paragraphs (a)(i) or (a)(iii)
of this definition.
"Material Adverse Effect" shall mean any event or condition of any
character which results in, has resulted in, or could reasonably be expected to
result in, a Material Adverse Change on the condition (financial or otherwise),
results of operations, assets, liabilities, properties, or business of a Person
and its Subsidiaries, taken as a whole, or would prevent or unreasonably delay
consummation of the transactions contemplated hereby.
"Merger" shall have the meaning set forth in the in the recitals to
this Agreement.
"Merger Consideration" shall have the meaning set forth in Section
3.3(a)(i).
"Merger Consideration Calculation Time" shall mean 5:00 p.m. (Phoenix
time) on the day that is five (5) Business Days prior to the anticipated Closing
Date.
"Monitored Products" shall mean the SAPI-Marines, SAPI-Army (other than
with respect to the Army SAPI Bid), Seats (Cockpit and Troop), and Cockpit
Airbag Systems ("CABS") product lines of the Company (but excluding in all cases
spares).
"9 1/2% Notes Debt" shall mean the indebtedness evidenced by the 9 1/2%
Notes.
"9 1/2% Notes" shall mean the Company's 9 1/2% Senior Subordinated
Notes due September 30, 2003 (subject to acceleration of maturity or mandatory
prepayment).
"Non-U.S. Anti-Trust Law" shall mean any anti-trust or similar law of
any Governmental Authority (other than a Governmental Authority within the
United States), including Article 6(1)(b) or 8(2) of Council Regulation No.
4064/89 of the European Community.
"NYSE" shall mean the New York Stock Exchange, or any successor
exchange.
"O&D Tail Insurance" shall have the meaning set forth in Section
6.8(b)(i).
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"Option Cancellation Agreement" shall have the meaning set forth in
Section 3.3(a)(ii).
"Option Plan(s)" shall have the meaning set forth in Section
3.3(a)(ii).
"Outstanding Company Shares" shall mean the total number of issued and
outstanding shares of Company Common Stock immediately prior to the Effective
Time plus the total number of shares of Company Common Stock deemed to be issued
upon exercise of all Eligible Options plus the total number of shares of Company
Common Stock deemed to be issued in connection with the ESPP.
"Parent" shall have the meaning set forth in the Preamble to this
Agreement.
"Parent Average Trading Price" shall be the mean of the average between
the bid and the ask price of Parent Common Stock on the NYSE (as reported on the
NYSE Composite Tape) at the close of the market for the twenty (20) consecutive
trading days ending ten (10) trading days prior to the Closing Date.
"Parent Common Stock Consideration Percentage" shall mean 100% less the
Cash Consideration Percentage.
"Parent Common Stock" shall have the meaning set forth in the recitals
to this Agreement.
"Parent-Company Confidentiality Agreement" shall mean the
Confidentiality Agreement, dated January 28, 2003, between the Parent and the
Company.
"Parent Disclosure Schedule" shall have the meaning set forth in the
preamble to Article V.
"Parent Litigation" shall have the meaning set forth in Section 5.7.
"Parent MAC" shall have the meaning set forth in the preamble to
Article V.
"Parent Preferred Stock" shall have the meaning set forth in Section
5.4(a).
"Parent Reports" shall have the meaning set forth in Section 5.6.
"Parent Specified Line of Business" shall mean (i) the provision of
security products, training or services to civilian and military law enforcement
agencies and corrections departments, homeland security providers, U.S. and
foreign militaries, Governmental Authorities, non-governmental organizations,
fire departments and other first responders; and (ii) the provision of vehicle
armoring systems to individuals, companies and the other Persons described in
(i) above.
"Parent Termination Notice" shall have the meaning set forth in the
preamble to Article IV.
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"Parent Transaction Expenses" shall mean the aggregate amount (without
duplication) of all reasonable, documented, out-of-pocket costs, fees, or
expenses incurred by the Parent in connection with the negotiation and
preparation of this Agreement and the consummation of the Merger and with
respect to which Parent has control over such costs, fees and expenses, all as
such costs, fees or expenses shall have been incurred by the Parent commencing
on July 23, 2003, and ending on the earlier to occur of (a) termination of this
Agreement or (b) acceptance by the Company of an Unsolicited Offer:
(i) the reasonable, documented, out-of-pocket expenses incurred by
Wachovia Securities, Inc. in connection with the negotiation and
preparation of this Agreement and the consummation of the Merger (other
than the expenses generally described in item (ii) below), which are
reimbursable to such investment advisor by Parent pursuant to a binding
agreement on the Parent as of the date of this Agreement (but not any
other fees of such investment advisor, howsoever described, except as
set forth in item (ii) of this definition);
(ii) up to but not exceeding US$250,000 of the total fees of Wachovia
Securities, Inc., which are payable to such investment advisor by
Parent pursuant to a binding agreement on the Parent as of the date of
this Agreement, relating to the investment advisor's preparation of a
"fairness opinion" for the Parent relating to the Merger;
(iii) the other consulting, legal, Escrow Agent, Tax and accounting,
printing, travel, due diligence and related fees and expenses incurred
by the Parent in connection with the negotiation and preparation of
this Agreement and the consummation of the Merger (including any fees
incurred by Parent or the Purchaser pursuant to Section 6.4(g)); and
(iv) if the Company breaches its obligations under Sections 8.2(d) and
8.7 and the Parent prevails in enforcing Sections 8.2(d) and 8.7
against the Company, the Parent Transaction Expenses shall include,
without duplication, the interest, fees and expenses payable by the
Company as described in and pursuant to the terms and conditions of the
last two sentences of Section 8.7(f).
"Parent Updates" shall have the meaning set forth in the preamble to
Article V.
"Participating Company Shares" or "Participating Company Stock" shall
mean any Outstanding Company Shares other than shares of Company Common Stock,
if any, cancelled pursuant to Section 3.3(a)(iv).
"Patents" shall have the meaning set forth in the definition of
Intellectual Property.
"Permitted Encumbrances" shall mean any and all (a) Encumbrances for
Taxes and other charges or assessments of any Governmental Authority which (i)
arise by operation of Applicable Law, (ii) are not due and payable at the Merger
Consideration Calculation Time, and (iii) for which adequate reserves have been
established on the books, records, and financial statements of the Company; (b)
Encumbrances of landlords with respect to Company Leases where the Company or
any of its Subsidiaries is a lessee or tenant, and all mechanics' liens,
workmen's liens, common carrier liens, warehousemen's liens and other similar
liens or Encumbrances incurred in the ordinary course of business for sums not
yet due and payable, (c)
A-20
purchase money security interests relating to the acquisition of goods in the
ordinary course of business, (d) any and all restrictions, easements or other
imperfections of title or Encumbrances on any Real Property or other property or
asset that do not materially diminish the value thereof or materially interfere
with the use thereof in the operations of the Company or any of its
Subsidiaries, (e) any Encumbrances arising from or related to the Funded
Indebtedness or other immaterial capital leases of the Company or its
Subsidiaries, and (f) any other Encumbrances disclosed on the Company Disclosure
Schedules.
"PBGC" shall have the meaning set forth in Section 4.11(g).
"Person," whether or not capitalized, shall mean any natural person,
corporation, unincorporated organization, partnership, limited liability
company, association, joint stock company, joint venture, trust or government,
or any agency or political subdivision of any government or any other entity.
"Post Signing Returns" shall have the meaning set forth in Section
6.10(a).
"Product" shall have the meaning set forth in Section 4.25.
"Production Period" shall mean each consecutive complete two (2) week
period beginning with the two (2) week period which commences on August 31, 2003
and ends on September 13, 2003; ending with the last complete two (2) week
period ending prior to the Closing Date.
"Proxy Statement" shall have the meaning set forth in Section 4.26.
"Proxy Statement/Prospectus" shall have the meaning set forth in
Section 6.3(a).
"Purchaser" shall have the meaning set forth in the Preamble to this
Agreement.
"Regulatory Challenge" shall have the meaning set forth in Section
6.4(d).
"Regulatory Law" shall have the meaning set forth in Section 6.4(c).
"Regulatory Restrictions" shall have the meaning set forth in Section
6.4(b).
"Reporting Requirements" shall have the meaning set forth in Section
6.2(b)(xvii).
"Representatives" shall mean, with respect to any Person, any officer,
director, employee, investment banker, advisor, consultant agent or other
representative of such Person, its Subsidiaries or its Affiliates.
"Restraints" shall have the meaning set forth in Section 7.1(b).
"Rosestone Debt" shall mean the indebtedness evidenced by the Company's
US$800,000 promissory note, dated June 13, 2000, issued to Rosestone Properties,
LLC.
"RSP" shall have the meaning set forth in Section 3.3(d)(i).
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"Schedule of Production" shall mean each two week schedule of
production for any Production Period during the Total Production Period of
Monitored Products attached hereto as Schedule II and which are the subject of
binding customer agreements or purchase orders, subject to, and as modified from
time to time by, the Company hereinafter (with written notice to the Parent) as
necessary to reflect changes in planned production arising in the ordinary
course of business during the Production Period which are occasioned by delays
in production of any Monitored Products requested by any customer of the Company
with respect to such Monitored Products.
"SEC" shall mean the Securities and Exchange Commission of the United
States.
"Securities Act" shall mean the Securities Act of 1933.
"Shareholder Agreement" shall have the meaning set forth in the
Preamble to this Agreement.
"Shareholders Meeting" shall have the meaning set forth in Section 4.2.
"Software" shall mean any and all material computer programs (excluding
mass market software licensed to Company that is available in consumer retail
stores or otherwise commercially available and subject to "shrink-wrap" or
"click-through" license agreements), including any and all related (i) software
implementations of algorithms, models and methodologies, whether in source code
or object code form, (ii) databases, compilations, and any other electronic data
files, including any and all collections of data, whether machine readable or
otherwise, (iii) descriptions, flow-charts, technical and functional
specifications, and other work product used to design, plan, organize, develop,
test, troubleshoot and maintain any of the foregoing, (iv) without limitation of
the foregoing, the software technology supporting any functionality contained on
any Internet site(s), and (v) documentation, including technical, end-user,
training and troubleshooting manuals and materials, relating to any of the
foregoing.
"Subsidiary" of any specified Person shall mean any corporation fifty
percent (50%) or more of the outstanding capital stock of which, or any
partnership, joint venture, limited liability company or other entity fifty
percent (50%) or more of the ownership interests of which, is directly or
indirectly owned or controlled by such specified Person, or any such
corporation, partnership, joint venture, limited liability company, or other
entity which may otherwise be controlled, directly or indirectly, by such
Person.
"Subsidiary Liquidations" shall have the meaning set forth in Section
6.15.
"Superior Transaction" shall have the meaning set forth in Section
6.1(b).
"Surviving Corporation" shall have the meaning set forth in Section
2.1.
"Tax" or "Taxation" means any federal, state, local, or foreign income,
gross receipts, license, payroll, employment, excise, severance, stamp,
occupation, premium, windfall profits, environmental (including taxes under Code
Section 59A), customs duties, capital stock, franchise, profits, withholding,
social security (or similar), unemployment, disability, real property, personal
property, sales, use, transfer, registration, value added, alternative or add-on
A-22
minimum, estimated, or other tax of any kind whatsoever, including any interest,
penalty, or addition thereto, whether disputed or not.
"Tax Group" shall have the meaning set forth in Section 4.10(a).
"Tax Return" shall mean a report, return or other information
(including any attached schedules or any amendments to such report, return or
other information) supplied to or filed with, or required to be supplied to or
filed with, a Governmental Authority with respect to any Tax, including an
information return, claim for refund, amended return or declaration of estimated
Tax.
"Terminating Company Breach" shall have the meaning set forth in
Section 8.4(a).
"Terminating Parent Breach" shall have the meaning set forth in Section
8.3.
"Total Consideration" shall mean US$110,500,000.
"Total Production Period" shall mean the period beginning on the first
day of the first Production Period and ending on the last day of the last
Production Period.
"Trademarks" shall have the meaning set forth in the definition of
Intellectual Property.
"Trade Secrets" shall have the meaning set forth in the definition of
Intellectual Property.
"Unsolicited Offer" shall have the meaning set forth in Section 6.1(b).
"WARN Act" shall have the meaning set forth in Section 4.12.
1.2 Interpretation. For purposes of this Agreement, (i) the words
"include," "includes" and "including" shall be deemed to be followed by the
words "without limitation", (ii) the words "herein", "hereof", "hereby",
"hereto" and "hereunder" and words of similar import refer to this Agreement as
a whole, including the Exhibits and Schedules, and (iii) unless the context
clearly indicates otherwise, words describing the singular number shall include
the plural, and vice versa, and words denoting any gender shall include all
genders. Any references herein to Articles, Sections, Exhibits and Schedules
mean the Articles and Sections of, and the Exhibits and Schedules attached to,
this Agreement. Any reference herein to any agreement, instrument, report,
filing, financial statement, balance sheet, schedule, exhibit or other document
(howsoever described) means such agreement, instrument, report, filing,
financial statement, balance sheet, schedule, exhibit or other document as from
time to time amended, modified or supplemented, including (in the case of
agreements, instruments, schedules or exhibits) by waiver or consent, and all
attachments thereto and instruments incorporated therein. Any Applicable Law
defined or referred to herein (i) means, if the law is a statutory law, rule or
regulation, such statutory law, rule or regulation as from time to time amended,
modified or supplemented or replaced by succession of comparable successor
statutes, rules or regulations, in each case through the date of this Agreement
or through the Closing Date, as applicable; and (ii) includes, if the law is a
statutory law, all rules and regulations issued or promulgated thereunder. All
references to a Person are also to such Person's permitted successors and
assigns.
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ARTICLE II
THE MERGER
2.1 The Merger. At the Effective Time, upon the terms and subject to the
conditions of this Agreement and the applicable provisions of the Arizona
Business Corporation Act, A.R.S. (Sections) 10-001, et. seq. (the "Arizona
Code"), Purchaser shall be merged with and into the Company and the separate
corporate existence of Purchaser shall thereupon cease. The Company shall be the
surviving corporation in the Merger (sometimes hereinafter referred to as the
"Surviving Corporation") and shall become a wholly-owned Subsidiary of Parent.
The Merger shall have the effects specified in Section 10-1106(A) of the Arizona
Code. Without limiting the generality of the foregoing and subject thereto, at
the Effective Time, all of the property, rights, privileges, immunities, powers
and franchises of the Company and Purchaser shall vest in the Surviving
Corporation, and all debts, liabilities, and duties of the Company and Purchaser
shall become the debts, liabilities and duties of the Surviving Corporation.
2.2 The Closing. Subject to the terms and conditions of this Agreement, the
closing of the Merger (the "Closing") shall take place at the offices of Kane,
Kessler, P.C., 1350 Avenue of the Americas, New York, New York, on the third
Business Day following the date of satisfaction (or waiver, if permissible) of
the conditions set forth in Article VII (excluding conditions that, by their
terms, cannot be satisfied until the Closing Date, but subject to the
fulfillment or waiver of such conditions on the Closing Date), or at such other
time, date or place as Parent and the Company may agree. The date on which the
Closing occurs is hereinafter referred to as the "Closing Date."
2.3 Effective Time. On the Closing Date, the parties hereto shall (i) file
articles of merger with respect to the Merger (the "Articles of Merger") in such
form as is required by and executed in accordance with the Arizona Code and (ii)
make all other filings or recordings required under the Applicable Laws of the
State of Arizona in connection with the consummation of the Merger. The Merger
shall become effective at the date and time of filing of the Articles of Merger
(or at such later time which the parties hereto shall have agreed upon and
designated in such filing as the effective time of the Merger as may be
permitted by the Arizona Code) (the "Effective Time").
2.4 Articles of Incorporation, Bylaws, Directors and Officers of the
Surviving Corporation.
Unless otherwise agreed by the Company and Parent prior to the Closing,
at the Effective Time, without any further action on the part of Parent,
Purchaser or the Company:
(a) The Articles of Incorporation of the Purchaser in effect
immediately prior to the Effective Time shall be at and after the Effective Time
the Articles of Incorporation of the Surviving Corporation, until thereafter
amended as provided by Applicable Law and such Articles of Incorporation;
provided, however, that Article I of such Articles of Incorporation shall be
amended to read as follows: "The name of the corporation is Simula, Inc.";
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(b) The Bylaws of Purchaser as in effect immediately prior to the
Effective Time shall be at and after the Effective Time (until amended as
provided by Applicable Law, its Articles of Incorporation and its Bylaws, as
applicable) the Bylaws of the Surviving Corporation;
(c) The officers of the Purchaser immediately prior to the Effective
Time shall serve in their respective offices of the Surviving Corporation from
and after the Effective Time, until their successors are elected or appointed
and qualified or until their resignation or removal; and
(d) The directors of Purchaser immediately prior to the Effective Time
shall be the directors of the Surviving Corporation from and after the Effective
Time, until their successors are elected or appointed and qualified or until
their resignation or removal.
2.5 Section 338(g) Election. At the election of Parent, in its sole and
absolute discretion, the Parent may make the election provided under Section
338(g) of the Code (including under any comparable statutes in any other
jurisdiction) with respect to all Subsidiaries of the Company. Such election
(the "338(g) Election") shall be in accordance with the Code and all other
Applicable Law. In the event that the Parent elects to make the 338(g) Election,
the Parent shall give timely written notice thereof to the Company, and the
Company shall cooperate with the Parent in order to facilitate the 338(g)
Election, and the Parent shall file the appropriate IRS Form ("338(g) Election
Form"). The Parent shall specify the calculations which shall be used concerning
(i) the assets deemed purchased pursuant to the 338(g) Election contained in
this Section 2.5, (ii) the computation of the Modified Aggregate Deemed Sale
Price ("MADSP") and the Adjusted Gross-Up Base, each as defined pursuant to the
Code, and (iii) the allocation of the MADSP among the assets of the Company and
its Subsidiaries. The Parent shall choose the accounting and Tax advisors to
assist in the preparation and filing of the 338(g) Election Form. Upon
submission by the Company of proper invoices or other similar documentation
prior to the Merger Consideration Calculation Time, the Parent shall pay the
reasonable fees, costs and expenses incurred by the Company in connection with
the 338(g) Election and the preparation and filing of the 338(g) Election Form
(including reasonable advisory and consulting fees, costs and expenses), and
such amounts shall not be deducted from the Total Consideration or the Merger
Consideration.
ARTICLE III
EFFECT OF THE MERGER ON SECURITIES OF PURCHASER AND THE COMPANY
3.1 Parent Securities. Each share of capital stock of Parent issued and
outstanding immediately prior to the Effective Time shall remain issued and
outstanding from and after the Effective Time.
3.2 Purchaser Securities. At the Effective Time, each share of common
stock, par value US$.01 per share, of Purchaser that is outstanding immediately
prior to the Effective Time shall, by virtue of the Merger and without any
action on the part of the holders thereof, be
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converted into and become one validly issued, fully paid and non-assessable
share of common stock, par value US$.01 per share, of the Surviving Corporation.
3.3 Company Common Stock.
(a) Company Common Stock.
(i) At the Effective Time, each Participating Company Share
shall, by virtue of the Merger and without any action on the part of
the holder thereof, be converted into the right to receive the
following (the "Merger Consideration"):
(A) an amount of cash equal to the quotient of: (i)
the product of (a) the Total Consideration (as increased by
the amounts described in Part A of Schedule I and decreased by
the amounts described in Part B of Schedule I, as increased by
the Eligible Option Exercise Proceeds, and as decreased by the
Closing Date Payments) multiplied by (b) the Cash
Consideration Percentage, divided by (ii) the aggregate number
of Participating Company Shares; and
(B) the number of shares, or fraction thereof, of
Parent Common Stock, equal to the quotient of: (i) ((a) the
product of (1) the Total Consideration (as increased by the
amounts described in Part A of Schedule I and decreased by the
amounts described in Part B of Schedule I, as increased by the
Eligible Option Exercise Proceeds, and as decreased by the
Closing Date Payments) multiplied by (2) the Parent Common
Stock Consideration Percentage, divided by (b) the aggregate
number of Participating Average Trading Price.
(ii) At the Effective Time, each outstanding option to
purchase Company Common Stock granted under the Company's 1992 Stock
Option Plan, 1994 Stock Option Plan, and 1999 Stock Option Plan
(collectively the "Option Plans") which (a) has not previously expired
or been exercised in full and (b) has an exercise price less than the
Merger Consideration (each such option, an "Eligible Option"), whether
or not vested or exercisable on the Closing Date, shall be deemed for
the purposes of this Section 3.3 to have been exercised by "cashless
exercise" immediately prior to the Effective Time for the number of
shares of Company Common Stock issuable upon exercise of such Eligible
Option and shall have the right to receive the Merger Consideration for
each resulting Participating Company Share pursuant to Section
3.3(a)(i), subject to the deduction of applicable withholding Taxes;
and provided, that
(A) the cash portion of the Merger Consideration
payable with respect to each such Participating Company Share
shall be reduced by an amount equal to (x) the exercise price
of such Eligible Option multiplied by (y) the Cash
Consideration Percentage; and
(B) the number of shares of Parent Common Stock
issued to the holder of such Participating Company Shares as a
portion of the Merger Consideration with respect to such
Participating Company Shares held by such holder shall be
reduced by a number of shares of Parent Common Stock equal to
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the result of (x) the aggregate exercise price of all Eligible
Options held by such holder multiplied by (y) the Parent
Common Stock Consideration Percentage and divided by (z) the
Parent Average Trading Price.
No payment of Merger Consideration with respect to an
Eligible Option shall be made to the holder of such Eligible
Option until receipt by the Exchange Agent of an Option
Cancellation Agreement, in a form mutually acceptable to the
Company and the Parent ("Option Cancellation Agreement"), with
respect to all Eligible Options signed by the holder of such
Eligible Option. The Exchange Agent shall be required to
deliver to the Surviving Corporation all such executed Option
Cancellation Agreements promptly after receipt.
(iii) As a result of the Merger and without any action on the
part of the holders thereof, at the Effective Time, all shares of
Company Common Stock shall cease to be outstanding and shall be
cancelled and retired and shall cease to exist, and each holder of a
share of Company Common Stock (other than the Company, the Parent, and
the Purchaser) shall thereafter cease to have any rights with respect
to such shares of Company Common Stock, except with respect to holders
of Participating Company Shares, the right to receive, without
interest, the Merger Consideration in accordance with Section 3.3 upon
the surrender of a certificate or certificates representing such shares
of Company Common Stock (if any such certificates had been issued by
the Company with respect to such shares of Company Common Stock).
(iv) At the Effective Time, each share of Company Common Stock
held by the Parent or the Purchaser or held in the Company's treasury
at the Effective Time shall, by virtue of the Merger and without any
action on the part of the holder thereof, cease to be outstanding and
shall be cancelled and retired without payment of any Merger
Consideration or any other consideration therefor.
(v) If the aggregate number of shares of Parent Common Stock
to be delivered to any holder of Participating Company Shares as a
portion of the Merger Consideration includes any fractional shares, the
aggregate number of shares of Parent Common Stock to be delivered to
such holder of Participating Company Shares shall be rounded down to
the nearest whole number of shares of Parent Common Stock and, if so
rounded down, such holder of Participating Company Shares shall
receive, in lieu of the fractional shares not delivered due to such
rounding, a cash payment therefor pursuant to Section 3.4(e).
(b) Parent will: (i) on or after the Effective Time, pay off any and
all amounts due and owing with respect to the Funded Indebtedness, including but
not limited to the aggregate outstanding principal amount of, and all accrued,
but unpaid, interest, fees, charges and penalties on, the Funded Indebtedness,
to the holders thereof in accordance with the terms and conditions of the notes,
agreements, documents and/or instruments evidencing the Funded Indebtedness in a
timely manner when due (including any mandatory redemption thereof); and (ii) at
Closing, pay off any and all amounts of the Company's Transaction Fees which
have accrued, or are due and owing, but remain unpaid and outstanding
immediately prior to the Closing (which may include a reasonable estimate of
unbilled expenses, up to seven (7) days
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reasonably estimated legal fees prior to the Closing, and a reasonable estimate
of potential post-Closing legal fees and expenses). No later than the Merger
Consideration Calculation Time, the Company shall provide Parent with such
bills, invoices and other supporting documentation as Parent may reasonably
request in respect of the Company's Transaction Fees, and with payoff letters
from each holder of, or trustee with respect to, Funded Indebtedness (if
available from such holder or trustee or, if unavailable, in such form as
reasonably acceptable to Parent), or such other evidence acceptable to the
Parent of the aggregate outstanding amount of any portion of the Funded
Indebtedness. If a payoff letter cannot be obtained with respect to any Funded
Indebtedness, the payoff amount of such Funded Indebtedness shall be calculated
pursuant to the terms of the notes, agreements, documents, indentures, and/or
instruments evidencing such Funded Indebtedness, or after consultation with the
holders of such Funded Indebtedness.
(c) Option Plan(s).
(i) At the Effective Time, all Option Plans shall be
terminated by the Company and all Options and certificates
representing Options, if any, shall no longer be outstanding
and shall automatically be canceled and retired and shall
cease to exist, and each holder of an Option (and of a
certificate representing an Option, if any) shall cease to
have any rights with respect thereto, other than and subject
to the rights of holders of Eligible Options to receive the
Merger Consideration pursuant to Section 3.3(a)(ii).
(ii) The Company's board of directors, or any
committee appointed by the Company's board of directors to
administer the Option Plans, shall take any and all actions
reasonably required to vest and make fully exercisable all of
the Eligible Options granted under the Option Plans and to
provide all of the holders of such Eligible Options with the
right to exercise all of such Eligible Options regardless of
whether such Eligible Options were exercisable on the date of
this Agreement.
(d) Restricted Stock Plan and Employee Stock Purchase Plan.
(i) The Company's 1992 Restricted Stock Plan (the
"RSP") shall terminate.
(ii) The Company's Employee Stock Purchase Plan
adopted on June 20, 1996 (the "ESPP") shall terminate and be
liquidated. As of the Effective Time, each of the purchase
rights to purchase a share of Company Common Stock granted or
awarded under the ESPP, whether or not vested or exercisable
on the date of this Agreement, shall become fully vested and
exercised immediately prior to the Effective Time and shall be
deemed to be a Participating Company Share and retired and
converted at the Effective Time into the right to receive the
Merger Consideration pursuant to Section 3.3(a), subject to
(A) the Surviving Corporation's withholding by payroll
deduction of the unpaid purchase price therefor pursuant to
the terms and conditions of the ESPP, and (B) the deduction of
applicable withholding Taxes, if any.
3.4 Exchange of Certificates Representing Company Common Stock.
(a) On or prior to the Closing, (i) Parent shall appoint Bank of
America, N.A., to act as exchange agent (the "Exchange Agent") hereunder for
payment of the Merger
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Consideration to the holders of the Participating Company Stock upon surrender
of certificates representing any shares of Company Common Stock cancelled
pursuant to Section 3.3(a) (the "Company Common Stock Certificates") and the
delivery of Option Cancellation Agreements; and (ii) Parent shall enter into an
agreement with the Exchange Agent reasonably satisfactory to the Company which
shall provide that Parent shall deposit with the Exchange Agent as of the
Effective Time, for the benefit of the holders of Participating Company Stock,
the aggregate Merger Consideration for exchange in accordance with this Article
III through the Exchange Agent, including certificates representing the
aggregate number of whole shares of Parent Common Stock issuable pursuant to
Section 3.3 in exchange for outstanding shares of Participating Company Stock
and an amount of cash equal to the aggregate cash amount payable to the holders
of Participating Company Stock pursuant to the terms of Section 3.3 (such shares
of Parent Common Stock and cash, together with any dividends or distributions
with respect thereto with a record date after the Effective Time, being
hereinafter collectively referred to as the "Exchange Fund").
(b) Promptly after the Effective Time, Parent shall cause the Exchange
Agent to mail to each holder of record of Participating Company Stock whose
Participating Company Stock was converted into the right to receive the Merger
Consideration pursuant to Section 3.3: (i) a letter (in such form and having
such provisions as are customary for letters of this nature) specifying that
delivery of the Participating Company Stock shall be effected, and risk of loss
and title to Participating Company Stock shall pass, only upon delivery of the
Company Common Stock Certificates or Option Cancellation Agreements to the
Exchange Agent, as applicable, together with a form letter of transmittal; and
(ii) instructions for effecting the surrender of such Company Common Stock
Certificates and delivery of Option Cancellation Agreements to the Exchange
Agent in exchange for the Merger Consideration. Upon surrender of a Company
Common Stock Certificate or delivery of an Option Cancellation Agreement to the
Exchange Agent together with such letter of transmittal, duly executed and
completed in accordance with the instructions thereto, and such other documents
as may be reasonably required by the Exchange Agent, (i) the Exchange Agent
shall promptly deliver to the holder of such Participating Company Stock in
exchange therefor certificates representing that number of whole shares of
Parent Common Stock which such holder has the right to receive pursuant to the
provisions of this Article III, certain dividends or other distributions in
accordance with Section 3.4(c), and a check in the amount equal to the cash
which such holder has the right to receive pursuant to the provisions of this
Article III (including any cash in lieu of any fractional shares in accordance
with Section 3.4(e)), and (ii) such shares of Participating Company Stock so
surrendered shall forthwith be cancelled. No interest will be paid or will
accrue on the cash payable upon surrender of any Participating Company Stock. In
the event of a transfer of ownership of Company Common Stock that is not
registered in the transfer records of the Company, exchange and payment may be
made with respect to such Company Common Stock to such a transferee if the
Company Common Stock Certificate representing such shares of Company Common
Stock is presented to the Exchange Agent, accompanied by all documents required
to evidence and effect such transfer. The Parent or the Purchaser shall pay all
applicable transfer and stamp Taxes with respect to the issuance of Parent
Company Stock as payment of Merger Consideration. Until surrendered as
contemplated by this Section 3.4, each Company Common Stock Certificate shall be
deemed at any time after the Effective Time for all purposes, to represent only
the right to receive upon surrender the Merger Consideration with respect to the
shares formerly represented thereby. Notwithstanding the foregoing, Company
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Common Stock Certificates surrendered for, or Option Cancellation Agreements
delivered for, exchange by any Person constituting an "affiliate" (as that term
is used in Rule 145 under the Securities Act) of the Company shall not be
exchanged until Parent has received an Affiliate Letter in substantially the
form attached hereto as Exhibit A ("Affiliate Letter"). From and after the
Effective Time, there shall be no transfers on the stock transfer books of the
Company of the shares of Company Common Stock that were outstanding immediately
prior to the Effective Time. If, after the Effective Time, Company Common Stock
Certificates or Option Cancellation Certificates are presented to the Surviving
Corporation, they shall be cancelled and exchanged as provided in this Article
III.
(c) No dividends or other distributions with respect to Parent Common
Stock with a record date after the Effective Time shall be paid to the holder of
any unsurrendered Participating Company Stock with respect to shares of Parent
Common Stock represented thereby, and no cash which such holder has the right to
receive pursuant to the provisions of this Article III (including any cash
payment in lieu of fractional shares pursuant to Section 3.4(e)) shall be paid
to any such holder, and all such dividends, other distributions and cash shall
be paid by Parent to the Exchange Agent and shall be included in the Exchange
Fund, in each case until the surrender of such Company Common Stock Certificate
or delivery of the Option Cancellation Agreement in accordance with this Article
III. Subject to the effect of applicable escheat or similar laws, following
surrender of any such Company Common Stock Certificate or delivery of an Option
Cancellation Agreement, as applicable, there shall be paid to the holder of the
certificate representing whole shares of Parent Common Stock issued in exchange
therefor, without interest, (i) at the time of such surrender, the amount of
dividends or other distributions with a record date after the Effective Time
theretofore paid with respect to such whole shares of Parent Common Stock and
the amount of cash which such holder has the right to receive pursuant to the
provisions of this Article III (including any cash payable in lieu of a
fractional share of Parent Common Stock to which such holder is entitled
pursuant to Section 3.4(e)) and (ii) at the appropriate payment date, the amount
of dividends or other distributions with a record date after the Effective Time
and with a payment date subsequent to such surrender payable with respect to
each whole share of Parent Common Stock.
(d) All shares of Parent Common Stock issued upon the surrender for
exchange of Participating Company Stock in accordance with the terms of this
Article III and any cash paid pursuant to this Article III shall be deemed to
have been issued and paid at the Effective Time in full satisfaction of all
rights pertaining to the shares of Company Common Stock, theretofore represented
by such Participating Company Stock, subject, however, to the Surviving
Corporation's obligation to pay any dividends or make any other distributions
with a record date prior to the Effective Time which may have been declared or
made by the Company on such shares of Company Common Stock in accordance with
the terms of the Agreement, which remain unpaid at the Effective Time.
(e) (i) Notwithstanding anything to the contrary contained herein, no
certificates or scrip representing fractional shares of Parent Common Stock
shall be issued in the Merger upon the surrender for exchange of Participating
Company Stock, no dividend or distribution of Parent shall relate to such
fractional share interests, and such fractional share interests will not entitle
the owner thereof to vote or to any rights of a stockholder of Parent. In lieu
of the issuance of such fractional shares, the Exchange Agent shall pay each
former holder of
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Participating Company Stock an amount in cash equal to the product obtained by
multiplying (A) the fractional share interest to which such former holder would
otherwise be entitled by (B) the Parent Average Trading Price.
(ii) As soon as practicable after the determination of the
amount of cash, if any, to be paid to holders of Participating Company
Stock with respect to any fractional share interests, the Exchange
Agent shall deliver such amounts to such holders of Participating
Company Stock subject to and in accordance with the terms of Section
3.4(b).
(f) Any portion of the Exchange Fund (including the proceeds of any
interest and other income received by the Exchange Agent in respect of all such
funds) that remains unclaimed by the holders of the Participating Company Stock
six months after the Effective Time shall be delivered to Parent. Any holders of
the Participating Company Stock who have not theretofore complied with this
Article III shall thereafter look only to the Surviving Corporation as general
creditors for payment of any Merger Consideration, without any interest thereon,
that may be payable in respect of each share of Participating Company Stock held
by such holder as determined pursuant to this Agreement.
(g) None of Parent, the Purchaser, the Company, the Surviving
Corporation, the Exchange Agent or any other Person shall be liable to any
former holder of Participating Company Stock for any amount properly delivered
to a public official pursuant to applicable abandoned property, escheat or
similar laws.
(h) In the event any Company Common Stock Certificate shall have been
lost, stolen or destroyed, upon the making of an affidavit of that fact by the
Person claiming such Company Common Stock Certificate to be lost, stolen or
destroyed, and, if required by the Surviving Corporation, the posting by such
Person of a bond in such reasonable amount as the Surviving Corporation may
direct as indemnity against any claim which may be made against it with respect
to such Company Common Stock Certificate, the Exchange Agent will issue, in each
case, in exchange for such lost, stolen or destroyed Company Common Stock
Certificate, the Merger Consideration payable in respect thereof pursuant to
this Agreement.
(i) In addition to the other deposits to be made by the Parent in the
Exchange Fund, the Parent shall separately pay (a) all of the fees and expenses
of the Exchange Agent, and (b) all of the fees and expenses related to the
preparation, handling and mailing of 1099 Tax forms with respect to payments
from the Exchange Fund.
(j) In the event that any amounts are withheld for the payment of Taxes
as permitted by this Agreement from any payments from the Exchange Fund to a
holder of the Participating Company Stock in respect of which such deduction and
withholding was made, such withheld amounts shall be held in trust and paid in a
timely manner to the applicable Governmental Authorities on account of such Tax
liabilities and treated for all purposes of this Agreement as having been paid
to the holder of the Participating Company Stock in respect of which such
deduction and withholding was made.
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3.5 Adjustment of Merger Consideration. If, subsequent to the date of
determination of the Parent Average Trading Price but prior to the Effective
Time, the number or class of outstanding shares of Parent Common Stock is
changed into a different number of shares or a different class as a result of a
stock split, reverse stock split, stock dividend, subdivision, reclassification,
combination, exchange, recapitalization or other similar transaction, then the
Merger Consideration shall be adjusted accordingly to provide to the holders of
Participating Company Stock the same economic effect as contemplated by this
Agreement prior to such stock split, reverse stock split, stock dividend,
subdivision, reclassification, combination, exchange, recapitalization or other
similar transaction.
3.6 Effect of Parent Election Of All Cash Merger Consideration; Automatic
Amendment of Certain Provisions of Agreement. In the event that Parent shall
irrevocably elect to designate the Cash Consideration Percentage to be one
hundred percent (100%), then, notwithstanding any other provision of this
Agreement to the contrary and without further notice to, or the consent or
agreement of, any party to this Agreement, the following Sections, Subsections,
clauses, Schedules or Exhibits of or to this Agreement shall be automatically
deemed to be amended in the manner set forth herein ab initio and deleted in
their entirety from this Agreement, or if less than in their entirety, in part
as described below; and no party to this Agreement shall have any right to
receive a Company Update or Parent Update with respect to any such Sections,
Subsections, clauses, Schedules or Exhibits of or to this Agreement; and any
inaccuracy contained in any such Sections, Subsections, clauses, Schedules or
Exhibits, or amended portion thereof, of or to this Agreement, any breach
thereof, or any failure to satisfy any condition therein by any party to this
Agreement, shall be deemed to be waived by all of the parties to this Agreement
and shall not constitute a breach of this Agreement, a Material Adverse Change,
a Material Adverse Effect, a basis for any assertion of any duty, liability or
obligations of, or claim, demand or suit against, any party to this Agreement, a
condition to the obligations of any party to this Agreement to consummate the
Merger, or a reason or event by or pursuant to which this Agreement may be
terminated by any party to this Agreement:
(a) Representations and Warranties of the Company: Section 4.26, but
only with respect to clause (a) thereof relating to the Form S-4, together with
any Schedules or Exhibits set forth therein and any sections or subsections of
the Company Disclosure Schedule or Company Updates relating thereto;
(b) Representations and Warranties of the Parent and Purchaser:
Throughout Article V, any references to the Parent's Subsidiaries or Affiliates
(other than the Purchaser); Subsection 5.1(b); the following clauses of Section
5.3 - (b)(i) and (b)(ii); Sections 5.4, 5.6, 5.7 (except with respect to any
Parent Litigation or orders of Governmental Authorities which would challenge,
enjoin, prevent, hinder or delay any of the transactions contemplated by the
Agreement or the Parent's or Purchaser's performance of their respective
obligations under this Agreement and the Ancillary Documents), 5.8 (except with
respect to any event, condition, circumstance or state of facts that constitutes
a Material Adverse Change or Material Adverse Effect and which would challenge,
enjoin, prevent, hinder or delay any of the transactions contemplated by the
Agreement or the Parent's or Purchaser's performance of their respective
obligations under this Agreement and the Ancillary Documents), 5.10 (except with
respect to any liabilities or indebtedness which would prevent, hinder or delay
any of the transactions contemplated by the Agreement or the Parent's or
Purchaser's performance of their respective
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obligations under this Agreement and the Ancillary Documents), and 5.12 (but
only with respect to clause (a) thereof relating to the Form S-4), together with
any Schedules or Exhibits set forth therein and any sections or subsections of
the Parent Disclosure Schedule or Parent Updates relating thereto;
(c) Covenants of the Company: Section 6.13 (but only to the extent of
those matters with respect to, or relating to, the Affiliate Letter and Rule 145
promulgated under the Securities Act);
(d) Covenants of the Parent and/or the Purchaser: Section 6.12;
(e) Mutual Covenants of the Parties: Section 6.3 (but only to the
extent of those matters with respect to, or relating to, the Form S-4);
(f) Conditions to Obligation of the Company to Consummate the Merger:
Subsections 7.3(a) (but only with respect to those Parent and/or Purchaser
representations and warranties described in Section 3.6(b) above); and 7.3(b)
(but only with respect to those covenants of the Parent and/or Purchaser or
mutual covenants described in Sections 3.6(d) or 3.6(e) above);
(g) Conditions to Obligation of Parent and Purchaser to Consummate the
Merger: Subsections 7.2(a) (but only with respect to those Company
representations and warranties described in Section 3.6(a) above), and 7.2(b)
(but only with respect to those covenants of the Company or mutual covenants
described in Sections 3.6(c) or 3.6(e) above);
(h) Conditions to Each Party's Obligation to Consummate the Merger:
Subsection 7.1(c); and
(i) Other Provisions: Section 3.5 (Adjustment of Merger Consideration)
and Exhibit A to this Agreement.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Parent and Purchaser that as of
the date of this Agreement the statements contained in this Article IV, when
read together with and qualified by the Disclosure Schedule delivered by the
Company to Parent in connection with and prior to the execution of this
Agreement (the "Company Disclosure Schedule"), are true and correct except for
events, transactions or occurrences contemplated or required by this Agreement.
The Company Disclosure Schedule is divided into sections and subsections
corresponding to the sections and subsections of Article IV of this Agreement.
Whether or not specifically required by the terms of this Article IV or
otherwise, the Company may modify the Company's representations and warranties
contained in this Agreement by disclosing relevant facts on the Company
Disclosure Schedule; provided, however, that for any such disclosure to be
effective, it must indicate the specific section or subsection of this Agreement
to which it relates. The
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disclosure of any information in the Company Disclosure Schedule shall not be
deemed to constitute an acknowledgment that such information is required to be
disclosed in connection with the representations and warranties made by the
Company in this Agreement or that it is material, nor shall such information be
deemed to establish a standard of materiality. Unless otherwise specifically
defined therein or the context otherwise requires, capitalized terms set forth
in the Company Disclosure Schedule shall have the meanings ascribed to such
terms in this Agreement.
Promptly following the Company having knowledge of or receiving notice
of the occurrence of any matter or event arising after the date of this
Agreement which (a) may be deemed to constitute a Material Adverse Change with
respect to the Company (a "Company MAC"); (b) if existing or occurring at or
before the date of this Agreement, would have been required to be set forth or
described in such Company Disclosure Schedule; or (c) is necessary to correct
any information in such Company Disclosure Schedule or in the representations
and warranties of the Company herein which have been rendered inaccurate by such
matter or event, the Company shall supplement or amend the affected sections or
subsections of the Company Disclosure Schedule in writing with respect to such
matter or event in the same manner as required of the Company for making
disclosures and taking exceptions to the Company's representations and
warranties in the Company Disclosure Schedule (the "Company Updates").
Upon receipt of any such Company Update, the Parent shall have ten (10)
Business Days following the receipt of the Company Updates: (a) to review,
investigate and analyze the information disclosed in the Company Update; (b) to
make a determination whether or not the information disclosed in the Company
Update, individually or together with any other information previously disclosed
in any other Company Updates, disclose events or circumstances that constitute a
Company MAC; and (c) if the Parent reasonably determines that the information
disclosed in the Company Update, individually or together with any other
information previously disclosed in any other Company Updates or other events
occurring after the date hereof, disclose events or circumstances that
constitute a Company MAC, to notify the Company in writing that the Parent has
determined that such a Company MAC has occurred, including a reasonable
explanation of the reasons for such determination, and that the Parent has
elected to terminate this Agreement pursuant to Section 8.4 of this Agreement
(subject to the expiration of any cure or grace periods contained therein or
applicable to the breach giving rise to the Company MAC) (a "Parent Termination
Notice"). If any Company Update is received by the Parent within ten (10)
Business Days prior to the scheduled Closing Date and the Parent has not, in its
reasonable discretion, had an adequate opportunity to review, investigate and
make a determination with respect to the matters or events disclosed therein as
of the scheduled Closing Date, or the parties have not come to a resolution with
respect thereto, notwithstanding any other provision of this Agreement to the
contrary, the Parent may postpone the Closing Date to a date that is ten (10)
Business Days following the date of the Parent's receipt of the applicable
Company Update. Upon the timely delivery of a Parent Termination Notice to the
Company pursuant to this paragraph, this Agreement shall terminate, except as
provided by Section 9.1 hereof, and all duties and obligations of the Parent and
Purchaser under this Agreement and to consummate the Merger shall terminate.
In the event that (a) a Company Update does not, either individually or
in the aggregate with any or all prior Company Updates delivered to the Parent
prior to the Closing, disclose
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events or circumstances that constitute a Company MAC; (b) the Parent does not
timely deliver a Parent Termination Notice to the Company with respect to the
Company Update pursuant to the terms contained in the preceding paragraph; or
(c) the Closing occurs without the Parent timely delivering a Parent Termination
Notice to the Company, then the Parent and Purchaser shall no longer have the
rights of termination described above with respect to such Company Update and
all other Company Updates previously delivered as described above and the events
or circumstances so disclosed shall not constitute a Company MAC, provided,
however, if the Company delivers a subsequent Company Update to the Parent the
events and circumstances disclosed therein may be aggregated with the events and
circumstances disclosed in all prior Company Updates previously delivered by the
Company to the Parent pursuant to the terms set forth above. Notwithstanding the
immediately preceding sentence, in the event that a new Company Update is
thereafter received by the Parent that either individually or together with all
Company Updates previously delivered by the Company to the Purchaser pursuant to
the terms set forth above disclose events or circumstances that constitute a
Company MAC, then provided that the Purchaser timely delivers a Parent
Termination Notice to the Company with respect thereto, the delivery of such
Parent Termination Notice shall be effective to terminate this Agreement
pursuant to Section 8.4 of this Agreement.
4.1 Existence; Good Standing; Corporate Authority.
(a) The Company and each of its Subsidiaries is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation or formation. The Company and each of its
Subsidiaries is duly qualified to do business as a foreign corporation and is in
good standing under the laws of any other state of the United States in which
the ownership or leasing of its properties or the conduct of its business
requires such qualification, except where the failure to be so qualified or in
good standing would not be reasonably likely to have a Material Adverse Effect.
The Company and each of its Subsidiaries has all requisite corporate power and
authority to own or lease and operate its properties and to carry on its
business substantially as now being conducted. Attached to Section 4.1(a) of the
Company Disclosure Schedule are true and correct copies of the Articles of
Incorporation and Bylaws (or equivalent organizational documents) as currently
in full force and effect for the Company and each of its Subsidiaries. Each
Company Subsidiary is wholly-owned by the Company and all of the capital stock
and other interests of the Company Subsidiaries so held by the Company are
directly or indirectly owned by it, free and clear of any Encumbrances with
respect thereto, except for Permitted Encumbrances.
(b) Section 4.1(b) of the Company Disclosure Schedule sets forth, as of
the date of this Agreement, a true, complete, and correct list of each
Subsidiary of the Company, together with (i) the name and jurisdiction of
incorporation or organization of each such Subsidiary; and (ii) an indication of
whether each such Subsidiary is a "significant subsidiary" as defined in
Regulation S-X under the Exchange Act. Except for the Company's Subsidiaries,
and except for securities, equity interests, or other ownership interests held
by the Company or its Subsidiaries as passive investments, there is no other
Person with respect to which: (i) the Company or any of its Subsidiaries
beneficially owns, directly or indirectly, any outstanding securities, equity
interests, or other ownership interests of such Person; (ii) any other Person,
other than a natural person, which the Company or any of its Subsidiaries may be
deemed to be an Affiliate of because of factors or relationships other than any
outstanding securities, equity interests, or
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other ownership interests owned by the Company or any of its Subsidiaries; or
(iii) the Company or any of its Subsidiaries may be liable under any
circumstances for the payment of additional amounts with respect to securities,
equity interests, or other ownership interests held by the Company or its
Subsidiaries, whether in the form of assessments, capital calls, installment
payments, general partner liability or otherwise. Other than the Company, no
Person controls any of the Subsidiaries, whether by contract or otherwise.
4.2 Authorization, Validity and Effect of Agreements. The Company's board
of directors has (a) determined that the Company's execution and delivery of
this Agreement and the Ancillary Documents to which the Company is a party, and
the transactions contemplated by this Agreement and such Ancillary Documents,
including but not limited to the Merger, are advisable and in the best interest
of the Company and its shareholders and has approved this Agreement and the
Ancillary Documents to which the Company is a party in accordance with all
Applicable Laws, (b) resolved to recommend the approval of this Agreement and
the Ancillary Documents to which the Company is a party, and the transactions
contemplated by this Agreement and such Ancillary Documents, including but not
limited to the Merger, by the Company's shareholders at a meeting thereof duly
called and held in accordance with the Company's Articles of Incorporation and
Bylaws and the requirements of the Arizona Code (the "Shareholders Meeting"),
and (c) subject to Section 6.3, directed that this Agreement and the Ancillary
Documents to which the Company is a party, and the transactions contemplated by
this Agreement and such Ancillary Documents, including but not limited to the
Merger, be submitted to the Company's shareholders for approval. The Company has
the requisite corporate power and authority to execute and deliver this
Agreement, and all Ancillary Documents to which it is a party, and to consummate
the transactions contemplated hereby and thereby, including but not limited to
the Merger. The execution and delivery of this Agreement and the Ancillary
Documents to which it is a party by the Company and the consummation by the
Company of the transactions contemplated hereby and thereby have been duly and
validly authorized by the Company's board of directors, and no other corporate
proceedings on the part of the Company are necessary to authorize this
Agreement, to authorize the Ancillary Documents to which it is a party, or to
consummate the transactions contemplated hereby and thereby, including but not
limited to the Merger, other than, with respect to the Merger, the approval of
this Agreement, all Ancillary Documents to which the Company is a party, and the
transactions contemplated hereby and thereby, including but not limited to the
Merger, by the affirmative vote of the holders of a majority of the outstanding
shares of Company Common Stock (voting as one class with each share of Company
Common Stock having one vote) (the "Company Shareholder Approval") based upon
the foregoing recommendation of the Company's Board of Directors and the filing
and recordation of the Articles of Merger in accordance with the Arizona Code.
This Agreement and any Ancillary Documents to which the Company is a party at
the time of execution has been or will be duly and validly executed and
delivered by the Company, and (assuming this Agreement and such Ancillary
Documents each constitutes a valid and binding obligation of any other parties
thereto) constitutes and will constitute the valid and binding obligations of
the Company, enforceable against the Company in accordance with their respective
terms, subject to (a) applicable bankruptcy, reorganization, insolvency,
moratorium, and similar laws affecting the enforcement of creditors' rights
generally; and (b) the effect of general principles of equity (including
specific performance) regardless of whether considered in a proceeding in equity
or at law.
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4.3 Compliance with Laws. The Company and each of its Subsidiaries is in
material compliance with and is not in default under or in violation of (a) its
respective Articles of Incorporation and Bylaws (or equivalent organizational
documents) or (b) any Applicable Law, including, but not limited to, those
relating to (i) the development, manufacture, distribution, marketing, and sale
of its products and services and (ii) the bidding for Government Contracts or
conducting its business with respect to Government Contracts. Neither the
Company, nor any of its Subsidiaries, is subject to any material judicial,
governmental or administrative order, judgment or decree of any Governmental
Authority currently in effect to which the Company or any Company Subsidiary, or
its or any of their respective assets or properties, are subject. Attached to
Section 4.3 of the Company Disclosure Schedule are true and correct copies of
all reports of inspections of each of the Company's and its Subsidiaries'
businesses and properties which occurred during the past three (3) years under
Applicable Law which resulted or could, after the date hereof, result in the
imposition of a material fine, penalty, or other restriction. The Company has
not received notice of any material breach, default or violation (or notice of
any investigation, inspection, audit, or other proceeding by any Governmental
Authority involving an allegation of any material breach, default or violation)
of any Applicable Law by or affecting the Company or any of its Subsidiaries,
and to the knowledge of the Company, no such investigation, inspection, audit,
or other proceeding by any Governmental Authority is threatened or pending.
4.4 Capitalization.
(a) As of the date hereof, the authorized capital stock of the Company
consists of 50,000,000 shares of Company Common Stock and 50,000,000 shares of
preferred -stock of the Company, US$0.05 par value per share ("Company Preferred
Stock").
(b) Of the authorized shares of Company Common Stock, as of the close
of business on August 25, 2003, (i) there are issued and outstanding 13,058,046
shares of Company Common Stock; (ii) no shares of Company Common Stock are
issued and held in the treasury of Company; (iii) 5,310,000 shares of Company
common Stock were reserved for issuance pursuant to the Option Plans (of which
4,613,680 shares of Company Common Stock are subject to outstanding Options);
(iv) 1,774,074 shares of Company Common Stock were reserved for issuance
pursuant to the 8% Notes; (v) 600,000 shares of Company Common Stock were
reserved for issuance pursuant to the Company's ESPP; (vi) 19,500 shares of
Company Common Stock were reserved for issuance pursuant to the Company's RSP,
and (vii) no other shares of Company Common Stock of the Company are issued or
outstanding, reserved for issuance, or subject to any outstanding options,
warrants, or other purchase or conversion rights. Exhibit B attached hereto, or
delivered by the Company to the Purchase within ten (10) Business Days after the
date hereof sets forth the names of the holders of the Eligible Options as of
August 25, 2003, the number of shares of Participating Company Stock
attributable to such Eligible Options and the number of shares of Participating
Common Stock issuable upon a "cashless" exercise of such Eligible Options, each
based on the assumption, for illustrative purposes only, that the Merger
Consideration shall be equal to US$3.00 per share of Participating Company
Stock.
(c) Of the authorized shares of Company Preferred Stock, as of the
close of business on August 25, 2003, no shares of Company Preferred Stock are
issued or outstanding,
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and except for the issued or outstanding Company Common Stock described in
Section 4.4(b), no other capital stock of the Company is issued or outstanding.
(d) The 8% Notes (i) are due May 1, 2004, (ii) bear interest at 8% per
annum, payable semi-annually, (iii) are convertible into shares of Company
Common Stock at a price of US$17.55 per share of Company Common Stock, and (iv)
may be redeemed at the Company's option in whole or in part on a pro rata basis,
on or after May 1, 1999, at certain specified redemption prices plus accrued
interest payable to the redemption date. As of the close of business on August
25, 2003, the aggregate principal amount of the 8% Notes Debt outstanding and
unpaid was US$31,135,000 and accrued but unpaid interest thereon was
US$167,392.51. As of the close of business on August 25, 2003, the aggregate
outstanding principal amount of the Funded Indebtedness (including the 8% Notes
Debt) was US$59,673,588.82 and the accrued, but unpaid, interest thereon was
US$1,015,976.52. The Company has made available to Parent true and correct
copies of all of the notes, agreements, documents and/or instruments evidencing
the Funded Indebtedness.
(e) Except as described in this Section 4.4, there are no restrictions
upon the transfer of or otherwise pertaining to the Company Common Stock or any
capital stock of the Company's Subsidiaries (including, but not limited to, the
ability to pay dividends thereon), or the ownership thereof, or retained
earnings of the Company and the Company Subsidiaries, other than those imposed
by the Securities Act, the Exchange Act, applicable state securities laws, or
other Applicable Laws.
(f) Except for the stock options issued or issuable pursuant to the
Option Plans, shares of Company Common Stock issued or issuable pursuant to the
ESPP or the RSP, the notes, agreements, documents and/or instruments evidencing
the Funded Indebtedness, or as otherwise described in this Section 4.4, there
are no outstanding securities, bonds, debentures, promissory notes, unsatisfied
rights (including stock appreciation rights and preemptive rights),
subscriptions, warrants, puts, calls, options or other agreements of any kind
issued by the Company or its Subsidiaries, to which the Company or its
Subsidiaries is a party (other than this Agreement), or which is binding upon
the Company or any of its Subsidiaries, of any kind or character, which: (i)
relate to any of the outstanding, authorized but not issued, unauthorized, or
shares held in treasury, capital stock or other securities of the Company or any
of its Subsidiaries; (ii) entitle third parties to vote with the shareholders of
the Company or its Subsidiaries on any matter submitted to a vote of the
shareholders of the Company or its Subsidiaries; (iii) are convertible into or
exercisable for securities having such voting rights; or (iv) obligate the
Company or any of its Subsidiaries to (A) issue, transfer or sell any shares of
capital stock or other equity interests of the Company or any of its
Subsidiaries (or securities convertible into or exchangeable for such shares or
equity interests), (B) grant, extend, issue or enter into any such subscription,
option, warrant, call, convertible securities, or other similar right,
agreement, arrangement or commitment, (C) redeem or otherwise acquire any such
shares of capital stock or other equity interests of the Company or any of its
Subsidiaries, or (D) make any investment (in the form of a loan, capital
contribution or otherwise) in any Person. All issued and outstanding shares of
Company Common Stock are duly authorized, validly issued, fully paid and
nonassessable. Except as contemplated by this Agreement, there are no voting
trusts, voting agreements or other agreements to which the Company or any of its
Subsidiaries is
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a party with respect to the voting of the capital stock or other equity
interests of the Company or any of its Subsidiaries.
4.5 Subsidiaries. Neither the Company nor any of its Subsidiaries nor any
of their respective current or to the Company's knowledge former officers,
employees or directors have issued, granted or sold, or promised, committed or
proposed to issue, grant or sell, to any person any options, warrants, shares or
other equity interests in any Subsidiary of the Company which remain
outstanding. No Subsidiary of the Company owns any capital stock or has any
equity interest in the Company. Each of the outstanding shares of capital stock
(or such other ownership interests) of each of the Company's Subsidiaries is
duly authorized, validly issued, fully paid and nonassessable. Section 4.5 of
the Company Disclosure Schedule sets forth the following information for each
Subsidiary of the Company: (a) its authorized capital stock or share capital,
(b) the number of issued and outstanding shares of capital stock, share capital
or other equity interests, and (c) any debt securities issued by it.
4.6 No Violation; Consents. Neither the execution and delivery by the
Company of this Agreement or any of the Ancillary Documents to which it is a
party, nor the consummation by the Company of the transactions contemplated
hereby or thereby, will: (a) violate, conflict with or result in a material
breach of the respective Articles of Incorporation or Bylaws (or equivalent
organizational documents) of the Company or any Subsidiary of the Company; (b)
except for the notes, agreements, documents and/or instruments evidencing the
Funded Indebtedness, violate, conflict with, result in a material breach of,
constitute (with or without due notice or lapse of time or both) a default
under, result in the termination or in a right of termination of, accelerate the
performance required by or benefit obtainable under, result in the triggering of
any payment or other obligations pursuant to, result in the creation of any
Encumbrances (except for Permitted Encumbrances) upon any of the properties of
the Company or its Subsidiaries under, or result in there being declared void,
voidable, or without further binding effect, any of the terms, conditions or
provisions of, any Company Material Contracts to which the Company or any of its
Subsidiaries is a party, as identified in Section 4.6 to the Company Disclosure
Schedules, or by which the Company or any of its Subsidiaries or any of their
respective properties or assets is bound, as identified in Section 4.6 to the
Company Disclosure Schedules, except where the Company or any of its
Subsidiaries has obtained or will obtain prior to the Closing the necessary
written agreements, waivers, releases or consents of the other parties to such
Company Material Contracts to avoid, release or waive any such default,
conflict, material breach, violation, termination, right to terminate or
accelerate, or triggering of payment with respect to such Company Material
Contracts (provided, however that the parties rights with respect to the
Company's failure to obtain any such consents shall be as set forth in paragraph
(a)(i) of the definition of "Material Adverse Change" and Section 7.2(h) of this
Agreement); or (c) require any consent, approval or authorization of, or filing
or registration with, any Governmental Authority, except for (A) applicable
requirements of the Securities Act and the Exchange Act, (B) the applicable
pre-merger notification requirements of the HSR Act, any Non-U.S. Anti-Trust
Laws or other Regulatory Laws, (C) if required, the receipt of a decision under
any Non-U.S. Anti-Trust Laws declaring the Merger compatible with any Non-U.S.
Anti-Trust Laws, and (D) the filing and recordation of the Articles of Merger
pursuant to the Arizona Code (provided however, the parties rights with respect
to the failure to obtain any such consents shall be as set forth in paragraph
(a)(i) of the definition of "Material Adverse Change" and Section 7.2(h) of this
Agreement).
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4.7 Company Reports; Financial Statements. The Company has made available
to Parent true and complete copies of (i) its Annual Report on Form 10-K, for
the fiscal years ended December 31, 2000, December 31, 2001, and December 31,
2002, as filed with the SEC under the Securities Act and/or the Exchange Act, as
applicable, (ii) its proxy statements relating to all of the meetings of
shareholders (whether annual or special) of the Company since January 1, 2001,
as filed with the SEC, and (iii) all other reports, statements and registration
statements and amendments thereto (including, without limitation, Quarterly
Reports on Form 10-Q and Current Reports on Form 8-K) required to be filed by
the Company with the SEC under the Securities Act and/or the Exchange Act, as
applicable, since January 1, 2000. The reports and statements set forth in
clauses (i) through (iii), above, including all exhibits and information
incorporated by reference therein, are referred to collectively herein as the
"Company Reports."
(a) Since December 31, 2000, the Company filed all Company Reports
required to be filed by it with the SEC under the Securities Act and/or the
Exchange Act, as applicable. As of their respective filing dates (and if amended
or supplemented by a filing prior to the date of this Agreement, then as of the
date of such amended or supplemented filing), the Company Reports (i) complied
in all material respects with the then-applicable requirements of the Securities
Act and the Exchange Act and (ii) did not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements made therein, in the light of the circumstances
under which they were made, not misleading.
(b) No Subsidiary of the Company is required to file any forms, reports
or other documents with the SEC.
(c) The audited consolidated financial statements and unaudited interim
financial statements of the Company included in the Company Reports have been
prepared in accordance with GAAP applied on a consistent basis (except as may be
indicated therein or in the notes thereto) and present fairly, in all material
respects, the financial position of the Company and the Company Subsidiaries as
at the dates thereof and the results of their operations and cash flows for the
periods then ended subject, in the case of the unaudited interim financial
statements, to normal year-end audit adjustments, any other adjustments
described therein, and the fact that certain information and notes have been
condensed or omitted in accordance with the Exchange Act.
(d) The Company has established adequate reserves, in accordance with
GAAP, in the books, records, and financial statements of the Company as of the
date hereof for all bonuses required to be paid to any employee of the Company
or its Subsidiaries with respect to the period beginning January 1, 2003,
through the date hereof, pursuant to any written agreement or policy binding
upon the Company or which may be required to be paid in connection with the
consummation of the Merger.
4.8 Company Litigation. There are no actions, suits, arbitrations, claims
or proceedings or, to the knowledge of the Company, investigations, pending,
publicly announced or, to the knowledge of the Company, threatened, against or
affecting the Company or any of its Subsidiaries, at law or in equity
(collectively, "Company Litigation"), and there are no outstanding settlement
agreements, consent decrees or agreements, forbearance to sue
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agreements, or similar agreements or obligations binding upon the Company or its
Subsidiaries, which in either case are required to be described in any Company
Report that are not so described.
4.9 Absence of Certain Changes. Since June 30, 2003, except for the
consummation of the ASD Transaction and the sale of the Arizona Real Estate, the
Company and its Subsidiaries have conducted their respective businesses only in
the ordinary course, consistent with past practice, and there has not been or
occurred any action taken by the Company that, if taken after the date of this
Agreement without the prior written consent of Parent, would be a violation of
Section 6.2(b) hereof.
4.10 Taxes. Unless the context clearly requires otherwise, all references
in this Section 4.10 to the Company shall include the Company and its
Subsidiaries.
(a) The Company has made available to Parent true, correct and complete
copies of the Tax Returns of the Company for the past five fiscal years of the
Company which were due, without regard to any extensions granted, on or before
the date hereof. All Tax Returns required to be filed with respect to the
income, operations, business or assets of the Company or each affiliated,
combined or unitary group ("Tax Group") of which the Company has been a member
for the past five fiscal years of the Company, including, but limited to,
federal and state Tax Returns with respect to the Company's fiscal year ending
December 31, 2002, have been timely filed (or appropriate extensions have been
obtained which extensions are listed in Section 4.10 of the Company Disclosure
Schedule) with the appropriate Governmental Authorities in all jurisdictions in
which such returns and reports are required to be filed. All of the foregoing
Tax Returns as filed are true, correct and complete and, in all material
respects, reflect accurately in all material respects all liability for Taxes of
the Company for the periods to which such returns relate, and all amounts in
excess of US$10,000 shown as owing thereon have been paid, other than Taxes
being contested in good faith as set forth in Section 4.10 of the Company
Disclosure Schedule or Taxes for which adequate reserves (in accordance with
GAAP) have been established in the Company's financial statements set forth in
the Company Reports or, for periods thereafter, on the books of the Company. All
Taxes in excess of US$10,000, if any, collectible or payable by the Company or
relating to or chargeable against any of its assets, revenues or income or
relating to any employee, independent contractor, creditor, stockholder or other
third party, for the period from December 31, 2000, through December 31, 2002,
were fully collected and paid by December 31, 2002, other than Taxes being
contested in good faith or for which adequate reserves (in accordance with GAAP)
have been established in the Company's financial statements set forth in the
Company Reports or, for periods thereafter, on the books of the Company.
(b) No Government Authority with respect to Taxation has sought to
audit, and the Company has not received notice of an audit of, the records of
the Company for the purpose of verifying or disputing any Tax Returns, reports
or related information and disclosures provided to such Government Authority
with respect to Taxation, or related to the Company's alleged failure to provide
any such Tax Returns, reports or related information and disclosure. To the
Companies knowledge, no material claims, deficiencies, or assessments in excess
of US$100,000 have been asserted against, or inquiries raised with, the Company
with respect to any Taxes of the Company which have not been paid or otherwise
satisfied, including claims
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that, or inquiries whether, the Company has not filed a Tax Return that it was
required to file. The Company has not waived any restrictions on assessment or
collection of Taxes relating to the Company or consented to the extension of any
statute of limitations relating to Taxation of the Company. The Company has not
filed a consent under Section 341(f) of the Code concerning collapsible
corporations, and the Company has not been a United States real property holding
corporation within the meaning of Code Section 897(c)(2), during the applicable
period specified in Code Section 897(c)(1)(A)(ii).
(c) No notice of claim has been delivered to the Company, nor does the
Company know of any claim that is pending, by a Governmental Authority in any
jurisdiction where the Company does not file Tax Returns alleging that the
Company is or may be subject to Taxation in that jurisdiction.
(d) Except for Permitted Encumbrances, to the Company's knowledge there
is no Tax Encumbrance imposed by any Government Authority with respect to
Taxation outstanding against any of the assets or properties of the Company.
(e) The Company has not executed any material "closing agreement" or
similar agreement with any Governmental Authority relating to Taxes.
(f) The Company has not agreed to, and is not required to, make any
adjustments pursuant to Section 481(a) of the Code or any similar provision of
other Applicable Laws relating to Taxes by reason of a change in accounting
method initiated by it or any other relevant party nor has it any knowledge that
any Governmental Authority with respect thereto has proposed any such adjustment
or change in accounting method. The Company does not have any application
pending with any Governmental Authority relating to Taxes requesting permission
for any changes in accounting methods.
(g) The Company has not made any payments, nor is the Company obligated
to make any payments, nor is the Company a party to any agreement that under
certain circumstances could obligate it to make payments, that will not be
deductible under Section 280G or 162(m) of the Code.
(h) The Company is not a member of a Tax Group that has filed an
election pursuant to Rev. Proc. 95-11, 1995-1 C.B. 505, or under Treasury
Regulation Section 1.1502-75(c) or any other similar provision of Applicable
Laws with respect to the Company.
(i) None of the Company and its Subsidiaries is a party to any
currently effective Income Tax allocation or sharing agreement.
(j) None of the Company and its Subsidiaries has been a member of an
affiliated group filing a consolidated federal Income Tax Return (other than a
group the common parent of which was the Company).
(k) None of the Company and its Subsidiaries has been a party to or
otherwise participated in any transaction that would constitute a "listed
transaction" or "reportable transaction" as defined in Treasury Regulation
Section 1.6011-4.
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(l) To the Company's knowledge, the Company and its Subsidiaries have
disclosed all positions taken therein that could give rise to a substantial
understatement of income tax within the meaning of Section 6662 of the Code and
any comparable statutes in any other jurisdictions.
4.11 Company Employee Benefit Plans. Section 4.11 of the Company Disclosure
Schedule, as supplemented within ten (10) Business Days after the date of this
Agreement, lists each current Employee Benefit Plan (as defined in Section 3(3)
of ERISA), whether or not subject to ERISA, which the Company or any of its
Subsidiaries or ERISA Affiliates maintains, or to which the Company or any of
its Subsidiaries or ERISA Affiliates contributes, has within the last six (6)
years contributed (to the extent available to the Company utilizing commercially
reasonable efforts to obtain the same), or has any obligation to contribute
("Company Benefit Plan").
(a) Each Company Benefit Plan (and each related trust, insurance
contract, or fund) has been maintained, funded and administered in accordance
with the terms of such Company Benefit Plan and complies in form and in
operation in all material respects with the applicable requirements of ERISA,
the Code, and other Applicable Laws.
(b) All required reports and descriptions (including Form 5500 annual
reports, summary annual reports, and summary plan descriptions) have been timely
filed and/or distributed in accordance with the applicable requirements of ERISA
and the Code with respect to each such Company Benefit Plan. The requirements of
COBRA have been met with respect to each Company Benefit Plan and each Employee
Benefit Plan maintained by an ERISA Affiliate which is an Employee Welfare
Benefit Plan (as defined in Section 3(2) of ERISA) subject to COBRA.
(c) All contributions (including all employer contributions and
employee salary reduction contributions) that are due have been made within the
time periods prescribed by ERISA and the Code to each such Company Benefit Plan
that is an Employee Pension Benefit Plan (as defined in Section 3(2) of ERISA)
and all contributions for any period ending on or before the Closing Date which
are not yet due have been made to each such Employee Pension Benefit Plan or
accrued in accordance with the past custom and practice of the Company and its
Subsidiaries. All premiums or other payments for all periods ending on or before
the Closing Date have been paid with respect to each Company Benefit Plan that
is an Employee Welfare Benefit Plan.
(d) Each Company Benefit Plan which is intended to meet the
requirements of a "qualified plan" under Code (Section)401(a) has received a
determination from the Internal Revenue Service that such Company Benefit Plan
is so qualified, and nothing has occurred since the date of such determination
that could adversely affect the qualified status of any such Company Benefit
Plan. All such Company Benefit Plans have been or will be timely amended for the
requirements of the Tax legislation commonly known as "GUST" and "EGTRRA" and
have been or will be submitted to the Internal Revenue Service for a favorable
determination letter on the GUST requirements within the remedial amendment
period prescribed by GUST.
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(e) There have been no Prohibited Transactions (as defined in under
Section 406 of ERISA) with respect to any Company Benefit Plan or any Employee
Benefit Plan maintained by an ERISA Affiliate. No fiduciary has any liability
for breach of fiduciary duty or any other failure to act or comply in connection
with the administration or investment of the assets of any Company Benefit Plan.
No action, suit, proceeding, hearing, or investigation with respect to the
administration or the investment of the assets of any Company Benefit Plan
(other than routine claims for benefits) is pending or threatened. The Company
does not have any knowledge of any basis for any such action, suit, proceeding,
hearing or investigation.
(f) The Company has made available to the Purchaser correct and
complete copies of the plan documents and summary plan descriptions, the most
recent determination letter received from the Internal Revenue Service, the most
recent annual report (Form 5500, with all applicable attachments), and all
related trust agreements, insurance contracts, and other funding arrangements
which implement each Company Benefit Plan.
(g) With respect to each Company Benefit Plan or Employee Benefit Plan
of any ERISA Affiliate to which any of them contributes or has any obligation to
contribute, or with respect to which any of them has any liability or potential
liability:
(i) No such Company Benefit Plan that is an Employee Pension
Benefit Plan (other than any Multiemployer Plan (as defined in Section
3(37) of ERISA)) has been completely or partially terminated or been
the subject of a "reportable event". No proceeding by the Pension
Benefit Guaranty Corporation ("PBGC") to terminate any such Employee
Pension Benefit Plan has been instituted or threatened. The market
value of assets under each such Company Benefit Plan that is an
Employee Pension Benefit Plan (other than any Multiemployer Plan)
equals or exceeds the present value of all vested and nonvested
liabilities thereunder determined in accordance with PBGC methods,
factors, and assumptions applicable to an Employee Pension Benefit Plan
terminating on the date for determination; and
(ii) Neither the Company nor any of its Subsidiaries has
incurred, and none of the Company, its Subsidiaries, or their employees
with responsibility for employee benefits matters has any reason to
expect that the Company or any of its Subsidiaries will incur, any
liability to the PBGC (other than with respect to PBGC premium payments
not yet due) or otherwise under Title IV of ERISA or under the Code
with respect to any Company Benefit Plan which is an Employee Pension
Benefit Plan.
(h) None of the Company, its Subsidiaries, and any ERISA Affiliate
contributes to, has any obligation to contribute to, or has any liability
(including withdrawal liability as defined in ERISA (Section)4201) under or with
respect to any Multiemployer Plan.
(i) Neither the Company nor any of its Subsidiaries maintains,
contributes to or has an obligation to contribute to, or has any liability or
potential liability with respect to, any Employee Welfare Benefit Plan providing
health or life insurance or other welfare-type benefits for current or future
retired or terminated directors, officers or employees (or any spouse or other
dependent thereof) of the Company or any of its Subsidiaries other than in
accordance with COBRA.
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4.12 Labor and Employment Matters. Neither the Company nor any of its
Subsidiaries is a party to, or bound by, any collective bargaining agreement
with employees or other Company Material Contracts or understandings with a
labor union or labor organization. There are no strikes or lockouts with respect
to any employee of the Company or any Subsidiary, and to the knowledge of the
Company, there is no union organizing effort pending or threatened against the
Company or any Subsidiary. There is no unfair labor practice, labor dispute
(other than routine individual grievances) or labor arbitration proceedings
pending or, to the knowledge of the Company, threatened, against the Company or
its Subsidiaries relating to their business; there is no slowdown, work stoppage
or to the Company's knowledge a threat thereof by or with respect to the
employees of the Company or its Subsidiaries; and the Company and its
Subsidiaries are in material compliance with all Applicable Laws respecting (A)
employment and employment practices, (B) terms and conditions of employment and
wages and hours, and (C) unfair labor practices. Section 4.12 of the Company
Disclosure Schedule lists any claims pending or threatened in writing against
the Company or any of its Subsidiaries alleging systematic or routine violations
of Applicable Law relating to employment and employment practices. Neither the
Company nor any of its Subsidiaries has any liabilities under the Worker
Adjustment and Retraining Notification Act (the "WARN Act") as a result of any
action taken by the Company.
4.13 Intellectual Property Rights. Unless the context clearly requires
otherwise, all references in this Section 4.13 to the Company shall include the
Company and its Subsidiaries.
(a) Section 4.13(a) of the Company Disclosure Schedule sets forth a
complete and accurate list (showing in each case the registered owner, title (in
the case of Patents), mark, applicable jurisdiction, application number,
registration number (where applicable) and date of filing or registration (if
any) of all (i) Patents, (ii) Trademarks and assumed or fictitious names under
which Company is currently conducting business, (iii) material Internet domain
names currently being utilized by the Company, and (iv) registered Copyrights,
which are owned by the Company.
(b) Section 4.13(b) of the Company Disclosure Schedule sets forth a
complete and accurate list and description of all material agreements, licenses,
contracts or sublicenses pursuant to which Company uses or grants others the
right to use any Intellectual Property and Software of the Company. All of the
Intellectual Property described in Sections 4.13(a) and 4.13(b) of the Company
Disclosure Schedule shall be denominated herein as "Company Intellectual
Property".
(c) The Company either owns or has the valid right to use all Company
Intellectual Property currently used in connection with the business of the
Company.
(d) (i) All of the registrations or applications set forth in Section
4.13(a) of the Company Disclosure Schedule are valid and subsisting, in full
force and effect, and have not expired or been canceled or abandoned; and (ii)
there is no pending or, to the Company's knowledge, threatened opposition,
interference or cancellation proceeding before any court or registration
authority in any jurisdiction against the Company Intellectual Property
described in Section 4.13(a) of the Company Disclosure Schedule.
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(e) The licenses or sublicenses granted by the Company to third parties
and described in Section 4.13(b) of the Company Disclosure Schedule or the terms
and conditions of any licenses or sublicenses granted to the Company by third
parties and described in Section 4.13(b) of the Company Disclosure Schedule are
valid and binding obligations of the Company, enforceable in accordance with
their terms against the Company in accordance with their respective terms,
subject to (a) applicable bankruptcy, reorganization, insolvency, moratorium,
and similar laws affecting the enforcement of creditors' rights generally; and
(b) the effect of general principles of equity (including specific performance)
regardless of whether considered in a proceeding in equity or at law, and to the
Company's knowledge there currently exists no event or condition which will
result in a violation or breach of, or constitutes (with or without due notice
or lapse of time or both) a default by the Company, under any such agreement.
(f) To the Company's knowledge, the manufacture, advertising, sale or
use of any products now being manufactured or sold by the Company did not and
does not infringe (nor to the Company's knowledge has any claim been made that
any such action infringes) the Intellectual Property rights of others, and the
Company has not received any notice of a third party claim or suit, (i) alleging
that the Company's activities or the conduct of the business of the Company
infringes or constitutes the unauthorized use of the Intellectual Property
rights of any third party, or (ii) challenging the ownership, use, validity or
enforceability of any Company Intellectual Property.
(g) To the knowledge of the Company, no Person (other than the Company
or the Company's Subsidiaries) is infringing on the Company Intellectual
Property or upon the rights of the Company therein.
(h) The Company owns or has the right to use all Software set forth in
Sections 4.13(a) and 4.13(b) of the Company Disclosure Schedule and all material
"shrink wrap license" software used or owned by the Company.
4.14 Permits. The Company and its Subsidiaries are in possession of all
material franchises, authorizations, licenses, permits, easements, variances,
exceptions, consents, certificates, certificate of occupancy, approvals and
orders of any Governmental Authority necessary for the Company and its
Subsidiaries to own, lease and operate their properties and assets or to carry
on their businesses as they are now being conducted (the "Company Permits"). All
Company Permits are in full force and effect.
4.15 Environmental Compliance. (a) To the Company's knowledge, the Company
and its Subsidiaries are in material compliance with all applicable
Environmental Laws; and (b) the Company and its Subsidiaries are in possession
of, and in material compliance with, all permits, certificates, licenses,
approvals, tariffs and other authorizations of or issued by Governmental
Authorities required by applicable Environmental Laws with respect to
Environmental Matters relating to the operations of the Company or its
Subsidiaries; and (c) there are no current Environmental Claims pending, or to
the Company's knowledge threatened, against the Company or its Subsidiaries.
Neither the Company nor any of its Subsidiaries has either expressly or, to the
Company's knowledge by operation of law, assumed or undertaken any liability or
corrective, investigatory or remedial obligation of any other Person relating to
any Environmental Claims. To the Company's knowledge, no Environmental Lien has
attached to
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any property leased or owned by the Company or any of its Subsidiaries for which
the Company has any material liability.
4.16 Material Contracts. Unless the context clearly requires otherwise, all
references in this Section 4.16 to the Company shall include the Company and its
Subsidiaries.
(a) Section 4.16(a) of the Company Disclosure Schedule sets forth a
list of each of the following contracts and agreements to which, as of the date
hereof, the Company is a party or signatory or pursuant to which the Company has
third party rights (except for the Company Benefit Plans which are disclosed in
Section 4.11 of the Company Disclosure Schedule or the Company Leases which are
disclosed in Section 4.18 of the Company Disclosure Schedule): (i) any contract
or series of contracts resulting in a commitment or potential commitment for
expenditure or other obligation or potential obligation, or which provides for
the receipt or potential receipt, involving in excess of Fifty Thousand Dollars
(US$50,000.00) in any instance, or series of related contracts that in the
aggregate give rise to rights or obligations exceeding such amount other than
contracts with Governmental Authorities referred to in clause (ii); (ii)
contract, agreement, binding bid, binding proposal, or binding quotation with a
Governmental Authority resulting in a commitment or potential commitment for
expenditure or other obligation or potential obligation, or which provides for
the receipt or potential receipt, involving in excess of One Hundred Thousand
Dollars (US$100,000.00) in any instance, or series of related contracts that in
the aggregate give rise to rights or obligations exceeding such amount; (iii)
employment and retention agreements, collective bargaining agreements and any
amendments or modifications thereof and union recognition agreements, (iv)
indenture, mortgage, promissory note, loan agreement, guarantee or other
agreement or commitment for the borrowing or lending of money or Encumbrance of
assets owned by the Company or any of its Subsidiaries involving more than Ten
Thousand Dollars (US$10,000.00) in each instance; (v) agreement which restricts
the Company from engaging in the Parent Specified Line of Business; (vi) the
Company has provided to Parent examples of warranties made by the Company or any
of its Subsidiaries for their products in the context of government and
commercial products, including a parachute warranty provision; (vii) all
agreements or arrangements entered into by the Company or any of its
Subsidiaries beginning on January 1, 1995, with respect to which the Company has
a continuing obligation of performance or liability and pursuant to which the
Company sold or divested itself, directly or through a Subsidiary, of any
material portion of its assets, other than obsolete or damaged equipment or
inventory and other than in the ordinary course of business, including the sale
of all or substantially all of the capital stock or other ownership interests of
any of its Subsidiaries ("Divestiture Agreements"); and (viii) any partnership,
shareholder, joint venture, teaming, or similar agreement or arrangement to
which the Company is a party and as to which the Company has a continuing
obligation of performance or liability (collectively, and together with the
Company Leases, Company Benefit Plans and all other agreements required to be
disclosed on any schedule to this Agreement, the "Company Material Contracts").
The Company has previously made available to Purchaser true, complete and
correct copies of each of the Company Material Contracts.
(b) All such Company Material Contracts are valid and binding upon the
Company or the Company Subsidiaries, as applicable, and are in full force and
effect and enforceable against the Company or such Company Subsidiaries in
accordance with their respective terms; subject to (i) applicable bankruptcy,
reorganization, insolvency, moratorium,
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and similar laws affecting the enforcement of creditors' rights generally; and
(ii) the effect of general principles of equity (including specific performance)
regardless of whether considered in a proceeding in equity or at law.
(c) Neither the Company nor any of its Subsidiaries has received notice
that it is in violation of, material breach of, or default under any, or is in
violation of, material breach of, or default under any, such Company Material
Contract, nor to the Company's knowledge is any other party to any such Company
Material Contract in violation of, material breach of, or default under any such
Company Material Contract; except that in the case of the notes, agreements,
documents and/or instruments evidencing the Funded Indebtedness, the Merger and
the consummation of the transactions contemplated by this Agreement and the
Ancillary Documents may result in a violation of, material breach of, or default
under a covenant or covenants contained therein.
(d) The Company has, with respect to all Governmental Contracts that
are Company Material Contracts: (i) complied in all material respects with all
certifications and representations that the Company has executed, acknowledged
or set forth with respect to each such Company Material Contract, (ii) complied
in all material respects with all clauses, provisions and requirements
incorporated expressly, by reference or by operation of law in each such Company
Material Contract, and (iii) submitted certifications and representations with
respect to each such Company Material Contract that were accurate, current and
complete when submitted in all material respects, and were properly updated in
all material respects to the extent required by Applicable Law or the applicable
Company Material Contract.
(e) The Company has not, with respect to any Governmental Contract that
is a Company Material Contract: (i) received notice that the Company has
materially breached or violated any Applicable Law, certification,
representation, clause, provision, or requirement with respect to any such
Company Material Contract, (ii) received any show cause notice or cure notice
with respect to any such Company Material Contract, (iii) received any formal or
informal determination that costs incurred under any such Company Material
Contract have been questioned or disallowed, (iv) received any adverse decision
from a contracting officer relating to any such Company Material Contract issued
by any Governmental Authority, or (v) received any notice that monies due under
any such Company Material Contract are or may be subject to withholding or
setoff.
(f) With respect to any Governmental Contracts that are Company
Material Contracts, there are no pending claims against any Governmental
Authority or, to the knowledge of the Company, threatened claims against any
prime contractor, subcontractor or vendor, arising out of or relating to any
such Governmental Contracts.
(g) The Company has not received any notice that the Company is
currently debarred or suspended from doing business with any Governmental
Authority, nor has the Company received any notice that the Company has been
declared ineligible for doing business with any Governmental Authority, nor has
the Company received any notice nor does the Company have any knowledge that a
Governmental Authority intends to institute any debarment, suspension or
ineligibility proceedings against the Company.
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(h) The Company has not received any negative determination of
responsibility by any Governmental Authority or government prime contractor with
respect to the Company. The Company does not have knowledge of any reasonably
likely negative determination of responsibility by any Governmental Authority or
government prime contractor with respect to the Company.]
(i) The Company possesses all necessary and material security
clearances and permits for the execution of its obligations with respect to any
Governmental Contract that constitutes a Material Contract or any material bid,
proposal or quotation the Company currently has pending before any Governmental
Authority or government prime contractor. The Company has never been denied a
facility security clearance and to the Company's knowledge none of its employees
has been denied a personal clearance for material reasons.
4.17 Divestiture Agreements. Section 4.17 of the Company Disclosure
Schedule sets forth (a) a statement of the reserves set aside by the Company or
its Subsidiaries for any liabilities, contingent liabilities, or continuing or
executory obligations of performance or payment that the Company or its
Subsidiaries has or may have as of the date of the Company's most recent Company
Report setting forth such reserves pursuant to or in connection with any of the
Divestiture Agreements, and (b) a statement summarizing any claims made by third
parties with respect to such liabilities, contingent liabilities, or continuing
or executory obligations of performance or payment through the date of this
Agreement pursuant to or in connection with any of the Divestiture Agreements.
The Company has used the net proceeds from the consummation of the ASD
Transaction for general corporate purposes (including paying debt to the holders
of the Funded Indebtedness and other indebtedness to the extent permitted by
this Agreement) and has not used the proceeds from the ASD Transaction to pay
any bonuses (except as required by pre-existing contracts, as required by
Applicable Law, or as otherwise permitted by Section 6.2).
4.18 Real Property. Unless the context clearly indicates otherwise, all
references to the Company in this Section 4.18 shall include the Company and all
of its Subsidiaries.
(a) The Company does not own any fee simple interest in real property
other than the Arizona Real Estate. The Company does not lease or sublease (as
lessee, sublessee or sublessor) any real property other than the Company Leased
Property. Section 4.18(a) of the Company Disclosure Schedule sets forth the
street address of each parcel of real property owned by the Company (the
"Company Owned Property") or leased or subleased (as lessee, sublessee or
sublessor) by the Company (the "Company Leased Property" and, together with the
Company Owned Property, the "Company Real Property"). Attached to Section
4.18(a) of the Company Disclosure Schedule is a list of all of the lease and
sublease agreements and all other instruments granting such leasehold interests,
rights, options, or other interests (the "Company Leases") relating to the
Company Leased Property. A true, complete, and correct copy of each of the
Company Leases has previously been made available to the Purchaser. The Company
Leases are valid, binding upon the Company, and in full force and effect,
subject to (a) applicable bankruptcy, reorganization, insolvency, moratorium,
and similar laws affecting the enforcement of creditors' rights generally; and
(b) the effect of general principles of equity (including specific performance)
regardless of whether considered in a proceeding in equity or at law; all rent
and other sums and charges due and payable thereunder are current; no notice of
default or
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termination under any of the Company Leases has been received by the Company or
delivered by the Company and is outstanding; and no termination event or
condition or uncured default on the part of the Company or, to the knowledge of
the Company, on the part of the landlord or sublandlord, as the case may be,
thereunder, exists under any the Company Leases. Except for the Company Leases,
there are no other subleases, licenses or other agreements granting to any
Person other than the Company any right to possession, use, occupancy or
enjoyment of the premises demised by the Company Leases. Except as contemplated
by the ASD Transaction, and to the Company's knowledge no event has occurred and
no condition exists which, with the giving of notice or the lapse of time or
both, would constitute such a default or termination event or condition under
any of the Company Leases. In the event that any of the Company Leases is a
sublease, the Company or its Subsidiaries, as sublessee or sublessor, as the
case may be, has obtained the required consent of the prime landlord to such
sublease, and to the Company's knowledge such prime lease is in full force and
effect, and to Company's knowledge no right of Company or its Subsidiaries in
any such sublease conflicts with such prime lease. All of the Company Real
Property is used in the conduct of the Company's business. Notwithstanding any
of the provisions of this Section 4.18(a) to the contrary, none of the foregoing
representations and warranties of the Company shall apply to the Company's
financial liability related to its former Airline Interiors facility located in
Poway, California. Copies of the documents relating to such financial liability
have been made available to the Parent (which documents have not been amended
except as indicated herein); the Company has adequately reserved against any
such financial liability in its financial statements contained in the Company
Reports in accordance with GAAP; the prime lease and any sublease contained in
such documents are in full force and effect; neither the lessee nor sublessee
thereunder is in default with respect to any financial terms of such documents
or, to the Company's knowledge, with respect to any of the other terms of such
documents and to the knowledge of the Company no condition or event exists that
would give rise to any such default; and the Company has not, and shall not
have, between the date of this Agreement and the Closing Date, amended any of
the documents relating to such financial liability which have been available to
the Parent.
(b) The Company has good title in fee simple or otherwise to the
Company Owned Property and good leasehold title to the Company Leased Property
and to all plants, buildings, and improvements thereon, free and clear of any
Encumbrances (except for Permitted Encumbrances). The Company enjoys a peaceful
and undisturbed possession of the Company Real Property and to Company's
knowledge, no landlord under the Company Leases has any plans to make any
alterations to any of the Company Leased Property (i) which will interfere in
any material respect with the Company's peaceful and undisturbed possession of
the Company Leased Property or the Company's use of any material portion of the
Company Leased Property or (ii) the costs of which alterations would be borne in
any part by the Company under the applicable Company Lease.
(c) All of the material improvements (including material heating,
ventilation, air conditioning, plumbing and electrical systems) located on the
Company Real Property are maintained by the Company in good working order and
repair in the ordinary course of business and are in a condition adequate and
reasonably suitable for the conduct therein of the business as conducted by the
Company. The Company has not experienced any material and prolonged interruption
in such electrical, water, waste removal or other utility services provided to
any of the Company Real Property within the last year.
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(d) The Company has not received any written notice of nor has it any
knowledge of any pending or threatened condemnation or eminent domain proceeding
with respect to or affecting any Company Real Property or any material part
thereof.
(e) The Company and its Subsidiaries maintain all insurance policies
and coverage required of the Company and it Subsidiaries under the Company
Leases for Company Leased Property, and to the Company's knowledge, all
subtenants under any Company Lease that is a sublease maintain all insurance
policies required under the Company Leases for the Company Leased Property. All
of such policies are in full force and effect and are valid and enforceable in
accordance with their terms, and the Company and its Subsidiaries, and to the
Company's knowledge all subtenants under any Company Lease that is a sublease,
has complied in all material respects with all terms and conditions of such
policies, including premium payments.
4.19 Brokers. Except for Libra Securities, LLC and Relational Advisors, LLC
(individually or collectively, the "Financial Advisors", no broker, finder or
financial advisor is entitled to any brokerage, finder's or other fee or
commission in connection with the transactions contemplated by this Agreement
that is based upon any arrangement made by or on behalf of the Company or any of
its Subsidiaries. True and correct copies of the engagement letter between the
Company and any of the Financial Advisors have been made available to Parent.
4.20 Opinion of Financial Advisor. The Company has received the written
opinion of Relational Advisors, LLC to the effect that, as of the date hereof,
the Merger Consideration is fair, from a financial point of view, to the
shareholders of the Company.
4.21 State Takeover Statutes. The approval of the Company's board of
directors described in Section 4.2 is sufficient, assuming the accuracy of
Parent's and Purchaser's representations and warranties set forth in Article V,
to render inapplicable to the Merger, this Agreement, and the transactions
contemplated hereby and thereby, the limitations on business combinations
contained in Sections 10-2741 through 10-2743 of the Arizona Code.
4.22 No Undisclosed Liabilities. Except (i) as reflected or reserved
against in the Company's consolidated balance sheets (or the notes thereto)
included in the Company's Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 2003, (ii) for liabilities incurred in connection with this
Agreement or the transactions contemplated hereby, (iii) for liabilities and
obligations incurred in the ordinary course of business, consistent with past
practice, (iv) the Funded Indebtedness and Company's Transaction Fees, and (v)
liabilities or obligations of the Company incurred in connection with
Divestiture Transactions, since June 30, 2003, neither the Company nor any
Subsidiary of the Company has incurred any material liabilities or obligations
of any nature, whether or not accrued, contingent or otherwise, that would be
required by GAAP to be reflected on a consolidated balance sheet of the Company
and its Subsidiaries (or in the notes thereto) in the Company Reports.
4.23 Certain Business Practices. None of the Company, the Company
Subsidiaries, nor any directors, officers, agents, or employees of the Company
or any Company Subsidiary has (i) used any funds of the Company for unlawful
contributions, gifts, entertainment, or other unlawful expenses relating to
political activity or (ii) made any unlawful payment by the
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Company to foreign or domestic government officials or employees or to foreign
or domestic political parties or campaigns or violated any provision of the
Foreign Corrupt Practices Act of 1977.
4.24 Affiliates. Section 4.24 of the Company Disclosure Schedule sets forth
the name of each Person who is, in the Company's reasonable judgment, an
affiliate (as that term is used in Rule 145 under the Securities Act) of the
Company.
4.25 Products. To the Company's knowledge, there exists no reasonably
likely basis for (i) the withdrawal or suspension of any authorization of any
Governmental Authority, approval or consent of any Governmental Authority with
respect to any product distributed or sold by any of the Company or any of its
Subsidiaries (a "Product"), or (ii) the recall, withdrawal or suspension by
order of any Governmental Authority of any Product. To the Company's knowledge,
there are no defects in the designs, specifications, or process with respect to
any Product currently sold or otherwise distributed that will give rise to any
material liabilities, damages, fines, assessments, losses, penalties, or
expenses.
4.26 Form S-4; Proxy Statement. None of the information supplied in writing
by the Company for inclusion in, and none of the information regarding the
Company from the Company Reports incorporated by reference in (a) the
registration statement on Form S-4 to be filed with the SEC by Parent in
connection with the issuance of shares of Parent Common Stock in connection with
the Merger, or any of the amendments or supplements thereto (the "Form S-4")
will, at the time the Form S-4 is filed with the SEC, or at any time it is
amended or supplemented, or at the time it becomes effective under the
Securities Act, or at the time of the Shareholders Meeting, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they are made, not misleading, and (b) the proxy
statement for use relating to the Company Shareholder Approval or any of the
amendments or supplements thereto (collectively, the "Proxy Statement"), will
not, at the date it is first mailed to the Company's shareholders and at the
time of the Shareholders Meeting, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in the light of the
circumstances under which they are made, not misleading. The Proxy Statement
will comply as to form in all material respects with the requirements of the
Exchange Act.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PARENT AND PURCHASER
Each of the Parent and Purchaser represents and warrants to the Company
that as of the date of this Agreement the statements contained in this Article
V, when read together with and qualified by the Disclosure Schedule delivered by
the Parent and Purchaser to the Company in connection with and prior to the
execution of this Agreement (the "Parent Disclosure Schedule"), are true and
correct except for events, transactions or occurrences contemplated or required
by this Agreement. Whether or not specifically required by the terms of this
Article V or otherwise,
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Parent and Purchaser may modify their representations and warranties contained
in this Agreement by disclosing relevant facts on the Parent Disclosure
Schedule; provided, however, that for any such disclosure to be effective, it
must indicate the specific Section or Subsection of this Agreement to which it
relates. The disclosure of any information in the Parent Disclosure Schedule
shall not be deemed to constitute an acknowledgment that such information is
required to be disclosed in connection with the representations and warranties
made by the Parent and Purchaser in this Agreement or that it is material, nor
shall such information be deemed to establish a standard of materiality. Unless
otherwise specifically defined or the context otherwise requires, capitalized
terms set forth in the Parent Disclosure Schedule shall have the meanings
ascribed to such terms in this Agreement.
Promptly following the Parent or Purchaser having knowledge of or
receiving notice of the occurrence of any matter or event arising after the date
of this Agreement which (a) may be deemed to constitute a Material Adverse
Change with respect to the Parent or Purchaser (a "Parent MAC"); (b) if existing
or occurring at or before the date of this Agreement, would have been required
to be set forth or described in such Parent Disclosure Schedule; or (c) is
necessary to correct any information in such Parent Disclosure Schedule or in
the representations and warranties of the Parent and Purchaser herein which have
been rendered inaccurate by such matter or event, the Parent and Purchaser shall
supplement or amend the affected sections or subsections of the Parent
Disclosure Schedule in writing with respect to such matter or event in the same
manner as required of the Parent and Purchaser for making disclosures and taking
exceptions to the Parent's and Purchaser's representations and warranties in the
Disclosure Schedule (the "Parent Updates").
Upon receipt of any such Parent Update, the Company shall have ten (10)
Business Days following the receipt of the Parent Updates: (a) to review,
investigate and analyze the information disclosed in the Parent Update; (b) to
make a determination whether or not the information disclosed in the Parent
Update, individually or together with any other information previously disclosed
in any other Parent Updates, disclose events or circumstances that constitute a
Parent MAC; and (c) if the Company reasonably determines that the information
disclosed in the Parent Update, individually or together with any other
information previously disclosed in any other Parent Updates or other events
occurring after the date hereof, disclose events or circumstances that
constitute a Parent MAC, to notify the Parent in writing that the Company has
determined that such a Parent MAC has occurred, including a reasonable
explanation of the reasons for such determination, and that the Company has
elected to terminate this Agreement pursuant to Section 8.3 of this Agreement
(subject to the expiration of any cure or grace periods contained therein or
applicable to the breach giving rise to the Parent MAC) (a "Company Termination
Notice"). If any Parent Update is received by the Company within ten (10)
Business Days prior to the scheduled Closing Date and the Company has not, in
its reasonable discretion, had an adequate opportunity to review, investigate
and make a determination with respect to the matters or events disclosed therein
as of the scheduled Closing Date, or the parties have not come to a resolution
with respect thereto, notwithstanding any other provision of this Agreement to
the contrary, the Company may postpone the Closing Date to a date that is ten
(10) Business Days following the date of the Company's receipt of the applicable
Parent Update. Upon the timely delivery of a Company Termination Notice to
Parent pursuant to this paragraph, this Agreement shall terminate, except as
provided by Section 9.1 hereof, and all duties and
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obligations of the Company under this Agreement and to consummate the Merger
shall terminate.
In the event that (a) a Parent Update does not, either individually or
in the aggregate with any or all prior Parent Updates delivered to the Company
prior to the Closing, disclose events or circumstances that constitute a Parent
MAC; (b) the Company does not timely deliver a Company Termination Notice to
Parent with respect to the Parent Update pursuant to the terms contained in the
preceding paragraph; or (c) the Closing occurs without the Company timely
delivering a Company Termination Notice to Parent, then the Company shall no
longer have the rights of termination described above with respect to such
Parent Update and all other Parent Updates previously delivered as described
above and the events or circumstances so disclosed shall not constitute a Parent
MAC, provided, however, if the Parent delivers a subsequent Parent Update to the
Company the events and circumstances disclosed therein may be aggregated with
the events and circumstances disclosed in all prior Parent Updates previously
delivered by the Parent to the Company pursuant to the terms set forth above.
Notwithstanding the immediately preceding sentence, in the event that a new
Parent Update is thereafter received by the Company that either individually or
together with all Parent Updates previously delivered by Parent and Purchaser to
the Company pursuant to the terms set forth above disclose events or
circumstances that constitute a Parent MAC, then provided that the Company
timely delivers a Company Termination Notice to Parent with respect thereto, the
delivery of such Company Termination Notice shall be effective to terminate this
Agreement pursuant to Section 8.3 of this Agreement.
5.1 Existence; Good Standing; Corporate Authority.
(a) The Parent and each of its Subsidiaries (including the Purchaser)
is a corporation duly organized, validly existing and in good standing under the
laws of the jurisdiction of its incorporation or formation. The Parent and each
of its Subsidiaries (including the Purchaser) is duly qualified to do business
as a foreign corporation and is in good standing under the laws of any other
state of the United States in which the ownership or leasing of its properties
or the conduct of its business requires such qualification, except where the
failure to be so qualified or in good standing would not be reasonably likely to
have a Material Adverse Effect. The Parent and each of its Subsidiaries
(including the Purchaser) has all requisite corporate power and authority to own
or lease and operate its properties and to carry on its business substantially
as now being conducted. Attached to Section 5.1(a) of the Parent Disclosure
Schedule are true and correct copies of the Articles of Incorporation and Bylaws
(or equivalent organizational documents) as currently in full force and effect
for the Parent and the Purchaser. Purchaser is wholly-owned by the Parent and
all of the capital stock and other interests of the Purchaser so held by the
Parent are directly or indirectly owned by it, free and clear of any
Encumbrances with respect thereto, except for Permitted Encumbrances. As of the
date of this Agreement, the Purchaser is a newly-formed shell corporation with
no material assets, liabilities or operations.
5.2 Authorization, Validity and Effect of Agreements. Each of the Parent's
and Purchaser's respective boards of directors has determined that the Parent's
and Purchaser's execution and delivery this Agreement and the Ancillary
Documents to which the Parent and Purchaser are a party, and the transactions
contemplated by this Agreement and such Ancillary Documents, including but not
limited to the Merger, are advisable and in the best interest of the
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Parent, Purchaser and their respective shareholders and has approved this
Agreement and the Ancillary Documents to which the Parent is a party in
accordance with all Applicable Laws. Each of the Parent and the Purchaser has
the requisite corporate power and authority to execute and deliver this
Agreement, and all Ancillary Documents to which it is a party, and to consummate
the transactions contemplated hereby and thereby, including but not limited to
the Merger. The execution and delivery of this Agreement and the Ancillary
Documents to which it is a party by the Parent or the Purchaser and the
consummation by the Parent or the Purchaser of the transactions contemplated
hereby and thereby have been duly and validly authorized by each of the Parent's
and Purchaser's respective boards of directors, and no other corporate
proceedings on the part of the Parent or the Purchaser are necessary to
authorize this Agreement, to authorize the Ancillary Documents to which it is a
party, or to consummate the transactions contemplated hereby and thereby,
including but not limited to the Merger, other than the filing and recordation
of the Articles of Merger in accordance with the Arizona Code. This Agreement
and any Ancillary Documents to which the Parent or the Purchaser is a party at
the time of execution has been or will be duly and validly executed and
delivered by the Parent and/or the Purchaser, and (assuming this Agreement and
such Ancillary Documents each constitutes a valid and binding obligation of any
other parties thereto) constitutes and will constitute the valid and binding
obligations of the Parent and/or the Purchaser, enforceable against the Parent
and/or the Purchaser in accordance with their respective terms, subject to (a)
applicable bankruptcy, reorganization, insolvency, moratorium, and similar laws
affecting the enforcement of creditors' rights generally; and (b) the effect of
general principles of equity (including specific performance) regardless of
whether considered in a proceeding in equity or at law.
5.3 Compliance with Laws. Since August 18, 2003, Parent and each of its
Subsidiaries (including Purchaser) is in material compliance with and is not in
default under or in violation of (a) its respective Articles of Incorporation
and Bylaws (or equivalent organizational documents) or (b) any Applicable Law,
including, but not limited to, those relating to (i) the development,
manufacture, distribution, marketing, and sale of its products and services and
(ii) the bidding for Government Contracts or conducting its business with
respect to Government Contracts. Neither the Parent, nor any of its Subsidiaries
(including Purchaser), is subject to any material judicial, governmental or
administrative order, judgment or decree of any Governmental Authority currently
in effect to which the Parent or any of its Subsidiaries (including Purchaser),
or its or any of their respective assets or properties, are subject. Attached to
Section 5.3 of the Parent Disclosure Schedule are true and correct copies of all
reports of inspections of each of the Parent's and its Subsidiaries' (including
Purchaser's) businesses and properties which occurred during the past three (3)
years under Applicable Law which resulted or could, after the date hereof,
result in the imposition of a material fine, penalty, or other restriction. The
Parent has not received notice of any material breach, default or violation (or
notice of any investigation, inspection, audit, or other proceeding by any
Governmental Authority involving an allegation of any material breach, default
or violation) of any Applicable Law by or affecting the Parent or any of its
Subsidiaries (including Purchaser), and to the knowledge of the Parent, no such
investigation, inspection, audit, or other proceeding by any Governmental
Authority is threatened or pending.
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5.4 Capitalization.
(a) As of the date hereof, the authorized capital stock of the Parent
consists of 50,000,000 shares of Parent Common Stock, US$0.01 par value per
share, and 5,000,000 shares of preferred stock of the Parent, US$0.01 par value
per share ("Parent Preferred Stock"). Of the authorized shares of Parent Common
Stock, as of the close of business on August 25, 2003, (i) there were issued and
outstanding 33,947,988 shares of Parent Common Stock; (ii) 6,060,222 shares of
Parent Common Stock were issued and held in the treasury of Parent; (iii)
1,346,135 shares of Parent common Stock were reserved for issuance pursuant to
the Parent's 2002 Stock Incentive Plan, and 2002 Executive Stock Plan; and (iv)
no shares of Parent Preferred Stock were issued and outstanding. As of the date
of this Agreement, as of the Closing Date, and as of the Effective Time, except
for the issued or outstanding Parent Common Stock described herein, no other
capital stock of the Parent is issued or outstanding.
(b) As of the date of this Agreement, as of the Closing Date, and as of
the Effective Time, the Parent shall have a sufficient number of shares of
Parent Common Stock authorized and reserved for issuance as may be required for
the payment of the Merger Consideration to the holders of the Participating
Company Stock as set forth in this Agreement and are not reserved for any other
purpose whatsoever. When issued to the holders of the Participating Company
Stock pursuant to the terms and conditions set forth in this Agreement, such
shares of Parent Common Stock shall be free and clear of all Encumbrances, shall
be duly authorized, validly issued, fully paid and nonassessable.
(c) Except as described in this Section 5.4, there are no restrictions
upon the transfer of or otherwise pertaining to the Parent Common Stock
(including, but not limited to, the ability to pay dividends thereon), or the
ownership thereof, or retained earnings of the Parent and the Parent
Subsidiaries, other than those imposed by the Securities Act, the Exchange Act,
applicable state securities laws, or other Applicable Laws.
(d) All issued and outstanding shares of Parent Common Stock are duly
authorized, validly issued, fully paid and nonassessable. Except as contemplated
by this Agreement, there are no voting trusts, voting agreements or other
agreements to which the Parent is a party with respect to the voting of the
capital stock or other equity interests of the Parent.
5.5 No Violation; Consents. Neither the execution and delivery by the
Parent or the Purchaser of this Agreement or any of the Ancillary Documents to
which it is a party, nor the consummation by the Parent or the Purchaser of the
transactions contemplated hereby or thereby, will: (a) violate, conflict with or
result in a material breach of the respective Articles of Incorporation or
Bylaws (or equivalent organizational documents) of Parent or any Subsidiary of
Parent (including Purchaser); (b) violate, conflict with, result in a material
breach of, constitute (with or without due notice or lapse of time or both) a
default under, result in the termination or in a right of termination of,
accelerate the performance required by or benefit obtainable under, result in
the triggering of any payment or other obligations pursuant to, result in the
creation of any Encumbrances (except for Permitted Encumbrances) upon any of the
properties of the Parent or its Subsidiaries (including Purchaser) under, or
result in there being declared void, voidable, or without further binding
effect, any of the terms, conditions or provisions of, any material contract to
which the Parent or any of its Subsidiaries (including Purchaser) is a party, or
by
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which the Parent or any of its Subsidiaries (including Purchaser) or any of
their respective properties or assets is bound, except where the Parent or any
of its Subsidiaries (including Purchaser) has obtained or will obtain prior to
the Closing the necessary written agreements, waivers or consents of the other
parties to such material contracts to avoid, release or waive any such default,
conflict, breach, violation, termination, right to terminate or accelerate, or
triggering of payment with respect to such material contracts; or (c) require
any consent, approval or authorization of, or filing or registration with, any
Governmental Authority, except for (A) applicable requirements of the Securities
Act and the Exchange Act, (B) the applicable pre-merger notification
requirements of the HSR Act, any Non-U.S. Anti-Trust Laws or other Regulatory
Laws, (C) if required, the receipt of a decision under any Non-U.S. Anti-Trust
Laws, declaring the Merger compatible with any Non-U.S. Anti-Trust Laws, and (D)
the filing and recordation of the Articles of Merger pursuant to the Arizona
Code,
5.6 Parent Reports; Financial Statements. The Parent has made available to
the Company true and complete copies of (i) its Annual Report on Form 10-K, for
the fiscal years ended December 31, 2000, December 31, 2001, and December 31,
2002, as filed with the SEC under the Securities Act and/or the Exchange Act, as
applicable, (ii) its proxy statements relating to all of the meetings of
shareholders (whether annual or special) of the Parent since January 1, 2001, as
filed with the SEC, and (iii) all other reports, statements and registration
statements and amendments thereto (including, without limitation, Quarterly
Reports on Form 10-Q and Current Reports on Form 8-K) required to be filed by
the Parent with the SEC under the Securities Act and/or the Exchange Act, as
applicable, since January 1, 2000. The reports and statements set forth in
clauses (i) through (iii), above, including all exhibits and information
incorporated by reference therein, are referred to collectively herein as the
"Parent Reports."
(a) Since December 31, 2000, the Parent filed all Parent Reports
required to be filed by it with the SEC under the Securities Act and/or the
Exchange Act, as applicable. As of their respective filing dates (and if amended
or supplemented by a filing prior to the date of this Agreement, then as of the
date of such amended or supplemented filing), the Parent Reports (i) complied in
all material respects with the then-applicable requirements of the Securities
Act and the Exchange Act and (ii) did not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements made therein, in the light of the circumstances
under which they were made, not misleading.
(b) No Subsidiary of the Parent is required to file any forms, reports
or other documents with the SEC.
(c) The audited consolidated financial statements and unaudited interim
financial statements of the Parent included in the Parent Reports have been
prepared in accordance with GAAP applied on a consistent basis (except as may be
indicated therein or in the notes thereto) and present fairly, in all material
respects, the financial position of the Parent and the Parent Subsidiaries as at
the dates thereof and the results of their operations and cash flows for the
periods then ended subject, in the case of the unaudited interim financial
statements, to normal year-end audit adjustments, any other adjustments
described therein, and the fact that certain information and notes have been
condensed or omitted in accordance with the Exchange Act.
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5.7 Parent Litigation. Except (a) as required to be disclosed in any Parent
Report and so disclosed in any Parent Report on or before August 18, 2003, and
(b) since August 18, 2003, there are no actions, suits, arbitrations, claims or
proceedings or, to the knowledge of the Parent, investigations, pending,
publicly announced or, to the knowledge of the Parent, threatened, against or
affecting the Parent or any of its Subsidiaries (including Purchaser), at law or
in equity (collectively, "Parent Litigation"), and there are no outstanding
settlement agreements, consent decrees or agreements, forbearance to sue
agreements, or similar agreements or obligations binding upon the Parent or any
of its Subsidiaries (including Purchaser).
5.8 Absence of Certain Changes. Since August 18, 2003, the Parent and its
Subsidiaries have conducted their respective businesses only in the ordinary
course, consistent with past practice.
5.9 Brokers. Except for Wachovia, no broker, finder or financial advisor is
entitled to any brokerage, finder's or other fee or commission in connection
with the transactions contemplated by this Agreement that is based upon any
arrangement made by or on behalf of the Parent or any of its Subsidiaries.
5.10 No Undisclosed Liabilities. Except (i) as reflected or reserved
against in the Parent's consolidated balance sheets (or the notes thereto)
included in the Parent's Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 2003, (ii) for liabilities incurred in connection with this
Agreement or the transactions contemplated hereby, and (iii) for liabilities and
obligations incurred in connection with the issuance of the 8 1/4% Notes and in
the ordinary course of business, consistent with past practice, since June 30,
2003, neither the Parent nor any Subsidiary of the Parent has incurred any
material liabilities or obligations of any nature, whether or not accrued,
contingent or otherwise, that would be required by GAAP to be reflected on a
consolidated balance sheet of the Parent and its Subsidiaries (or in the notes
thereto) in the Parent Reports.
5.11 Certain Business Practices. None of the Parent, the Parent
Subsidiaries, nor any directors, officers, agents, or employees of the Parent or
any Parent Subsidiary has (i) used any funds of the Parent for unlawful
contributions, gifts, entertainment, or other unlawful expenses relating to
political activity or (ii) made any unlawful payment by the Parent to foreign or
domestic government officials or employees or to foreign or domestic political
parties or campaigns or violated any provision of the Foreign Corrupt Practices
Act of 1977, which will constitute a Material Adverse Effect.
5.12 Form S-4; Proxy Statement. None of the information supplied in writing
by the Parent for inclusion in, and none of the information regarding the Parent
from the Parent Reports incorporated by reference in (a) the registration
statement on Form S-4 to be filed with the SEC by the Parent in connection with
the Merger will, at the time the Form S-4 is filed with the SEC, or at any time
it is amended or supplemented, or at the time it becomes effective under the
Securities Act, or at the time of the Shareholders Meeting, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they are made, not misleading, and (b) the Proxy
Statement will, at the date it is first mailed to the Parent's shareholders and
at the time of the Shareholders Meeting, contain any untrue statement of a
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material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in the light of the
circumstances under which they are made, not misleading. The Form S-4 will
comply as to form in all material respects with the requirements of the
Securities Act and the Exchange Act, as applicable.
5.13 Disclosure Materials. None of the information contained in the certain
disclosure materials delivered by the Parent to the Company under cover dated
August 29, 2003 (the "Disclosure Materials"), except specifically with respect
to any information therein also disclosed in the Parent's Form 8-K filed with
the SEC on August 12, 2003, any pro forma financial information therein, and any
information relating to the financial results specifically associated with
Parent's individual product categories therein, did not as of the date of each
document contained in the Disclosure Materials, contain any untrue statement of
a material fact or omit to state a material fact required to be stated therein
or necessary to make the statements made therein, in the light of the
circumstances under which they were made, not misleading.
5.14 Parent Acknowledgement. The Parent acknowledges that Robert R.
Schiller, Glenn Heiar, Gary Julien, and counsel to the Parent have read the
entire Company Disclosure Schedule.
ARTICLE VI
COVENANTS
6.1 Alternative Proposals.
(a) Subject to Section 6.1(b), since July 23, 2003, the Company has
not, and until the earlier of the Effective Time or the termination of this
Agreement as provided herein, the Company agrees that neither it nor any of its
Subsidiaries or Affiliates, nor any of their Representatives, shall, directly or
indirectly, (i) encourage, invite, initiate or solicit any inquiries relating to
or the submission or making of a proposal by any Person with respect to an
Alternative Transaction or (ii) participate in or encourage, invite, initiate or
solicit negotiations or discussions with, or furnish or cause to be furnished
any information to, any Person relating to an Alternative Transaction. Any
violation of the restriction set forth in this Section 6.1 by any Representative
of the Company or any of its Subsidiaries, whether or not such Representative is
authorized to act on behalf of the Company or otherwise, shall be deemed to be a
breach of this Section 6.1 by the Company. Upon the execution of this Agreement,
the Company shall immediately cease, or cause to be ceased, any discussions or
negotiations with any Person regarding any proposed or potential Alternative
Transaction and shall request the prompt return to the Company, or destruction
of, any confidential information provided in connection with any such
discussions or negotiations. Except in accordance with Section 6.1(b), the
Company's board of directors shall not (1) make a Change in the Company
Recommendation, or (2) cause the Company to enter into any memorandum of
understanding, agreement in principle, letter of intent, contract or agreement
(whether written or oral) related to any Alternative Transaction.
(b) Anything set forth herein to the contrary notwithstanding, the
board of directors of the Company may, prior to receipt of the Company
Shareholder Approval, review, negotiate, and provide information (subject to a
confidentiality agreement at least as restrictive as
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the Parent - Company Confidentiality Agreement) in connection with the review
and negotiation of an unsolicited, bona fide written proposal regarding an
Alternative Transaction (an "Unsolicited Offer"), provided that: (i) the
Company's board of directors, in the exercise of its fiduciary duties, shall
have concluded in good faith, after considering Applicable Law, on the basis of
advice of counsel, that such actions are not inconsistent with its fiduciary
duties to the Company's stockholders under Applicable Law, (ii) the Company's
board of directors shall have determined in good faith (after consultation with
its financial advisors) that the acquiring party is capable of consummating such
Alternative Transaction, (iii) if any cash consideration is involved, such
Alternative Transaction shall not be subject to any financing contingency, and
(iv) the Company's board of directors shall have determined that such
Alternative Transaction is superior to the Merger from a financial point of view
to the stockholders of the Company (a proposed Alternative Transaction that
meets the criteria set forth in subsections (i) - (iv) of this Section 6.1(b) is
referred to herein as a "Superior Transaction").
(c) In the event a third party makes an inquiry, offer or proposal to
the Company with respect to any Alternative Transaction, the Company, subject to
any related confidentiality agreement existing on the date hereof that, in the
opinion of counsel to the Company, is binding on the Company and precludes such
disclosure, will promptly inform Parent of any such inquiry, offer or proposal
(including the terms thereof and the identity of the third party making such
inquiry, offer or proposal) and will promptly furnish to Parent a copy of any
such inquiry, offer or proposal, if in written form, or otherwise a summary of
the principal terms thereof; provided, that, in the event that any existing
confidentiality agreement, as described above, precludes any such disclosure,
then the Company will provide Parent with written notice of the existence of
such other inquiry, offer or proposal for an Alternative Transaction and will
provide as much information as is permissible consistent with the provisions of
such confidentiality agreement.
(d) Notwithstanding anything contained in Section 6.1 of this Agreement
to the contrary, the Company shall be permitted to (i) discuss and pursue with
its existing or replacement lenders regarding extensions and refinancings of all
or any portion of the Funded Indebtedness (provided that all such extensions and
refinancings of Funded Indebtedness shall provide that such indebtedness may by
prepaid at any time and that no warrants, options, or other securities
exercisable or convertible, in the aggregate, into more than ten percent (10%)
of the outstanding capital stock of the Company, shall be issued in connection
therewith) and (ii) provide information to its current lenders that is required
pursuant to contractual obligations existing as of the date hereof, or
information historically provided, consistent with past practices, including
status reports on the transactions contemplated herein, excluding, however, any
nonpublic competitive, price, strategic or valuation information or principal
deal terms relating to the Merger or this Agreement (except to the extent such
disclosure is required by the terms of the notes, agreements, documents and/or
instruments evidencing the Funded Indebtedness to a holder of the Funded
Indebtedness) and provided that the Company promptly provides to Parent copies
of all such information provided to current lenders.
(e) Nothing contained in this Section 6.1 or elsewhere in this
Agreement shall prohibit the Company from (i) taking and disclosing to its
shareholders a position contemplated by Rule 14e-2(a) and Rule 14d-9 promulgated
under the Exchange Act or (ii) making any other disclosure to the Company's
shareholders if, in the good faith judgment of the board of directors of the
Company, after consultation with its outside legal advisors, failure to do so
would be
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inconsistent with Applicable Law; provided, however that in no event shall the
Company or its board of directors or any committee thereof, take, agree to take,
or resolve to take any action expressly prohibited by this Section 6.1.
6.2 Interim Operations.
(a) From the date of this Agreement until the earlier of the Effective
Time and the termination of this Agreement pursuant to the terms hereof, unless
Parent has consented in writing thereto, or except as otherwise expressly
contemplated by this Agreement, the Company shall, and shall cause its
Subsidiaries to:
(i) conduct its business, financial, and other operations in
the ordinary course of business, consistent with past practice,
including the payment of all accounts payable and other routine and
customary expenses as they become due and payable (provided that the
sole and exclusive remedy for a failure to pay such accounts payable
and expenses as they become due and payable shall be a reduction of the
Total Consideration as set forth in Part B of Schedule I).
(ii) except as provided in Section 6.8(d), use commercially
reasonable efforts to preserve intact its business organizations and
goodwill, keep available the services of its officers and employees,
and maintain satisfactory relationships with those Persons having
business relationships with the Company or its Subsidiaries;
(iii) in the event the Company chooses to pay any indebtedness
for borrowed money (other than repayments of its Funded Indebtedness
and other principal and interest payments as they become due, all in
the ordinary course of business consistent with past practice),
promptly notify the Parent in writing of its intent to do so along with
such amount to be paid prior to such payment being made;
(iv) provide the Parent with an itemized schedule of the
Company's Transaction Fees on each of the date hereof, the first day of
each calendar month following the date hereof, and the Merger
Consideration Calculation Time;
(v) within thirty (30) days following the end of each calendar
month, provide the Parent with the Company's (a) consolidated financial
statements, (b) record of sales backlog for 2003 and 2004, (c) monthly
and year-to-date sales booking schedules of days sales outstanding and
days payable outstanding, (d) a statement of bidding and proposal
expenses, (e) revisions to, updates of, and reports of production under
the Schedule of Production, (f) amounts of any severance paid or agreed
to be paid and the recipients thereof, each as of the end of such
month, and (g) research and development and bid and proposal expenses,
(the first of such reports shall include the foregoing information for
the months ended June 30 and July 31, 2003);
(vi) provide the Purchaser with (x) a written report every ten
(10) Business Days of any accounts receivable which are thirty (30)
days or more past due (as of a date preceding such report with respect
to which such accounts receivable are reasonably ascertainable by the
Company) through the Merger Consideration Calculation Time and (y)
prompt notice of any account receivable of any Governmental Authority
or
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commercial customer in excess of US$1,000,000 which is more than thirty
(30) days past due; and
(vii) will use the proceeds from the consummation of the ASD
Transaction and the sale of the Arizona Real Property for general
corporate purposes (including paying debt to the holders of the Funded
Indebtedness and other indebtedness to the extent permitted by this
Agreement) and shall not use the proceeds from the ASD Transaction or
the sale of the Arizona Property to pay any bonuses (except as required
by pre-existing contracts, as required by Applicable Law, or as
otherwise permitted by this Section 6.2).
(b) Without limiting the generality of Section 6.2(a), from and after
the date of this Agreement until the Effective Time, except for actions required
to be taken by the Company or any of its Subsidiaries in the performance of
their respective obligations under the Company Material Contracts, or as
otherwise expressly permitted by Section 6.2(a), unless Parent has consented in
writing thereto, which consent will not be unreasonably withheld (except with
respect to subsections (vii), (viii) and (xiv), for which Parent may withhold
consent for any or no reason), or except as otherwise expressly contemplated or
permitted by this Agreement, the Company shall not, and shall not permit its
Subsidiaries to:
(i) amend their respective certificate of incorporation,
bylaws, or other organizational documents;
(ii) subject to Section 6.1(d)(i) and the Company's
obligations with respect to the ESPP, 8% Notes Debt, or the Option
Plans, issue, sell, pledge, dispose of or encumber, or authorize the
issuance, sale, pledge, disposition or encumbrance of, any shares of
its capital stock or other ownership interest in the Company or any
Subsidiaries or any securities convertible into or exchangeable for any
such shares or ownership interest, or any rights, warrants or options
to acquire or with respect to any such shares of capital stock,
ownership interest, or convertible or exchangeable securities;
(iii) subject to the Company's obligations with respect to the
ESPP, 8% Notes Debt, or the Option Plans, split, combine or reclassify
its capital stock, or otherwise change its capitalization as it exists
on the date hereof, or propose the issuance of any other securities in
respect of, in lieu of or in substitution for, shares of its capital
stock or any other equity interest;
(iv) grant, confer or award any option, warrant, convertible
security or other right to acquire any shares of its capital stock or
take any action to cause to be exercisable any otherwise unexercisable
option under the Option Plans or create any new equity based plan,
convertible security, or right to acquire any capital stock of the
Company (except (a) as otherwise required by the express terms of any
unexercisable options outstanding on the date hereof, (b) in connection
with grants of options to purchase Company Common Stock to newly hired
non-executive employees of the Company or any of its Subsidiaries in
the ordinary course of business, consistent with past practice or (c)
as may be required with respect to the ESPP, 8% Notes Debt, or the
Option Plans,.
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(v) declare, set aside or pay any dividend or make any other
distribution or payment (whether in cash, stock or property or any
combination thereof) with respect to any shares of its capital stock or
other ownership interests, including any constructive or deemed
distributions, or make any other payments to shareholders in their
capacity as such (other than any such payments by any Subsidiary to the
Company);
(vi) directly or indirectly redeem, purchase or otherwise
acquire any shares of its capital stock or capital stock of the
Subsidiaries;
(vii) transfer, license, mortgage, encumber, sell, lease or
otherwise dispose of any of its material assets (including capital
stock of the Subsidiaries); provided that (x) the Company may sell,
transfer or dispose of the stock or assets of the International Center
for Safety Education, a Subsidiary of the Company, in an arms-length
transaction to any Person that is not an Affiliate of the Company and
(y) the Company may sell, transfer or dispose of the Arizona Real
Estate in an arms-length transaction to any Person that is not an
Affiliate of the Company;
(viii) enter into a new, or extend an existing, license with
Intercast Europe S.P.A. with respect to the Company's Cleargard(R)
transparent polyurethane polymers;
(ix) acquire by merger, purchase or any other manner, any
business, entity or division, or make any capital expenditures or
otherwise acquire any material property or assets, except for purchases
of supplies or capital equipment in the ordinary course of business,
consistent with past practice;
(x) incur, assume, or otherwise become liable for any
indebtedness for borrowed money in excess of US$10,000, individually,
or US$50,000 in the aggregate, except (w) for any indebtedness which is
Funded Indebtedness, (x) for checks or other instruments endorsed by
the Company or any of its Subsidiaries, and (y) indebtedness to trade
creditors of the Company or its Subsidiaries, in the ordinary course of
business, consistent with past practice;
(xi) guaranty any obligation in excess of US$10,000,
individually, or US$50,000, in the aggregate, except pursuant to any
potential increase in the Company's guaranty obligations related to its
former Airline Interiors facility located at 12325 Kernan Street,
Poway, California.
(xii) make or forgive any loans, advances or capital
contributions to, or investments in, any other Person (other than
advances in respect of business expenses and loans and advances in
respect of relocation arrangements, in each case made to officers or
employees in the ordinary course of business, consistent with past
practice);
(xiii) modify, amend, terminate or waive any rights under any
confidentiality agreement entered into in connection with any
Alternative Transaction, except in the case of a modification,
amendment, or waiver that would not make such agreement less
restrictive than the Parent - Company Confidentiality Agreement;
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(xiv) enter into any agreement or contract which requires the
payment by the Company or any of its Subsidiaries after the Effective
Time of more than US$150,000, individually, or US$500,000 in the
aggregate, or which is not cancelable upon thirty (30) days' notice
without payment of a penalty;
(xv) modify, amend, terminate or waive any rights under any
Company Material Contracts, except in the ordinary course of business
consistent with past practice;
(xvi) except as may be required of the Company or any of its
Subsidiaries under any plan, agreement, policy, arrangement, or
obligation currently in effect, or as otherwise required by Applicable
Law: (a) increase the compensation, severance, bonus or, other benefits
payable or to become payable to any of the directors, officers or
employees of the Company or any of its Subsidiaries, (b) grant any
severance or termination pay to, or enter into any new employment,
consulting, retention, salary continuation or severance agreement with,
any officer or director of the Company or any of its Subsidiaries, or
(c) establish, adopt, enter into, amend or modify in any material
respect any collective bargaining agreement, employee benefit plan,
trust, fund, policy or arrangement for the benefit of any current or
former directors, officers or employees of the Company or any of its
Subsidiaries, or any of their beneficiaries;
(xvii) take any action to change accounting policies,
procedures or practices, except as required by a change in GAAP or
Applicable Law after the date hereof ("Reporting Requirements");
(xviii) subject to Section 6.3 or the submission of a Superior
Transaction to the vote of the Company's shareholders, and except for
the election of directors in the ordinary course at an annual meeting
of the Company's shareholders to be held concurrently with the
Shareholders Meeting, approve or authorize any action to be submitted
to the shareholders of the Company for approval other than pursuant to
this Agreement;
(xix) materially change any method of reporting income,
deductions or other material items for income Tax purposes, make or
change any material election with respect to Taxes, agree to or settle
any material claim or assessment in respect of Taxes in violation of
Section 6.17 hereto, or agree to an extension or waiver of the
limitation period to any material claim or assessment in respect of
Taxes, other than in the ordinary course of business consistent with
past practice or as required by Reporting Requirements;
(xx) settle or compromise any Company Litigation, or other
pending or threatened suit, action, or claim in violation of Section
6.17 hereto;
(xxi) demand the acceleration of payment any account
receivable or trade receivable when such invoice is not in default, or
accept an accelerated payment of less than the amount of the original
invoice of any accounts receivable or trade receivables as a result of
a discount granted by the Company, in either case not in the
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ordinary course of business consistent with past practice (provided
that the sole and exclusive remedy for a breach of this Section
6.2(b)(xxi) shall be a reduction of the Total Consideration as set
forth in Part B of Schedule I);
(xxii) enter into any binding oral or written agreement to
take any of the actions prohibited by this Section 6.2(b).
(c) Notwithstanding anything contained Sections 6.2(a) and (b), the
Company shall, and the Company shall cause its Subsidiaries to, maintain (i)
research and development spending of not less than US$1,000,000 between July 1,
2003 and October 31, 2003, and of not less than US$250,000 for each complete
calendar month thereafter until the Closing Date and (ii) fees and expenses
associated with applying for and defending its Patents and other Intellectual
Property of not less than US$100,000 between July 1, 2003 and October 31, 2003,
and of not less than US$25,000 for each complete calendar month thereafter until
the Closing Date, provided, however, that the Company's breach of any item
contained in this Section 6.2(c) shall not constitute a Company MAC; and
provided further the Company's breach of any item contained in Section 6.2(c)
when aggregated together with any other breach of any representation, warranty,
covenant, or agreement by the Company may otherwise constitute a Company MAC.
6.3 Preparation of the Form S-4 and the Proxy Statement; Company
Shareholder Approval.
(a) Subject to Section 6.1, promptly following the date of this
Agreement, the Company shall, with the assistance and approval of Parent (which
approval shall not be unreasonably withheld or delayed), prepare and file with
the SEC the Proxy Statement, and Parent shall, with the assistance and approval
of the Company (which approval shall not be unreasonably withheld or delayed),
prepare and file with the SEC the Form S-4, in which the Proxy Statement will be
included (the "Proxy Statement/Prospectus"). Each of the Company and Parent
shall use commercially reasonable efforts to have the Form S-4 declared
effective under the Securities Act as promptly as practicable after such filing.
The Company shall include in its Proxy Statement a discussion of the Tax
consequences of the Merger to the Company's shareholders in which it shall
advise its shareholders that the Merger is not a Tax free reorganization and
that the Merger Consideration is taxable to the shareholders and that they shall
consult with their tax advisors. The Company will call a special meeting of its
shareholders and cause the Proxy Statement to be mailed to its shareholders as
promptly as practicable after the Form S-4 is declared effective under the
Securities Act and, subject to Section 6.1, use its commercially reasonable
efforts to solicit from holders of shares of Company Common Stock proxies in
favor of the adoption of this Agreement and take all other action reasonably
necessary or advisable to secure, at the Shareholders Meeting, the Company
Shareholder Approval. Parent also shall take any action (other than qualifying
to do business in any jurisdiction in which it is not now so qualified) required
to be taken under any applicable state securities law in connection with the
issuance of Parent Common Stock in connection with the Merger, and the Company
shall furnish all information concerning the Company and the holders of the
Company Common Stock and rights to acquire Company Common Stock pursuant to the
Company Stock Option Plans as may be reasonably required in connection with any
such action. No filing of, or amendment or supplement to, the Form S-4 or the
Proxy Statement will be made by Parent or the
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Company, respectively, without providing the other party the opportunity to
review and comment thereon; provided, that with respect to documents filed by a
party which are incorporated by reference in the Form S-4 or Proxy
Statement/Prospectus, this right of approval shall apply only with respect to
information relating to the other party or its business, financial condition or
results of operations; and provided, further, that the Company, may, upon
termination of this Agreement in accordance with Section 8.2(d), withdraw the
Registration Statement and cease the solicitation of proxies in favor of
approval of the Agreement. Parent will advise the Company, promptly after it
receives notice thereof, of the time when the Form S-4 has become effective or
any supplement or amendment has been filed, the issuance of any stop order, the
suspension of the qualification of the Parent Common Stock issuable in
connection with the Merger for offering or sale in any jurisdiction, or any
request by the SEC for amendment of the Form S-4 or comments thereon and
responses thereto or requests by the SEC for additional information. The Company
will provide Parent, promptly after it receives notice thereof, a copy of any
request by the SEC for the amendment of the Proxy Statement and responses
thereto or requests by the SEC for additional information. Each of Parent,
Purchaser and the Company shall furnish all information concerning itself to the
other as may be reasonably requested in connection with any such action and the
preparation, filing and distribution of the Form S-4 and the preparation, filing
and distribution of the Proxy Statement. The Company, Parent and Purchaser each
agree to correct any information provided by it for use in the Form S-4 or the
Proxy Statement which shall have become false or misleading. If, at any time
prior to the Effective Time, any information relating to Parent or the Company,
or any of their respective affiliates (as that term is used in Rule 145 under
the Securities Act), officers or directors, should be discovered by Parent or
Company which should be but is not set forth in an amendment or supplement to
any of the Form S-4 or the Proxy Statement, so that any of such documents would
not include any misstatement of a material fact or omit to state any material
fact necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading, the party which discovers such
information shall promptly notify the other parties hereto and an appropriate
amendment or supplement describing such information shall be promptly filed with
the SEC and, to the extent required by Applicable Law, disseminated to the
shareholders of the Company.
(b) Subject to Section 6.1 and Section 6.3(c), and prior to any
termination of this Agreement pursuant to Section 8.2(d), the Company, acting
through the Company's board of directors, shall in accordance with Applicable
Law and the Company's Bylaws (i) duly call, give notice of, convene and hold, as
promptly as practicable following the date upon which the Form S-4 becomes
effective, the Shareholders Meeting and (ii) use its best efforts to solicit
from holders of shares of Company Common Stock proxies in favor of the adoption
of this Agreement and take all other action necessary or advisable to secure, at
the Shareholders Meeting, the Company Shareholder Approval, by the vote
described in Section 6.3 of this Agreement, and the Company's board of directors
shall unanimously recommend adoption of this Agreement and the transaction
contemplated hereby by the shareholders of the Company (the "Company
Recommendation"), and shall not withdraw, revoke or change the Company
Recommendation unless the board of directors of the Company, after complying
with the provisions of Section 6.1, has publicly announced or notified Parent
that it has approved a binding agreement for a Superior Transaction (a "Change
in the Company Recommendation"); provided, that, the foregoing shall not
prohibit accurate disclosure (and such disclosure shall not be deemed to be a
Change in the Company Recommendation) of factual information regarding the
business,
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financial condition or results of operations of Parent or the Company or the
fact that a proposal for an Alternative Transaction has been made, the identity
of the party making such proposal or the material terms of such proposal in the
Form S-4 or the Proxy Statement/Prospectus or otherwise, only to the extent such
information, facts, identity or terms is required to be disclosed under
Applicable Law.
(c) If there is a Change in the Company Recommendation in accordance
with Section 6.3(b) hereof, then from and after the date of such Change in the
Company Recommendation, in performing its obligations under this Section 6.3,
the Company shall not be obligated to solicit from holders of shares of Company
Common Stock proxies in favor of the adoption of this Agreement or to take any
action necessary or advisable to secure, at the Shareholders Meeting, the
Company Shareholder Approval.
6.4 Filings; Other Action.
(a) Subject to the terms and conditions herein provided, each of the
Company, Parent and Purchaser shall: (i) use reasonable best efforts to
cooperate with one another in (A) determining which filings are required or
advisable to be made prior to the Effective Time with, and which consents,
approvals, permits or authorizations are required or advisable to be obtained
prior to the Effective Time from, Governmental Authorities or other third
parties in connection with the execution and delivery of this Agreement, and any
other Ancillary Documents to which it is a party and the consummation of the
transactions contemplated hereby and thereby and (B) timely making all such
filings and timely seeking all such consents, approvals, permits, authorizations
and waivers; and (ii) use reasonable best efforts to take, or cause to be taken,
all other actions and do, or cause to be done, all other things necessary,
proper or appropriate to consummate and make effective the transactions
contemplated by this Agreement and the Ancillary Documents to which it is a
party. If, at any time after the Effective Time, any further action is necessary
or desirable to carry out the purpose of this Agreement, the proper officers and
directors of Parent and the Surviving Corporation shall take all such necessary
action.
(b) In furtherance and not in limitation of the foregoing, each party
hereto agrees to make an appropriate filing of a Notification and Report Form
pursuant to the HSR Act, if required, appropriate filings under any Non-U.S.
Anti-Trust Law, and appropriate filings under any other Regulatory Law (as
hereinafter defined) with respect to the transactions contemplated hereby as
promptly as practicable after the date hereof and to supply as promptly as
practicable any additional information and documentary material that may be
requested pursuant to the HSR Act, any Non-U.S. Anti-Trust Law, and any other
Regulatory Law and to take all other actions necessary to cause the expiration
or termination of the applicable waiting periods under the HSR Act, if required,
to obtain the receipt of any approvals required pursuant to any Non-U.S.
Anti-Trust Law, and to cause the expiration or termination of the applicable
waiting periods under any other Regulatory Law as soon as practicable. Nothing
in this Agreement shall require any of Parent and its Subsidiaries or the
Company and its Subsidiaries to sell, hold separate or otherwise dispose of or
conduct their business in a specified manner, or agree to sell, hold separate or
otherwise dispose of or conduct their business in a specified manner, or permit
the sale, holding separate or other disposition of, any material assets of
Parent, the Company or their respective Subsidiaries or the conduct of their
business in a specified manner, whether as a condition to
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obtaining any such approval from a Governmental Authority or any other Person or
for any other reason ("Regulatory Restrictions").
(c) Each of Parent and the Company shall, in connection with the
efforts referenced in Section 6.4(a), obtain all requisite material approvals
and authorizations for the transactions contemplated by this Agreement under the
HSR Act, any Non-U.S. Anti-Trust Law, or any other Regulatory Law, use
commercially reasonable efforts to (i) cooperate in all respects with each other
in connection with any filing or submission and in connection with any
investigation or other inquiry, including any proceeding initiated by a private
party, (ii) promptly inform the other party of any communication received by
such party from, or given by such party to, the Antitrust Division of the DOJ,
the Federal Trade Commission (the "FTC") or any other Governmental Authority and
of any material communication received or given in connection with any
proceeding by a private party, in each case regarding any of the transactions
contemplated hereby, and (iii) permit the other party to review any
communication given by it to, and consult with each other in advance of any
meeting or conference with, the DOJ, the FTC or any such other Governmental
Authority or, in connection with any proceeding by a private party, with any
other Person, and to the extent appropriate or permitted by the DOJ, the FTC or
such other applicable Governmental Authority or other Person, give the other
party the opportunity to attend and participate in such meetings and
conferences. For purposes of this Agreement, "Regulatory Law" means, if
applicable, the Sherman Act, the Federal Trade Commission Act, and all other
federal, state and foreign, if any, Applicable Laws that are designed or
intended to prohibit, restrict or regulate antitrust violations or
anti-competitive activities.
(d) Subject to the terms and conditions of this Agreement, in
furtherance and not in limitation of the covenants of the parties contained in
Section 6.4(a) and 6.4(b), if any administrative or judicial action or
proceeding, including any proceeding by a private party, is instituted (or
threatened to be instituted) challenging any transaction contemplated by this
Agreement as violative of any Regulatory Law (a "Regulatory Challenge"), each of
Parent and the Company shall cooperate in all respects with each other and use
its respective commercially reasonable efforts in order to contest and resist
any such Regulatory Challenge and to have vacated, lifted, reversed or
overturned any decree, judgment, injunction or other order whether temporary,
preliminary or permanent, that is in effect and that prohibits, prevents or
restricts consummation of the transactions contemplated by this Agreement.
(e) If any objections are asserted with respect to the transactions
contemplated hereby under any Regulatory Law or if any suit is instituted by any
Governmental Authority or any private party challenging any of the transactions
contemplated hereby as violative of any Regulatory Law, each of Parent and the
Company shall use commercially reasonable efforts and cause its respective
Subsidiaries to use their commercially reasonable efforts to resolve any such
objections or challenge as such Governmental Authority or private party may have
to such transactions under such Regulatory Law so as to permit consummation of
the transactions contemplated by this Agreement.
(f) The Company and Parent agree to cooperate in connection with
sharing necessary information with respect to and making all necessary filings
under the HSR Act, any Non-U.S. Anti-Trust Law and any other Regulatory Law; and
making any preliminary filings of
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the Proxy Materials with the SEC, as promptly as practicable, on a confidential
basis pursuant to Rule 14a-6(e)(2) under the Exchange Act, to the extent such
treatment is available.
(g) Any fees incurred in connection with filings made or consents
sought pursuant to the HSR Act or any required filings made pursuant to any
Non-U.S. Anti-Trust Law shall be borne equally by the Company and the Parent.
6.5 Access to Information.
(a) From the date of this Agreement until the Closing, the Company
shall, and shall cause its Subsidiaries to, (i) give Parent, its officers and a
reasonable number of its employees and its authorized Representatives,
reasonable access at all reasonable times during normal business hours to the
Company Material Contracts, books, records, analysis, projections, plans,
systems, personnel, commitments, offices and other facilities and properties of
the Company and its Subsidiaries and their accountants and accountants' work
papers and (ii) furnish Parent on a timely basis with such financial and
operating data and other information with respect to the business and properties
of the Company and its Subsidiaries as Parent may from time to time reasonably
request and use commercially reasonable efforts to make available at all
reasonable times during normal business hours to the officers, employees,
accountants, counsel, financing sources and other Representatives of the Parent
the appropriate individuals (including management personnel, attorneys,
accountants and other professionals) for discussion of the Company's business,
properties, prospects and personnel as Parent may reasonably request.
(b) Not later than the Merger Consideration Calculation Time, Parent
shall use commercially reasonable efforts to make available during normal
business hours to Representatives of the Company Robert Schiller, Glenn Heiar,
Robert Mecredy and Todd Smith for a meeting in person or by telephone conference
call for the purpose of updating the Company's due diligence investigation of
the Parent and Purchaser and to confirm the continuing accuracy of the
representations and warranties made by Parent and Purchaser in Article V of this
Agreement.
6.6 Publicity. Any press release relating to this Agreement or its
termination (except for press releases relating to a Superior Transaction) shall
be issued jointly by the Company and Parent in a form previously agreed upon by
the Company and Parent; provided, however, that any party may, without the prior
written consent of the others, issue such press release or make such public
statement as may, upon the advice of counsel, be required by Applicable Law or
the rules and regulations of the SEC or the NYSE in the case of Parent or the
rules and regulations of the SEC or the AMEX in the case of Company, in advance
of obtaining such prior written consent, in which case, the issuing party shall
use commercially reasonable efforts to consult with the other party before
issuing any such release or making any such public statement.
6.7 Further Action. Upon the terms and subject to the conditions set
forth in this Agreement, but without limiting the rights of the parties
hereunder, each of the parties agrees to use its best efforts to take, or cause
to be taken, all actions, and to do, or cause to be done, and to assist and
cooperate with the other parties in doing, all things necessary, proper or
advisable to consummate and make effective, in the most expeditious manner
practicable, the Merger and the
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other transactions contemplated by this Agreement, including using its best
efforts to accomplish each of the following:
(a) the taking of all acts reasonably necessary to cause the Closing to
be consummated as promptly as practicable;
(b) subject to Section 6.4 the obtaining of all necessary actions or
non-actions, waivers, consents and approvals from Governmental Authorities and
the making of all necessary registrations and filings (including filings with
Governmental Authorities), including, without limitation, filings pursuant to
the taking of all steps as may be necessary to obtain an approval or waiver
from, or to avoid an action or proceeding by, a Governmental Authority;
(c) the obtaining of all necessary consents, approvals or waivers from
third parties;
(d) the defending of any lawsuits or other legal proceedings, whether
judicial or administrative, challenging this Agreement, or the consummation of
the transactions contemplated hereby and thereby;
(e) the taking of all necessary actions to prevent the entry of
Restraints and to appeal as promptly as possible any such Restraints that may be
entered; and
(f) the execution and delivery of any additional instruments reasonably
necessary to consummate the transactions contemplated by, and to fully carry out
the purposes of, this Agreement.
6.8 Indemnification of Company Directors and Officers, O&D Tail
Insurance, Insurance.
(a) Parent agrees that commencing at the Effective Time and for seven
(7) years and one (1) Business Day after the Effective Time, the bylaws of the
Surviving Corporation shall provide that the Surviving Corporation, shall
indemnify and hold harmless and pay expenses to the present and former directors
and officers of the Company, and each person who prior to the Effective Time
becomes an officer or director of the Company (each an "Indemnified Person"), in
respect of acts or omissions by any of them in their capacities as such
occurring at or prior to the Effective Time (including, without limitation, for
acts or omissions occurring in connection with this Agreement and the
consummation of the Merger) to the fullest extent permissible under Applicable
Law and, in any event, on terms no less favorable than the terms of the bylaws
of the Company in effect immediately prior to the Effective Time (collectively,
the "Indemnified Losses"). Such provisions of the Surviving Corporation's
articles of incorporation and bylaws relating to the indemnification of
Indemnified Persons for Indemnified Losses shall not be amended, modified,
repealed or rescinded for a period of seven (7) years and one (1) Business Day
after the Effective Time in any manner that would materially and adversely
effect the rights of Indemnified Persons thereunder, unless such modification
shall be required by Applicable Law. Without limiting the generality of the
foregoing, the Indemnified Losses shall include reasonable costs of prosecuting
a claim under this Section 6.8. The Parent shall cause the Surviving Corporation
to honor, assume and perform the obligations of the Company in the place and
stead of the Company under any and all indemnification agreements between the
Company
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and any such Indemnified Persons in existence on the Closing Date (which
agreements have been made available by the Company to the Parent).
(b) Parent agrees that commencing at the Effective Time and for six (6)
years and one (1) Business Day after the Effective Time:
(i) Parent shall obtain and provide at its expense, or shall
cause the Surviving Corporation to obtain and provide at its expense,
(and shall provide evidence to the Company that the Parent has obtained
and provided or caused the Surviving Corporation to obtain or provide
same on or before the Closing) officers' and directors' liability
insurance or officers' and directors' liability tail insurance policies
with respect to acts or omissions occurring prior to the Effective Time
(including, without limitation, for acts or omissions occurring in
connection with this Agreement and the consummation of the Merger)
covering each Indemnified Person on terms with respect to coverage and
amount (including with respect to the payment of attorney's fees) no
less favorable than those of the Company's policy in effect on the date
hereof (which policies have been made available by the Company to
Parent) (the "O&D Tail Insurance").
(ii) The rights of each Indemnified Person and his or her
heirs and legal representatives under this Section 6.8 shall be in
addition to any rights such Indemnified Person may have under the
articles of incorporation or bylaws of the Company, any agreement
providing for indemnification, or under the laws of the State of
Arizona or any other Applicable Laws. These rights shall survive
consummation of the Merger and are intended to benefit, and shall be
enforceable by, each Indemnified Person.
(c) Immediately upon the execution and delivery of this Agreement by
the Company, the Parent and the Purchaser, the Company shall appoint AON Risk
Services, Inc. as its exclusive broker to negotiate the extension, through
December 31, 2003, of its director and officer liability insurance. The Company
shall, using a broker of its own choosing, timely negotiate extensions, through
December 31, 2003, of all of its other insurance policies due to expire on
October 1, 2003.
(d) Within ten (10) Business Days after the date of this Agreement, the
Company shall, and shall cause each of its Subsidiaries to, if necessary, obtain
adequate property and casualty insurance covering each piece of real property
owned or leased by the Company or any of its Subsidiaries. The Company shall
give the Parent prompt notice of any insurable loss arising with respect to any
real property owned or leased by the Company or any of its Subsidiaries. In the
event an insurable loss occurs with respect to any real property owned or leased
by the Company or any of its Subsidiaries, neither the Company nor any of its
Subsidiaries shall, without the prior written consent of the Parent, which
consent shall not be unreasonably withheld, use the proceeds of any insurance
policy received as a result of or in connection with such insurable loss to
rebuild or repair any property, or any structure thereon, which is the basis for
such insurable loss.
6.9 Conveyance Taxes. The Company and Parent shall cooperate in the
preparation, execution and filing of all returns, questionnaires, applications
or other documents regarding any real property transfer or gains, sales, use,
transfer, value added, stock transfer and stamp Taxes,
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any transfer, recording, registration and other fees and any similar Taxes which
become payable in connection with the transactions contemplated by this
Agreement that are required or permitted to be filed on or before the Effective
Time.
6.10 Certain Tax Matters.
(a) During the period from the date hereof to the Effective Time, each
of the Company and the Parent shall, and shall cause each of its Subsidiaries
to: (i) timely file all Tax Returns ("Post Signing Returns") required to be
filed by it and such Post Signing Returns shall be prepared in a manner
consistent with past practice, (ii) timely pay all Taxes due and payable in
respect of such Post Signing Returns that are so filed, (iii) accrue a reserve
in its books and records and financial statements, in accordance with past
practice, for all Taxes payable by it for which no Post Signing Return is due
prior to the Effective Time, and (iv) promptly notify the other parties to this
Agreement of any federal or state income or franchise, or other material Tax,
suit, claim, action, investigation, proceeding or audit pending against or with
respect to it or any of its Subsidiaries in respect of any Tax matters (or any
significant developments with respect to any ongoing Tax matters), including
material Tax liabilities and material refund claims; provided, that the Merger
Consideration shall not be reduced solely due to any increase in corporate tax
liability resulting solely from the effect of the Parent making the 338(g)
Election; provided, further, however, that the Company acknowledges that the
transaction contemplated by this Agreement is taxable and will not qualify or be
reported as a tax free reorganization under the Internal Revenue Code.
(b) The Company shall make all required estimated tax payments due
before the Effective Time. The total estimated income/franchise tax payments
(including federal, state, local or foreign tax payments) shall reflect the
total tax liability based on taxable income calculated by annualizing actual
taxable income as of August 31, 2003.
(c) The Parent shall prepare or cause to be prepared and file or cause
to be filed all Tax Returns for the Company and its Subsidiaries which are filed
after the Effective Time.
6.11 Benefit Plans and Option Plans.
(a) Subject to Section 6.11(b) below, between the date of this
Agreement and through the Effective Time, no discretionary award or grant under
any benefit plan of the Company or a Company Subsidiary shall be made without
the consent of Parent; nor shall the Company or a Company Subsidiary take any
action or permit any action to be taken to accelerate the vesting of any
warrants or options previously granted pursuant to any such benefit plan except
as specifically required or permitted pursuant to (i) the terms of this
Agreement and (ii) the terms thereof as in effect on July 23, 2003. Subject to
Section 6.11(b) below, neither the Company nor any Company Subsidiary shall make
any amendment to any benefit plan or any awards thereunder, or establish any new
benefit plan, without the consent of Parent, provided that the Company shall as
required by Applicable Law amend or modify any benefit plan (including its
401(k) plan) to conform to legal and regulatory requirements and/or to change
the administrator or provider thereunder.
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(b) Prior to the Effective Time, the Company shall, if necessary, amend
the Option Plans, ESPP and RSP in order to allow and provide for acceleration of
the vesting of the Eligible Options and termination of the Option Plans, ESPP
and RSP, each as provided in Article III.
6.12 Stock Exchange Listing. Parent shall use commercially reasonable
efforts to have the Parent Common Stock to be issued in the Merger approved for
listing on the NYSE prior to the Effective Time, subject to official notice of
issuance.
6.13 Affiliates; Shareholder Agreement. The Company shall use
commercially reasonable efforts to obtain an executed Affiliate Letter from (i)
each Person identified on Section 4.24 of the Company Disclosure Schedule hereto
within thirty (30) days following the date of this Agreement and (ii) from any
Person who, to the knowledge of the Company, may be deemed to have become an
affiliate (as that term is used in Rule 145 under the Securities Act) of the
Company after the date of this Agreement and prior to the Effective Time as soon
as practicable after attaining such status. Notwithstanding the foregoing,
Parent shall be entitled to place a restrictive legend, substantially in the
form set forth in the Affiliate Letter, on the certificates evidencing any of
the Parent Common Stock to be received by (i) any Person identified on Section
4.24 of the Company Disclosure Schedule or (ii) any Person Parent reasonably
identifies in writing to the Company as being a Person who is an "affiliate"
within the meaning of Rule 145 promulgated under the Securities Act, and to
issue appropriate stop transfer instructions to the transfer agent for such
Parent Common Stock, regardless whether such Person has executed an Affiliate
Letter and regardless whether such Person's name appears on Section 4.24 of the
Company Disclosure Schedule. In addition, the Company shall use commercially
reasonable efforts to cause each of the Company's executive officers and
directors to execute and deliver to the Parent a Shareholders Agreement
substantially in the form annexed hereto as Exhibit C (the "Shareholders
Agreement") prior to any filing made by the Parent and the Company pursuant to
the HSR Act.
6.14 Escrow Agreement. The Parties agree that at the Effective Time,
the Parent and the Company shall execute and deliver to the Escrow Agent a joint
instruction letter instructing the Escrow Agent to release and deliver to the
Parent all amounts held by the Escrow Agent pursuant to the Escrow Agreement,
including accumulated, but unpaid, interest thereon, to the order of the Parent
(the "Escrow Release Letter").
6.15 Liquidation of Subsidiaries. Prior to the Effective Time, the
Company shall, in consultation with the Parent, use commercially reasonable
efforts to cause the legal existence of each of its Subsidiaries which are shell
companies or are non-operating companies and listed on Schedule 6.15 to be
terminated and the assets of such Subsidiaries transferred to the Company and
the liabilities of such Subsidiaries to be paid, to the extent they are due and
payable, or transferred to the Company (the "Subsidiary Liquidations");
provided, that at least 15 Business Days prior to each such termination and
transfer the Company shall inform the Parent in writing of the amount and nature
of such assets and liabilities to be paid or transferred to the Company; and
provided, further that if following receipt of such notice the Parent should
notify the Company that any such Subsidiary should not be liquidated, the
Company will take no action with respect to the liquidation of such Subsidiary
and the transfer of its assets and liabilities to the Company.
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6.16 Certain Benefit Plans. At the Parent's option, by written notice
to the Company not later than 30 days prior to the Closing Date: the Company
shall initiate all actions necessary to freeze, as of the Effective Time, any
Company Benefit Plan and any qualified or non-qualified defined benefit plans of
the Company. On or before September 30, 2003, to the extent required by
Applicable Law, the Company will prepare and file with the U.S. Internal Revenue
Service an application for a determination letter with respect to the Company's
defined benefit pension plan to comply with the requirements of the Tax
legislation commonly known as "GUST" and "EGTRRA", and all plan amendments shall
give effect to the most recent qualification letter through the date of such
filing. Prior to the Closing Date, the Company shall give to the U.S. Internal
Revenue Service, the Pension Benefits Guaranty Corporation, the Department of
Labor, and all participants in each Company Benefit Plan, all notices of the
Merger required to be given ERISA or the Code.
6.17 Company Litigation. Subject in each case to the good faith
conclusion of the Company's board of directors, in the exercise of its fiduciary
duties, after considering the best interests of the Company, Applicable Law, and
the advice of counsel, that a settlement of any Company Litigation is in the
best interests of the Company, until the earlier of the termination of this
Agreement in accordance with its terms and the Effective Time, the Company and
the Company's Subsidiaries:
(a) shall permit the Parent to monitor, at its own expense and with
separate counsel, the defense or settlement of Company Litigation brought by any
Company shareholder against the Company or the board of directors of the Company
relating to this Agreement or the Merger, and shall not settle any such Company
Litigation, without first consulting with the Parent (if practicable) regarding
the nature and terms of such settlement;
(b) shall not settle any other Company Litigation to which it is a
party without first consulting with the Parent (if practicable) regarding the
nature and terms of such settlement; and
(c) shall not settle any Company Litigation unless the payment by the
Company or its Subsidiaries of any cash amount is paid prior to the Merger
Consideration Calculation Time and such settlement does not impose any material
restriction on the business, assets, or operations of the Surviving Corporation
(as successor to the Company) following the Closing Date.
6.18 Control of Operations. Nothing contained in this Agreement shall
give Parent, directly or indirectly, the right to control or direct the
operations of the Company and its Subsidiaries prior to the Effective Time.
Prior to the Effective Time, the Company shall exercise, consistent with the
terms and conditions of this Agreement, complete control and supervision over
its operations.
6.19 Pro Forma Financial Statements.. The Company will timely file with
the SEC any Form 8-K containing any pro forma financial information required to
be filed by the Company pursuant to Article 11 of Regulation S-X promulgated
pursuant to the Exchange Act with respect to the consummation of the ASD
Transaction and/or the sale of the Arizona Real Estate.
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6.20 Termination of Certain Company Executive Officers.. To effectuate
the intent of the parties to the Agreement that all costs and expenses
associated with the termination of all employment agreements with the President
and Chief Executive Officer of the Company (Bradley P. Forst) and the Executive
Vice President and Chief Development Officer of the Company (Joseph W. Coltman),
be paid by the Company at or prior to the Closing, the board of directors of the
Company and the Company shall take such actions as shall be necessary prior to
the Closing and in compliance with such employment agreements and Applicable
Law, and Parent hereby consents to such actions, to: (a) give notice and
terminate the President and Chief Executive Officer of the Company (Bradley P.
Forst) and the Executive Vice President and Chief Development Officer of the
Company (Joseph W. Coltman), without cause, effective immediately following the
Closing; (b) pay all salary earned or accrued through the Termination Date and
all management change of control contract payments and severance payments,
including any Tax gross-up amounts and excise Taxes resulting from such
payments, associated with or resulting from the termination of such executive
officers of the Company at Closing; and (c) notwithstanding any other provision
contained in this Agreement to the contrary, any amounts described in item (b)
above which remain unpaid immediately following the Closing shall constitute
Company's Transaction Fees. This covenant shall not be deemed to prohibit or
require the Parent and either of such executive officers from entering into any
interim or permanent employment or consulting agreement with Parent or Surviving
Corporation following the Closing.
ARTICLE VII
CONDITIONS
7.1 Conditions to Each Party's Obligation to Consummate the Merger. The
respective obligation of each party to consummate the Merger shall be subject to
the satisfaction or, where permitted by Applicable Law, the waiver prior to the
Effective Time, of each of the following conditions:
(a) The Company's shareholders shall have approved the Merger and this
Agreement in accordance with the Arizona Code and the rules and regulations of
the American Stock Exchange; provided, that this Section 7.1(a) shall not
constitute a condition to the obligation of the Company to consummate the Merger
if the Company shall have breached Section 6.3;
(b) No temporary restraining order, preliminary or permanent injunction
or other judgment or order issued by any Governmental Authority of competent
jurisdiction or pursuant to any statute, law, rule, legal restraint or
prohibition (collectively, "Restraints") shall be in effect prohibiting the
consummation of the Merger or the transactions contemplated hereby; provided
that this Subsection 7.1(b) shall not constitute a condition to the obligations
of any party to this Agreement to consummate the Merger that files suit or
institutes proceedings with respect to, obtains, or otherwise affirmatively
seeks to obtain, directly or indirectly, or any of its respective Subsidiaries
that files suit or institutes proceedings with respect to, obtains, or otherwise
affirmatively seeks to obtain, directly or indirectly, any such Restraints;
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(c) The Form S-4 and any required post-effective amendment thereto
shall have become effective under the Securities Act and shall not be the
subject of any stop order or proceedings seeking a stop order; provided that
this Subsection 7.1(c) shall not constitute a condition to the obligations of
Parent or Purchaser to consummate the Merger if Parent is in breach of Section
6.3;
(d) Any waiting period (and any extension thereof) or approval of a
Governmental Authority applicable to the consummation of the Merger under the
HSR Act, Non-U.S. Anti-Trust Law, or other Regulatory Law shall have terminated,
expired or been obtained; provided that this Subsection 7.1(d) shall not
constitute a condition to the obligations of any party to this Agreement to
consummate the Merger that fails, or fails to cause any of its respective
Subsidiaries, to timely make any filing with or give any notice to any
Governmental Authority, or to use its commercially reasonable efforts to obtain
any approval from any Governmental Authority under the HSR Act, any Non-U.S.
Anti-Trust Law, or other Regulatory Law, required of such party or its
Subsidiary; and
(e) All consents, approvals and actions of, filings with, and notices
to any Governmental Authority required of the Company, Parent, Purchaser or any
of their respective Subsidiaries under any Regulatory Law with respect to the
consummation of the Merger (other than the filing of a certificate of merger
pursuant to the Arizona Code) shall have been obtained or made; provided that
this Subsection 7.1(e) shall not constitute a condition to the obligations of
any party to this Agreement to consummate the Merger that fails, or fails to
cause any of its respective Subsidiaries, to make any filing with or give any
notice to any Governmental Authority, or to use its commercially reasonable
efforts to obtain any consent, approval or action by any Governmental Authority,
required of such party or its Subsidiary.
7.2 Conditions to Obligation of Parent and Purchaser to Consummate the
Merger. The obligation of Parent and Purchaser to consummate the Merger shall be
subject to the fulfillment or waiver at or prior to the Effective Time of the
following conditions:
(a) The representations and warranties of the Company set forth in this
Agreement or any Ancillary Document shall be true and correct both when made and
as of the Closing (except to the extent expressly made as of a specified date or
as updated pursuant to a Company Update, in which case as of such date), except
where the failure of such representations and warranties to be true, complete
and correct would not, in the aggregate, result in a Company MAC;
(b) The Company shall have performed and complied in all material
respects with all obligations, agreements and covenants required by this
Agreement to be performed or complied with by it prior to the Effective Time,
except (i) where non-performance or non-compliance follows Parent's or
Purchaser's breach of this Agreement, (ii) unless such failure to perform or
comply would not have a Material Adverse Effect on the Company, or (iii) unless
such failure to perform or comply is a matter which is the subject of a decrease
in the Total Consideration pursuant to Part B of Schedule I, in which case such
adjustment shall be the sole consequence of such non-performance or
non-compliance and the matter shall not constitute or be deemed to be a Material
Adverse Change or Material Adverse Effect;
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(c) Parent shall have received a certificate signed by the chief
financial officer of the Company, dated as of the Closing Date, to the effect
that, to such officer's knowledge, the conditions set forth in Sections 7.2(a) -
(b) have been satisfied;
(d) This Agreement and the Merger shall have been approved by the
holders of a majority of the shares of Company Common Stock;
(e) Each of the executive officers and directors of the Company shall
have executed and delivered to the Parent the Shareholders Agreement;
(f) No Change in the Company Recommendation shall have occurred;
(g) The Company shall have duly executed and delivered to the Parent
the Escrow Release Letter, which release shall be effective as of the Effective
Time; and
(h) All consents of third parties required pursuant to the terms of any
Company Material Contract identified on Schedule III shall have been obtained.
7.3 Conditions to Obligation of the Company to Consummate the Merger
subject to Section 3.6. Subject to Section 3.6, the obligation of the Company to
consummate the Merger shall be subject to the fulfillment or waiver at or prior
to the Effective Time of the following conditions:
(a) The representations and warranties of Parent and Purchaser set
forth in this Agreement or any Ancillary Document shall be true and correct both
when made, and as of the Closing Date (except to the extent expressly made as of
a specified date, or as updated pursuant to a Parent Update, in which case as of
such date), except where the failure of such representations and warranties to
be true, complete and correct would not, in the aggregate, result in a Parent
MAC;
(b) Parent and Purchaser shall have performed and complied in all
material respects with all obligations, agreements and covenants required by
this Agreement to be performed and complied with by them prior to the Effective
Time, except (i) where non-performance or non-compliance follows Company's
breach of this Agreement, or (ii) unless such failure to perform or comply would
not have a Material Adverse Effect on the Parent;
(c) The shares of Parent Common Stock issuable as a portion of the
Merger Consideration shall have been approved for listing on the NYSE, subject
to official notice of issuance, unless the Parent shall have irrevocably
designated the Cash Consideration Percentage to be 100% (which designation is in
effect at the Closing Date or the Effective Time);
(d) Parent shall have provided evidence to the Company in a form
reasonably acceptable to the Company that the Parent has obtained the O&D Tail
Insurance; and
(e) The Company shall have received a certificate signed by the chief
financial officer of Parent, dated as of the Closing Date, to the effect that,
to such officer's knowledge, the conditions set forth in Section 7.3(a) through
Section 7.3(d) have been satisfied.
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ARTICLE VIII
TERMINATION
8.1 Termination by Mutual Consent. This Agreement may be terminated and
the Merger abandoned at any time prior to the Effective Time, whether or not the
Company Shareholder Approval has been obtained, by the mutual consent of Parent
and the Company.
8.2 Termination by Either Parent or Company. This Agreement may be
terminated by the Parent or the Company and the Merger abandoned at any time
prior to the Effective Time as follows:
(a) whether or not the Company Shareholder Approval has been obtained,
if the Effective Time shall not have occurred on or prior to December 31, 2003
(the "Deadline Date"), provided, however, that the right to terminate this
Agreement under this Section 8.2(a) shall not be available to any party whose
failure to fulfill any obligation under this Agreement shall have principally
caused, or resulted in, the failure of the Merger to be consummated on or prior
to such date;
(b) whether or not the Company Shareholder Approval has been obtained,
if a Governmental Authority shall have issued a nonappealable final order,
decree or ruling or taken any other nonappealable final action having the effect
of permanently restraining, enjoining or otherwise prohibiting the consummation
of the Merger, provided, however, that the right to terminate this Agreement
under this Section 8.2(b) shall not be available to any party whose actions, or
failure to act, principally caused, or resulted in, directly or indirectly, the
Governmental Authority issuing a nonappealable final order, decree or ruling or
taken any other nonappealable final action having the effect of permanently
restraining, enjoining or otherwise prohibiting the consummation of the Merger;
(c) if the Shareholders Meeting has been held and the Company
Shareholder Approval shall not have been obtained; or
(d) if, prior to the receipt of Company Shareholder Approval, (x) a
Change in the Company Recommendation shall have occurred or (y), the board of
directors of the Company, has publicly announced or has provided written notice
to the Parent that the Company's board of directors has approved a binding
agreement for a Superior Transaction; provided, that the Company may not
terminate this Agreement and abandon the Merger pursuant to this Section 8.2(d)
unless:
(i) the Company shall have complied with Section 6.1 and
Section 6.3 in all respects; and
(ii) the Company shall have (1) notified the Parent in
writing, at least two (2) Business Days prior to the vote of the
Company's board of directors to approve a Change in the Company
Recommendation or a Superior Transaction, of the Company's receipt of a
proposal for such Superior Transaction, and that the Company intends to
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make a Change in the Company Recommendation or enter into a binding
written agreement with respect to such Superior Transaction subject to
Section 8.2(d)(iii) below and (2) provided to the Parent, together with
the notice set forth in the immediately preceding clause, a copy of the
current written version of such Superior Transaction (or if there is no
written version, a summary of all material terms and conditions of such
Superior Transaction), subject to any related confidentiality agreement
existing on the date hereof that, in the opinion of counsel to the
Company, is binding on the Company and precludes such disclosure; and
(iii) the Parent does not make, within two (2) Business Days
after receipt of the Company's written notice pursuant to Section
8.2(d)(ii) above, an offer that the board of directors of the Company
shall have concluded in good faith (following consultation with its
financial advisors and outside legal counsel) is at least as favorable,
considering all relevant terms, to the Company shareholders as such
Superior Transaction; and
(iv) the Company shall, contemporaneously with making such
Change in the Company Recommendation or entering into such Superior
Transaction, terminate this Agreement by delivery of notice of such
termination to Parent, (x) concurrently pay to Parent such amounts and
take such actions as specified in Sections 8.7(a)(i) and 8.7(a)(ii),
and (y) shall deliver to the Parent a written undertaking to pay the
amount specified in Sections 8.7(a)(iii) as required by and pursuant to
the terms of Sections 8.7(a)(iii) upon the consummation of such
Superior Transaction.
8.3 Termination by the Company. Subject to Section 3.6 above, this
Agreement may be terminated and the Merger abandoned at any time prior to the
Effective Time by action of the Company's board of directors, whether or not the
Company Shareholder Approval has been obtained, upon a failure to satisfy any of
the conditions set forth in Sections 7.3(a) or 7.3(b) (a "Terminating Parent
Breach"); provided that, if such Terminating Parent Breach is curable by Parent
or Purchaser through the exercise of commercially reasonable efforts within
thirty (30) days following notice of such Terminating Parent Breach, for so long
as Parent or Purchaser continues to exercise such commercially reasonable
efforts, and such Terminating Parent Breach is cured within such thirty (30) day
period, the Company may not terminate this Agreement under this Section 8.3
within such thirty (30) day period; and provided further that the preceding
proviso shall not in any event be deemed to extend the Deadline Date; or upon
the occurrence of any other Material Adverse Change with respect to the Parent.
8.4 Termination by Parent. This Agreement may be terminated and the
Merger abandoned at any time prior to the Effective Time, by action of the board
of directors of Parent, on behalf of Parent and Purchaser, whether or not the
Company Shareholder Approval has been obtained:
(a) upon a failure to satisfy any of the conditions set forth
in Sections 7.2(a) or 7.2(b) (a "Terminating Company Breach"); provided that, if
such Terminating Company Breach is curable by Company through the exercise of
commercially reasonable efforts within thirty (30) days following notice of such
Terminating Company Breach, for so long as Company continues to exercise such
commercially reasonable efforts, the Parent may not terminate this Agreement
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under this Section 8.4 within such thirty (30) day period; and provided further
that the preceding proviso shall not (i) in any event be deemed to extend the
Deadline Date, or (ii) be operative in the case of a Change in the Company
Recommendation or a breach which results in a termination pursuant to Section
6.1 or 8.2(d) or a Company MAC; or
(b) if an Alternative Transaction shall have been announced or
otherwise become publicly known as a result of any action or inaction of the
Company, and the board of directors of Company shall have (A) failed to
recommend against acceptance of such by its shareholders (including by taking no
position, or indicating its inability to take a position, with respect to the
acceptance by its shareholders of an Alternative Transaction involving a tender
offer or exchange offer), (B) failed to reconfirm its approval and
recommendation of this Agreement and the transactions contemplated hereby within
five (5) Business Days after Parent requests in writing that such recommendation
be reconfirmed or (C) determined that such Alternative Transaction was a
Superior Transaction and takes any of the actions allowed by clause (ii) of
Section 6.1(a), or the board of directors of Company resolves to take any of the
actions described above.
(c) Upon the occurrence of any other Material Adverse Change with
respect to the Company.
8.5 Right to Terminate. The right of any party to terminate this
Agreement and abandon the Merger pursuant to this Article VIII shall remain
operative and in full force and effect regardless of any investigation made by
or on behalf of any party hereto or any of their Representatives, whether before
or after the date of this Agreement; provided, that if the Company can
demonstrate that the Parent or Purchaser had knowledge (as defined in Section
1.1 but without any obligation to conduct due inquiry) as of the date hereof of
any event, fact, or condition which would otherwise give rise to the right to
terminate this Agreement, the Parent may not terminate this Agreement as a
result of such breach of such representation, warranty, covenant, or agreement
made by the Company, or the Company's failure to satisfy such condition to the
obligation of Parent and the Purchaser to consummate the Merger set forth in
Section 7.2 arising out of such event, fact, or condition; provided that any
such breach or failure to satisfy such condition, when aggregated together with
any other breach of any representation, warranty, covenant or agreement, or
failure to satisfy a condition, may otherwise constitute a Company MAC.
8.6 Effect of Termination and Abandonment; Termination Fee. In the
event of the termination of this Agreement pursuant to Article VIII, written
notice thereof shall forthwith be given to the other party or parties specifying
the provision hereof pursuant to which such termination is made, and this
Agreement shall forthwith become void and there shall be no liability on the
part of any party hereto or any of its Affiliates or Representatives, except for
the obligation of the Company to make the payments set forth in Section 8.7
under the circumstances described in such Section and the rights of the parties
to receive the amounts held in escrow pursuant to the Escrow Agreement.
Notwithstanding the foregoing, or any other provision of this Agreement (but
subject to Sections 8.7(a), (b), (d) and (f)), nothing herein shall relieve the
Company, Parent or Purchaser from liability for any prior material breach
hereof.
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8.7 Termination Fees and Expenses.
(a) If (x) the Company shall have entered into a binding agreement for
a Superior Transaction as a result of an Unsolicited Offer and either Parent or
the Company shall have elected to terminate this Agreement pursuant to Section
8.2(d) or (y) there shall have occurred a Change the Company Recommendation,
then:
(i) in accordance with Section 8.2(d)(iv), the Company shall
promptly pay to Parent the Parent Transaction Expenses;
(ii) in accordance with Section 8.2(d)(iv), the Company shall
promptly instruct the Escrow Agent to release and pay to the Parent all
amounts held by the Escrow Agent pursuant to the Escrow Agreement; and
(iii) if (x) in the event of a Superior Transaction, such
Superior Transaction is consummated within one (1) year after the date
the Company shall have approved such Superior Transaction or (y) any
Alternative Transaction is consummated within 180 days, after the date
of termination of this Agreement following a Change in the Company
Recommendation, the Company shall pay to Parent, simultaneously with
the consummation of such Superior Transaction, or Alternative
Transaction, as the case may be, an amount equal to US$5,000,000, less
the amount of any Parent Transaction Expenses previously paid to
Parent.
(b) If as a result of the Company's violation of Section 6.1(a), Parent
shall have elected to terminate this Agreement pursuant to Section 8.4, then:
(i) the Company shall promptly pay to the Parent US$1,500,000;
(ii) the Company shall promptly instruct the Escrow Agent to
release and pay to the Parent all amounts held by the Escrow Agent
pursuant to the Escrow Agreement; and
(iii) if an Alternative Transaction is consummated by the
Company within one (1) year after such termination, the Company shall
pay to Parent, simultaneously with the consummation of such Alternative
Transaction, an additional US$3,500,000.
(iv) For avoidance of doubt, under the circumstances described
in Section 8.7(b), no Parent Transaction Expenses shall be due and
payable by the Company to the Parent.
(c) In the event this Agreement is terminated upon (i) mutual agreement
of the Company and the Parent, (ii) a material breach of the Agreement by the
Company, (iii) the failure to obtain any approval of a Governmental Authority
required to consummate the Merger, or (iv) failure of the Company to satisfy a
material condition to the Parent's obligation to consummate the Merger that has
not been waived in writing by the Parent or excused pursuant to the terms of
this Agreement, the Company shall promptly instruct the Escrow Agent to release
and pay to the Parent all amounts held by the Escrow Agent pursuant to the
Escrow Agreement.
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(d) Notwithstanding anything herein to the contrary, the aggregate
amount to be paid by the Company to Parent pursuant to this Section 8.7 shall
not exceed US$5,000,000 under any circumstances. For the avoidance of doubt,
payment of any monies by the Company pursuant to this Section 8.7 shall be in
addition to the release to the Parent of all moneys held by the Escrow Agent
pursuant to the Escrow Agreement, and none of the amounts paid by the Company
pursuant to this Section 8.7 or the monies held by the Escrow Agent pursuant to
the Escrow Agreement shall be set-off or deducted from each other. For avoidance
of doubt, the fees and expenses payable pursuant to Sections 8.7(a) and 8.7(b)
are not cumulative, but are alternative remedies, and constitute liquidated
damages.
(e) Any monies to be paid by the Company pursuant to this Section 8.7
shall be paid by wire transfer of same day funds to an account designated by
Parent.
(f) The agreements contained in Section 8.2(d) and Section 8.7 are an
integral part of the transactions contemplated hereby, do not constitute a
penalty, and constitute liquidated damages and constitute the sole remedy of the
Parent and the Purchaser with respect to a termination of this Agreement and/or
abandonment of the Merger under the circumstances described in Section 8.2(d).
In the event of any dispute between the Company and Parent as to whether any
monies are due and payable pursuant to Section 8.2(d) or Section 8.7, the
prevailing party shall be entitled to receive from the other party the
reasonable costs and expenses (including reasonable legal fees and expenses)
incurred in connection with any action, including the filing of any lawsuit or
other legal action relating to such dispute. Interest, calculated at the
publicly announced prime rate of the Bank of America, N.A., shall be paid on the
amount of any unpaid monies required to be paid by the Company pursuant to this
Section 8.7, calculated from the date such monies were required to be paid.
8.8 Extension; Waiver. At any time prior to the Effective Time, any
party hereto, by action taken by its board of directors, may, to the extent
legally allowed, (a) extend the time for the performance of any of the
obligations or other acts of the other parties hereto, (b) waive any
inaccuracies in the representations and warranties made to such party contained
herein or in any document delivered pursuant hereto and (c) waive compliance
with any of the agreements or conditions for the benefit of such party contained
herein; provided, that, any agreement on the part of a party hereto to any such
extension or waiver shall be valid only if set forth in an instrument in writing
signed on behalf of such party.
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ARTICLE IX
GENERAL PROVISIONS
9.1 Nonsurvival of Representations and Warranties. The representations and
warranties in this Agreement, and in any instrument delivered pursuant to this
Agreement, shall terminate at the Effective Time or upon termination of this
Agreement pursuant to Article VIII, as the case may be. This Section 9.1 shall
not limit any covenant or agreement of the parties which by its terms
contemplates performance after the Effective Time. Notwithstanding anything else
contained herein, Section 6.3(b), Section 8.2(d)(iv), Section 8.7 and Article IX
shall survive termination of this Agreement.
9.2 Notices. All notices, requests, claims, demands, or other
communications given or made pursuant hereto shall be in writing and shall be
deemed to have been duly given or made as of the date of receipt and shall be
delivered personally, mailed by registered or certified mail (postage prepaid,
return receipt requested), sent by a nationally recognized overnight courier
services, or sent by facsimile (with proof of sending), to the applicable party
at the following addresses or facsimile numbers (or at such other address or
telecopy number for a party as shall be specified by like notice):
If to Parent or Purchaser:
Armor Holdings, Inc.
1400 Marsh Landing Parkway
Jacksonville, FL 32250
Attn: Chief Executive Officer
Facsimile: (904) 741-5400
With a copy to:
Kane Kessler, P.C.
1350 Avenue of the Americas
New York, New York 10019
Attn: Robert L. Lawrence, Esq.
Facsimile: 212-245-3009
If to the Company:
Simula, Inc.
7822 South 46th Street
Phoenix, AZ 85004
Attention: Chief Executive Officer
Fax: (602) 631-9005
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with a copy to:
Bryan Cave LLP
Two North Central Avenue, Suite 2200
Phoenix, Arizona 85004-4406
Attention: Frank M. Placenti, Esq.
Fax: (602) 364-7070
9.3 Assignment; Binding Effect; No Third-Party Beneficiaries. Neither this
Agreement nor any of the rights, interests or obligations hereunder may be
assigned by any of the parties hereto (whether by operation of law or otherwise)
without the prior written consent of the other parties; provided, however, that
either Parent or Purchaser (or both) may assign its rights hereunder to a
wholly-owned Subsidiary of Parent; and, provided further that nothing shall
relieve the assignor from its obligations hereunder. Subject to the preceding
sentence, this Agreement shall be binding upon and shall inure to the benefit of
the parties hereto and their respective successors and assigns. Notwithstanding
anything contained in this Agreement to the contrary, nothing in this Agreement,
expressed or implied, is intended to confer on any Person other than the parties
hereto, or their respective heirs, successors, executors, administrators and
assigns, any rights, remedies, obligations or liabilities under or by reason of
this Agreement.
9.4 Entire Agreement. This Agreement, including the exhibits and schedules
hereto, the Parent - Company Confidentiality Agreement, the Escrow Agreement,
the Ancillary Documents and any other documents delivered by the parties in
connection herewith constitute the entire agreement among the parties with
respect to the subject matter hereof and supersede all prior representations,
warranties, agreements and understandings among the parties, both written and
oral, with respect thereto, including but not limited to the Letter of Intent
between the Parent and the Company, dated July 23, 2003; provided, that if there
is any conflict between the Parent - Company Confidentiality Agreement and this
Agreement, this Agreement shall prevail.
9.5 Governing Law. THIS AGREEMENT HAS BEEN ENTERED INTO AND SHALL BE
CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK
WITHOUT REFERENCE TO THE CHOICE OF LAW PRINCIPLES THEREOF.
9.6 Jurisdiction and Venue. THIS AGREEMENT SHALL BE SUBJECT TO THE
EXCLUSIVE JURISDICTION OF THE STATE OR FEDERAL COURTS SITTING IN NEW YORK
COUNTY, NEW YORK. THE PARTIES TO THIS AGREEMENT AGREE THAT ANY BREACH OF ANY
TERM OR CONDITION OF THIS AGREEMENT SHALL BE DEEMED TO BE A BREACH OCCURRING IN
THE STATE OF NEW YORK BY VIRTUE OF A FAILURE TO PERFORM AN ACT REQUIRED TO BE
PERFORMED IN THE STATE OF NEW YORK AND IRREVOCABLY AND EXPRESSLY AGREE TO SUBMIT
TO THE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN
DISTRICT OF NEW YORK OR COURTS OF THE STATE OF NEW YORK FOR THE PURPOSE OF
RESOLVING ANY DISPUTES AMONG THE PARTIES RELATING TO THIS AGREEMENT OR THE
TRANSACTIONS CONTEMPLATED HEREBY. THE PARTIES IRREVOCABLY WAIVE, TO THE FULLEST
EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH THEY MAY NOW OR HEREAFTER HAVE TO
THE LAYING
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OF VENUE OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS
AGREEMENT, OR ANY JUDGMENT ENTERED BY ANY COURT IN RESPECT HEREOF BROUGHT IN NEW
YORK COUNTY, NEW YORK, AND FURTHER IRREVOCABLY WAIVE ANY CLAIM THAT ANY SUIT,
ACTION OR PROCEEDING BROUGHT IN NEW YORK COUNTY, NEW YORK HAS BEEN BROUGHT IN AN
INCONVENIENT FORUM. THE PARTIES HERETO AGREE TO SERVICE OF PROCESS BY CERTIFIED
OR REGISTERED UNITED STATES MAIL, POSTAGE PREPAID, ADDRESSED TO THE PARTY IN
QUESTION.
9.7 Waiver of Jury Trial. EACH PARTY TO THIS AGREEMENT WAIVES, TO THE
FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY
JURY IN RESPECT OF ANY ACTION, SUIT OR PROCEEDING ARISING OUT OF OR RELATING TO
THIS AGREEMENT.
9.8 Fee and Expenses. Whether or not the Merger is consummated, except as
otherwise provided in this Agreement, all costs and expenses incurred in
connection with this Agreement and the transactions contemplated hereby shall be
paid by the party incurring such costs and expenses.
9.9 Headings; Interpretation. Headings of the Articles and Sections of this
Agreement are for the convenience of the parties only, and shall be given no
substantive or interpretive effect whatsoever. The table of contents contained
in this Agreement is for reference purposes only and shall not affect in any way
the meaning or interpretation of this Agreement. The parties have participated
jointly in the negotiation and drafting of this Agreement. In the event an
ambiguity or question of intent or interpretation arises, this Agreement shall
be construed as if drafted jointly by the parties, and no presumption or burden
of proof shall arise favoring or disfavoring any party by virtue of the
authorship of any provisions of this Agreement.
9.10 Amendment; Waivers. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties. Except as
otherwise provided herein, no action taken pursuant to this Agreement,
including, without limitation, any investigation by or on behalf of any party,
shall be deemed to constitute a waiver, by the party taking such action, of
compliance with any representations, warranties, covenants or agreements
contained in this Agreement or in any of the Ancillary Documents. Any term,
covenant or condition of this Agreement may be waived at any time by the party
which is entitled to the benefit thereof, but only by a written notice signed by
such party expressly waiving such term or condition. The waiver by any party
hereto of a breach of any provision hereunder shall not operate or be construed
as a waiver of any prior or subsequent breach of the same or any other provision
hereunder.
9.11 Severability. In the event that any one or more of the provisions
contained in this Agreement shall be declared invalid, void or unenforceable,
the remainder of the provisions of this Agreement shall remain in full force and
effect, and such invalid, void or unenforceable provision shall be interpreted
as closely as possible to the manner in which it was written. It is the desire
and intent of the parties that the provisions of this Agreement be enforced to
the fullest extent permissible under the laws and public policies of each
jurisdiction in which enforcement
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is sought. If any provision of this Agreement relating to a time period or scope
of activities is declared by a court of competent jurisdiction to exceed the
maximum permissible time period or scope of activities, as the case may be, the
time period or scope of activities shall be reduced to the maximum which such
court deems enforceable.
9.12 Parent Actions. The Company hereby acknowledges that from and after
the date of this Agreement, Parent or any of its Subsidiaries may take actions
involving (i) a merger, reorganization, share exchange, spin-off, consolidation,
recapitalization, liquidation, dissolution or similar transaction involving
Parent or any of its Subsidiaries, (ii) any purchase or sale of the consolidated
assets of a Person or any division or unit thereof by Parent or any of its
Subsidiaries, (iii) any purchase or sale of, or tender or exchange offer for,
equity securities of any Person by Parent or any of its Subsidiaries, (iv) the
acquisition of any equity securities of any Person by Parent or any of its
Subsidiaries or (v) any financings by the Parent or any of its Subsidiaries.
9.13 Remedies. Except under or with respect to any circumstance, condition
or event which results in an obligation of the Company to make the payments set
forth in Section 8.7 (in which case, such obligation of the Company shall be the
Parent's and the Purchaser's sole, exclusive and liquidated remedy under and
with respect to this Agreement, the Merger, or otherwise, whether at law or in
equity): (a) any and all remedies herein expressly conferred upon a party shall
be deemed cumulative with and not exclusive of any other remedy conferred
hereby, or by law or equity upon such party, and the exercise by a party of any
one remedy shall not preclude the exercise of any other remedy, (b) the parties
agree that irreparable damage will occur in the event that any of the provisions
of this Agreement are not performed in accordance with their specific terms or
are otherwise breached, and (c) the parties further agree they shall be entitled
to an injunction to prevent breaches of this Agreement and to enforce
specifically the terms and provisions of this Agreement, this remedy being in
addition to any other remedy to which the parties are entitled at law or in
equity.
9.14 Execution. This Agreement may be executed by facsimile signatures by
any party and such signature shall be deemed binding for all purposes hereof,
without delivery of an original signature being thereafter required.
9.15 Date for Any Action. In the event that any date on which any action is
required to be taken hereunder by any of the parties hereto is not a Business
Day, such action shall be required to be taken on the next succeeding day which
is a Business Day.
9.16 Counterparts. This Agreement may be executed by the parties hereto in
separate counterparts, each of which, when so executed and delivered, shall be
an original. All such counterparts shall together constitute one and the same
instrument. Each counterpart may consist of a number of copies hereof, each
signed by less than all, but together signed by all, of the parties hereto.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the parties have executed this Agreement and caused
the same to be duly delivered on their behalf on the day and year first written
above.
Armor Holdings, Inc.
By: /s/ Robert R. Schiller
-----------------------------------
Robert R. Schiller
Chief Operating Officer and Chief
Financial Officer
AHI Bulletproof Acquisition Corp.
By: /s/ Robert R. Schiller
-----------------------------------
Robert R. Schiller
President
Simula, Inc.
By: /s/ Bradley P. Forst
-----------------------------------
Bradley P. Forst
President and Chief Executive
Officer
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EXHIBIT A
FORM OF AFFILIATE LETTER
_____________ ___, 20___
Ladies and Gentlemen:
The undersigned, a holder of shares of common stock, par value US$0.01
per share ("Company Common Stock"), of Simula, Inc., an Arizona corporation (the
"Company"), acknowledges that the undersigned may be deemed an "affiliate" of
the Company within the meaning of Rule 145 ("Rule 145") promulgated under the
Securities Act of 1933, as amended (the "Securities Act"), by the Securities and
Exchange Commission (the "SEC"), although nothing contained herein should be
construed as an admission that the undersigned is, in fact, an affiliate of the
Company.
Pursuant to the terms of the Agreement and Plan of Merger, dated as of
August 29, 2003, among Armor Holdings, Inc., a Delaware corporation ("Parent"),
AHI Bulletproof Acquisition Corp., an Arizona corporation and a wholly-owned
subsidiary of Parent ("Purchaser"), and the Company, Purchaser will be merged
with and into the Company (the "Merger"), and in connection with the Merger, the
undersigned is entitled to receive common stock, par value US$0.01 per share
("Parent Common Stock"), of Parent.
If, in fact, the undersigned were an affiliate of the Company under the
Securities Act, the undersigned's ability to sell, assign or transfer the shares
of Parent Common Stock received by the undersigned in exchange for any shares of
Company Common Stock in connection with the Merger may be restricted unless such
transaction is registered under the Securities Act or an exemption from such
registration is available. The undersigned understands that such exemptions are
limited and the undersigned has obtained or will obtain advice of counsel as to
the nature and conditions of such exemptions, including information with respect
to the applicability to the sale of such securities of Rules 144 and 145(d)
promulgated under the Securities Act. The undersigned understands that Parent
will not be required to maintain the effectiveness of any registration statement
under the Securities Act for the purposes of resale of Parent Common Stock by
the undersigned.
The undersigned hereby represents to and covenants with Parent that the
undersigned will not sell, assign or transfer any of the shares of Parent Common
Stock received by the undersigned in exchange for shares of Company Common Stock
in connection with the Merger except (i) pursuant to an effective registration
statement under the Securities Act, (ii) in conformity with the volume and other
limitations of Rule 145 or (iii) in a transaction which, in the opinion of
counsel to the undersigned, such counsel to be reasonably satisfactory to Parent
and such opinion to be in form and substance reasonably satisfactory to Parent,
or as described in a "no-action" or interpretive letter from the Staff of the
SEC specifically issued with respect to a transaction to be engaged in by the
undersigned, is not required to be registered under the Securities Act.
In the event of a sale or other disposition by the undersigned of the
shares of Parent Common Stock pursuant to Rule 145, the undersigned will supply
Parent with evidence of
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compliance with such Rule, in the form of a letter in the form of Annex I hereto
or the opinion of counsel or no-action letter referred to above. The undersigned
understands that Parent may instruct its transfer agent to withhold the transfer
of any shares of Parent Common Stock disposed of by the undersigned, but that
(provided that such transfer is not prohibited by any other provision of this
letter agreement) upon receipt of such evidence of compliance, Parent shall
cause the transfer agent to effectuate the transfer of the shares of Parent
Common Stock sold as indicated in such letter.
Parent covenants that it will take all such actions as may be
reasonably available to it to permit the sale or other disposition of the shares
of Parent Common Stock by the undersigned under Rule 145 in accordance with the
terms thereof.
The undersigned acknowledges and agrees that the legend set forth below
will be placed on certificates representing the shares of Parent Common Stock
received by the undersigned in connection with the Merger or held by a
transferee thereof, which legend will be removed by delivery of substitute
certificates upon receipt of an opinion in form and substance reasonably
satisfactory to Parent from counsel reasonably satisfactory to Parent to the
effect that such legend is no longer required for purposes of the Securities
Act.
There will be placed on the certificates for Parent Common Stock issued
to the undersigned in connection with the Merger, or any substitutions therefor,
a legend stating in substance:
"The shares represented by this certificate were issued, in a
transaction to which Rule 145 promulgated under the Securities Act of
1933, as amended (the "Securities Act"), applies. The shares have not
been acquired by the holder with a view to, or for resale in connection
with, any distribution thereof within the meaning of the Securities
Act. The shares may not be sold, pledged or otherwise transferred
except in accordance with an exemption from the registration
requirements of the Securities Act."
It is understood and agreed that certificates with the legend set forth
above will be substituted by delivery of certificates without such legends if
(i) one year shall have elapsed from the date the undersigned acquired the
Parent Common Stock received in the Merger and the provisions of Rule 145(d)(2)
are then available, (ii) two years shall have elapsed from the date the
undersigned acquired the Parent Common Stock received in the Merger and the
provisions of Rule 145(d)(3) are then available or (iii) Parent has received
either a written opinion of counsel, which opinion of counsel shall be
reasonably satisfactory to Parent, or a "no-action" letter obtained by the
undersigned from the SEC, to the effect that the restrictions imposed by Rule
145 under the Securities Act no longer apply to the undersigned.
The undersigned acknowledges that (i) the undersigned has carefully
read this letter and understands the requirements hereof and the limitations
imposed upon the distribution, sale, transfer or other disposition of Parent
Common Stock and (ii) the receipt by Parent of this letter is an inducement to
Parent's obligations to consummate the Merger.
Very truly yours,
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Annex I
To Exhibit A
_____________ ___, 20___
Ladies and Gentlemen:
On ___________ ___, 20___, the undersigned sold the securities of Armor
Holdings, Inc., a Delaware corporation ("Parent"), described below in the space
provided for that purpose (the "Securities"). The Securities were received by
the undersigned in connection with the merger of AHI Bulletproof Acquisition
Corp., an Arizona corporation and a wholly-owned Subsidiary of Parent, with and
into Simula, Inc., an Arizona corporation.
Based upon the most recent report or statement filed by Parent with the
Securities and Exchange Commission, the Securities sold by the undersigned were
within the prescribed limitations set forth in paragraph (e) of Rule 144
promulgated under the Securities Act of 1933, as amended (the "Securities Act").
The undersigned hereby represents that the Securities were sold in
"brokers' transactions" within the meaning of Section 4(4) of the Securities Act
or in transactions directly with a "market maker" as that term is defined in
Section 3(a)(38) of the Securities Exchange Act of 1934, as amended. The
undersigned further represents that the undersigned has not solicited or
arranged for the solicitation of orders to buy the Securities, and that the
undersigned has not made any payment in connection with the offer or sale of the
Securities to any person other than to the broker who executed the order in
respect of such sale.
Very truly yours,
{Space to be provided for description of the Securities}
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SCHEDULE I
TOTAL CONSIDERATION ADJUSTMENTS
PART A. INCREASE IN TOTAL CONSIDERATION: The Total Consideration shall be
increased pursuant to Section 3.3(a) by the aggregate amount of the following
(in the case of each of the following categories of amounts by which the Total
Consideration shall be increased, without duplication of any amounts otherwise
described by any of the other following categories of amounts by which the Total
Consideration shall be increased):
(i) The amount of any prepaid insurance premiums (other than with
respect to the O&D Tail Insurance) as of the Merger Consideration
Calculation Time which the applicable insurers agree in writing
will be rebated in cash to the Parent or the Purchaser for any
period following the Effective Time.
(ii) The amount of any insurance receivables payable to the Company or
any of its Subsidiaries with respect to any claims by the Company
or any of its Subsidiaries under any of their business
interruption insurance policies which claims are outstanding as
of the Merger Consideration Calculation Time, provided that the
applicable insurer for such claims has confirmed in writing the
amount and payment to the Company or its Subsidiaries, without
reservation of rights.
(iii) The aggregate amount of all accounts receivable of the Company or
any of its Subsidiaries where the payor is a Governmental
Authority or in the sole judgment of the Parent is a credit
worthy prime contractor or subcontractor which are more than
thirty (30) days past due as of the Merger Consideration
Calculation Time and which the Parent has determined in its sole
discretion will be paid following the Merger Consideration
Calculation Time pursuant to a written statement received from
such payor that the applicable account receivable will be paid in
full, without reservation of rights, after the Merger
Consideration Calculation Time.
(iv) The amount of any insurance receivables payable to the Company or
any of its Subsidiaries with respect to any claims of the Company
or any of its Subsidiaries under any policies of property and
casualty insurance (other than business interruption or directors
and officers liability insurance policies) which claims are
outstanding as of the Merger Consideration Calculation Time to
the extent the Company or any of its Subsidiaries have previously
paid funds to repair or replace any of their tangible assets or
to make payments to any third parties with respect to such loss,
provided that (a) the applicable insurer for such claims has
confirmed in writing the amount and payment to be paid to the
Company or its Subsidiaries, without reservation of rights,
following the Merger Consideration Calculation Time, and (b) such
expenditures by the Company or its Subsidiaries have been made in
compliance with the terms of this Agreement.
PART B. DECREASE IN TOTAL CONSIDERATION: The Total Consideration shall be
reduced pursuant to Section 3.3(a) by the aggregate amount of the following (in
the case of each of the
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following categories of reduction amounts, without duplication of any Closing
Date Payments or amounts otherwise described by any of the other following
categories of reduction amounts):
(i) An amount equal to the result of (x) US$1,100,000 (if the last
day of the month preceding the Merger Consideration Calculation
Time occurs before November 30, 2003, but if the last day of the
month preceding the Merger Consideration Calculation Time occurs
on or after November 30, 2003, then US$1,375,000) minus (y) the
aggregate amount of all capital expenditures and "bid and
proposal" expenditures actually paid by the Company and/or any of
its Subsidiaries during the period beginning on July 1, 2003 and
ending on the last day of the month preceding the Merger
Consideration Calculation Time.
(ii) The amount of the Omitted Restructuring Changes (as defined in
the letter agreement between the Parent and the Company, dated of
even date herewith);
(iii) The aggregate amount of any license or other fees or payments
payable to the Company pursuant to any new or extended license
entered into by the Company or any of its Subsidiaries following
the date of this Agreement, including but not limited to any
extension of the license rights regarding the Intercast Europe,
S.P.A. helmet visor for the territory outside Europe and the
United States to the extent such fees or payments are received by
the Company or any of its Subsidiaries following the date of this
Agreement and prior to the Merger Consideration Calculation Time.
(iv) The amount of the accounts payable overage, if such accounts
payable overage is a positive number, calculated as follows:
The product of (ADO - 45) multiplied by ADC, where
ADO (Average Days Outstanding) means, with respect to
aggregate accounts payable of the Company or any of
its Subsidiaries which are outstanding as of the last
day of the calendar month end immediately preceding
the month in which the Merger Consideration
Calculation Time occurs, the quotient of (a) the
accounts payable from the most recent month end prior
to the month in which the Merger Consideration
Calculation Time occurs divided by (b) the ADC, with
such result rounded up or down to the nearest whole
number.
ADC (Average Daily Cost) shall equal the sum of the
costs of goods sold (excluding depreciation) and
selling, general and administrative expenses for the
most recent three calendar months prior to the Merger
Consideration Calculation Time and divided by ninety
(90) days, rounded up or down to the nearest whole
number.
(v) The amount of the original invoice of any Company account or
trade receivable outstanding at any time between the date hereof
and the Merger Consideration Calculation Time that is collected
through the Merger Consideration Calculation Time as a result of
(a) a demand for the acceleration of payment thereof by the
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Company when such invoice is not in default, or (b) an
acceptance of an accelerated payment of less than the amount
of the original invoice therefor as a result of a discount
granted by the Company, in either case not in the ordinary
course of business consistent with past practice.
(vi) An amount equal to the result of (x) US$3,150,000 minus (y) the
aggregate value of the customary and usable commercial
inventory, net of any slow moving or obsolete inventory
provision, of the Company and its Subsidiaries determined and
valued as of last day of the month preceding the Merger
Consideration Calculation Time in accordance with GAAP applied
in a manner consistent with the Company's past practice, but
only if such result is greater than US$1.00.
(vii) The amount of any due but unpaid Tax liabilities (including due
but unpaid estimated Tax payments, but excluding the amount of
any Alternative Minimum Tax arising as a result of the
consummation of the Merger and except for any VAT liabilities
relating to ASD, ASD UK, or the ASD Transaction) of the Company
or any of its Subsidiaries which were due to be paid prior to
the Merger Consideration Calculation Time.
(viii) The amount of any due but unpaid insurance premiums other than
(x) the premiums with respect to the O&D Tail Insurance, (y)
any premiums which are financed and constitute Funded
Indebtedness, and (z) customary accruals for employee health
insurance benefits premiums, including for long term
disability, vision, dental, group health, workers compensation
and supplemental life which are outstanding at the Merger
Consideration Calculation Time.
(ix) The net proceeds received by the Company or its Subsidiaries
prior to the Merger Consideration Calculation Time from any
sale of the outstanding capital stock or assets having an
aggregate value in excess of US$10,000 of the International
Center for Safety Education.
(x) The amount of any insurance proceeds received by the Company or
any of its Subsidiaries, including any payments thereof to
holders of Funded Indebtedness for the benefit of the Company
or its Subsidiaries, with respect to any claims by the Company
or any of its Subsidiaries under any of their property and
casualty insurance policies (but not business interruption
insurance proceeds) between the date of this Agreement and the
Merger Consideration Calculation Time, which are not used by
the Company or its Subsidiaries to repair or replace any of
their tangible assets or to make payments to any third parties
with respect to a loss relating to such insurance proceeds
prior to the Merger Consideration Calculation Time; provided
that such expenditures by the Company have been made in
compliance with this Agreement.
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ANNEX B
STOCKHOLDER AGREEMENT
This STOCKHOLDER AGREEMENT (this "Agreement") is made and entered into
as of ___________ ___, 2003 between Armor Holdings, Inc., a Delaware corporation
("Parent"), and the undersigned stockholder ("Stockholder") of Simula, Inc., an
Arizona corporation ("Company"). Capitalized terms used and not otherwise
defined herein shall have the respective meanings set forth in the Merger
Agreement described below.
RECITALS
WHEREAS, pursuant to an Agreement and Plan of Merger, dated as of
_________ ___, 2003 by and among Parent, Simula Acquisition Corp., an Arizona
corporation and a wholly owned subsidiary of Parent ("Merger Sub") and Company
(such agreement as it may be amended is hereinafter referred to as the "Merger
Agreement"). Parent has agreed to acquire the outstanding securities of Company
pursuant to a statutory merger of Merger Sub with and into Company (the
"Merger"), in which each outstanding share of capital stock of Company (the
"Company Capital Stock") will be converted into shares of common stock of Parent
(the "Parent Shares") on the terms set forth in the Merger Agreement (the
"Transaction");
WHEREAS, in order to induce Parent to enter into the Merger Agreement
and consummate the Transaction, Company has agreed to use its reasonable best
efforts to cause the officers, directors, and largest stockholder of Company to
execute and deliver to Parent a Stockholder Agreement upon the terms set forth
herein; and
WHEREAS, Stockholder is or may become the registered and beneficial
owner (within the meaning of Rule 13d-3 of the Exchange Act) of capital stock of
Company (the "Shares").
NOW, THEREFORE, the parties agree as follows:
1. Transfer and Encumbrance. Stockholder is the beneficial owner of ___
Shares. The Shares constitute the only shares of capital stock and voting
securities of Company beneficially owned by Stockholder. To Stockholder's
knowledge, the Shares are, and will be at all times up until the Effective Time,
free and clear of any liens, claims, options, charges or other encumbrances,
except as disclosed on the signature page hereto. Stockholder's principal
residence or place of business is accurately set forth on the signature page
hereto.
2. New Shares. Stockholder agrees that any additional shares of capital
stock or voting securities of Company that Stockholder purchases or with respect
to which Stockholder otherwise acquires beneficial ownership after the date of
this Agreement and prior to the Effective Time ("New Shares") shall be subject
to the terms and conditions of this Agreement to the same extent as if they
constituted Shares.
3. Agreement to Vote Shares. Prior to the Effective Time, and unless
and until there has been a Change in the Company Recommendation in accordance
with the Merger Agreement,
at every meeting of the stockholders of Company at which any of the following is
considered or voted upon, and at every adjournment thereof, and on every action
or approval by written resolution of the stockholders of Company with respect to
any of the following, Stockholder shall vote the Shares and any New Shares in
favor of approval and adoption of the Merger Agreement and of the Transaction.
4. Irrevocable Proxy. Stockholder hereby agrees to timely deliver to
Parent a duly executed proxy in the form attached hereto as Exhibit I (the
"Proxy"), such Proxy to cover the Shares and all New Shares in respect of which
Stockholder is entitled to vote at each meeting of the stockholders of Company
(including, without limitation, each written consent in lieu of a meeting). In
the event that Stockholder is unable to provide any such Proxy in a timely
manner, Stockholder hereby grants Parent a power of attorney to execute and
deliver such Proxy for and on behalf of Stockholder, such power of attorney,
which being coupled with an interest, shall survive any death, disability,
bankruptcy, or any other such impediment of Stockholder. Upon the execution of
this Agreement by Stockholder, Stockholder hereby revokes any and all prior
proxies or powers of attorney given by Stockholder with respect to the Shares
and agrees not to grant any subsequent proxies or powers of attorney with
respect to the Shares until after the Effective Time.
5. Representations, Warranties and Covenants of Stockholders.
Stockholder hereby represents, warrants and covenants to Parent as follows:
(a) Stockholder has full power and legal capacity to execute and
deliver this Agreement and the Proxy to perform its obligations
hereunder and to consummate the transactions contemplated hereby. This
Agreement has been duly and validly executed and delivered by
Stockholder and constitutes the valid and binding obligation of
Stockholder, enforceable against Stockholder in accordance with its
terms except as may be limited by (i) the effect of bankruptcy,
insolvency, conservatorship, arrangement, moratorium or other laws
affecting or relating to the rights of creditors generally, or (ii) the
rules governing the availability of specific performance, injunctive
relief or other equitable remedies and general principles of equity,
regardless of whether considered in a proceeding in equity or at law.
To Stockholder's knowledge, the execution and delivery of this
Agreement and the Proxy by Stockholder does not, and the performance of
Stockholder's obligations hereunder will not, result in any breach of
or constitute a default (or an event that with notice or lapse of time
or both would become a default) under, or give to others any right to
terminate, amend, accelerate or cancel any right or obligation under,
or result in the creation of any lien or encumbrance on any Shares or
New Shares pursuant to, any note, bond, mortgage, indenture, contract,
agreement, lease, license, permit, franchise or other instrument or
obligation to which Stockholder is a party or by which Stockholder or
the Shares or New Shares are or will be bound or affected.
(b) Stockholder understands and agrees that if Stockholder attempts
to transfer, vote or provide any other person with the authority to
vote any of the Shares other than in compliance with this Agreement,
Company shall not, and Stockholder hereby unconditionally and
irrevocably instructs Company to not, permit any such
2
transfer on its books and records, issue a new certificate representing
any of the Shares or record such vote unless and until Stockholder
shall have complied with the terms of this Agreement.
6. Additional Documents. Stockholder hereby covenants and agrees to
execute and deliver any additional documents necessary or desirable, reasonably
necessary and desirable, to carry out the purpose and intent of this Agreement.
7. Termination. This Agreement and the Proxy delivered in connection
herewith shall terminate and shall have no further force or effect as of the
Effective Time.
8. Miscellaneous.
8.1 Severability. If any term, provision, covenant or restriction of
this Agreement is held by a court of competent jurisdiction to be invalid, void
or unenforceable, then the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated.
8.2 Binding Effect and Assignment. This Agreement and all of the
provisions hereof shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and permitted assigns, but, except as
otherwise specifically provided herein, neither this Agreement nor any of the
rights, interests or obligations of the parties hereto may be assigned by either
of the parties without the prior written consent of the other. This Agreement is
intended to bind Stockholder solely as a securityholder of the Company and not
in any other capacity with the Company, if any, only with respect to the
specific matters set forth herein.
8.3 Amendment and Modification. This Agreement may not be modified,
amended, altered or supplemented except by the execution and delivery of a
written agreement executed by the parties hereto.
8.4 Specific Performance; Injunctive Relief. The parties hereto
acknowledge that Parent will be irreparably harmed and that there will be no
adequate remedy at law for a violation of any of the covenants or agreements of
Stockholder set forth herein. Therefore, it is agreed that, in addition to any
other remedies that may be available to Parent upon any such violation, Parent
shall have the right to enforce such covenants and agreements by specific
performance, injunctive relief or by any other means available to Parent at law
or in equity and Stockholder hereby waives any and all defenses which could
exist in its favor in connection with such enforcement and waives any
requirement for the security or posting of any bond in connection with such
enforcement.
8.5 Notices. All notices, requests, demands or other communications
that are required or may be given pursuant to the terms of this Agreement shall
be in writing and shall be deemed to have been duly given if delivered by hand
or mailed by registered or certified mail, postage prepaid, or sent by facsimile
transmission, as follows:
3
(a) If to Stockholder, at the address set forth below Stockholder's
signature at the end hereof.
(b) if to Parent, to:
Armor Holdings, Inc.
1400 Marsh Landing Parkway
Jacksonville, FL 32250
Attn: Chief Executive Officer
Facsimile: (904) 741-5400
With a copy to:
Kane Kessler, P.C.
1350 Avenue of the Americas
New York, New York 10019
Attn: Robert L. Lawrence, Esq.
Facsimile: 212-245-3009
or to such other address as any party hereto may designate for itself
by notice given as herein provided.
9.6 Governing Law. This Agreement shall be governed by, construed and
enforced in accordance with the internal laws of the State of Arizona without
giving effect to the principles of conflicts of law thereof.
9.7 Entire Agreement. This Agreement and the Proxy contain the entire
understanding of the parties in respect of the subject matter hereof, and
supersede all prior negotiations and understandings between the parties with
respect to such subject matter.
9.8 Counterpart. This Agreement may be executed in several
counterparts, each of which shall be an original, but all of which together
shall constitute one and the same agreement.
9.9 Effect of Headings. The section headings herein are for convenience
only and shall not affect the construction or interpretation of this Agreement.
4
IN WITNESS WHEREOF, the parties have caused this Stockholder Agreement
to be executed as of the date first above written.
Armor Holdings, Inc. STOCKHOLDER
By:__________________________________ _____________________________________
Name:_______________________________
Title:________________________________ _____________________________________
(Signature of Spouse)
-------------------------------------
(Print Name of Stockholder)
-------------------------------------
(Print Street Address)
-------------------------------------
(Print City, State and Zip)
-------------------------------------
(Print Telephone Number)
-------------------------------------
(Social Security or Tax I.D. Number)
5
SCHEDULE OF LIENS, CLAIMS, OPTIONS AND ENCUMBRANCES
TO THE SHARES PURSUANT TO SECTION 1 HEREOF:
6
ANNEX C
[Relational Advisors LLC Letterhead]
August 29, 2003
The Board of Directors
Simula, Inc.
7822 South 46th Street
Phoenix, AZ 85044
Gentlemen:
You have asked us to advise you with respect to the fairness from a
financial point of view, as of the date hereof, of the Consideration (as herein
defined) to be paid by Armor Holdings, Inc. (the "Acquirer") to the common
shareholders ("Shareholders") of Simula, Inc. (the "Company"), pursuant to the
terms of the Agreement and Plan of Merger (the "Merger Agreement") dated as of
August 29, 2003, among the Acquirer, AHI Bulletproof Acquisition Corp., a
wholly-owned subsidiary of Acquirer and the Company. The Merger Agreement
provides for, among other things, the acquisition by the Acquirer of all of the
outstanding shares of common stock, $0.01 par value per share (the "Shares"), of
the Company in a transaction that specifies a total enterprise value of
$110,500,000 for the Company which will provide consideration to the
Shareholders having an estimated value of $3.00 per share (after deduction for
funded indebtedness and transaction costs and expenses), in cash and/or stock of
the Acquirer (the "Consideration"), subject to certain terms and conditions,
including purchase price adjustments, more fully described in the Merger
Agreement (the "Merger"). We are acting as non-exclusive financial advisor to
the Company's Board of Directors in connection with the Merger (although in so
acting, we are not entering into an agency or other fiduciary relationship with
the Company, its Board or stockholders or any other person) and will receive a
fee from the Company for our services, a significant portion of which is
contingent upon the consummation of the Merger. In addition, the Company has
agreed to indemnify us for certain liabilities arising out of our engagement.
Except as otherwise defined herein, capitalized terms have the meanings ascribed
to such terms in the Merger Agreement.
In connection with our opinion, we have, among other things: (i)
reviewed certain publicly available information and internal financial and other
data with respect to the Company, including the financial statements for the
recent years (the last audited Company financial statements provided to
Relational Advisors LLC were as of December 31, 2002 and the last unaudited
financial statements were as of July 31, 2003) and certain other relevant
financial and operating data relating to the Company made available to us from
published sources and from the internal records of the Company; (ii) reviewed
certain publicly available information and internal financial and other data
with respect to the Acquirer, including the financial statements for the recent
years (the last audited Acquirer financial statements provided to Relational
Advisors LLC were as of December 31, 2002 and the last unaudited financial
statements were as of June 30, 2003) and certain other relevant financial and
operating data relating to the Acquirer made available to us from published
sources and from the internal records of the Acquirer; (iii) reviewed the
financial terms and conditions of the Merger Agreement dated August 29, 2003;
(iv) reviewed certain publicly available information concerning the trading of,
and the trading market for, the Shares; (v) reviewed certain publicly available
information concerning the trading of, and the trading market for the Acquirer's
common stock; (vi) reviewed and discussed with the Company's management the
background, history and terms of the transaction; (vii) compared the Company and
Acquirer from a financial point of view with certain other companies that we
deemed to be relevant; (viii) considered the publicly available financial terms,
as they relate to the Company, of selected recent business combinations of
companies that we deemed to be comparable, in whole or in part, to the Merger;
(ix) discussed with the Company's management the prospects for, and business
challenges facing, the Company absent the Merger; (x) reviewed and discussed
with representatives of the Company's management certain information of a
C-1
business and financial nature regarding the Company furnished to us by them,
including management's financial forecasts and related assumptions of the
Company and any benefits and challenges expected to result from the Merger; (xi)
made inquiries regarding, and discussed, the Merger and the Merger Agreement and
other matters related thereto with the Company's counsel; and (xii) performed
such other analyses and examinations and considered such other information as we
deemed appropriate.
In connection with our review, we have not assumed any obligation
independently to verify the foregoing information and have relied on its
accuracy and completeness in all material respects. With respect to the
financial forecasts provided to us by representatives of the Company's
management, (i) management has advised us that the forecasts provided to us
accurately reflect the good faith judgment of management; and (ii) upon their
advice and with the Board of Directors' consent we have assumed for purposes of
our opinion that (a) the forecasts have been reasonably prepared on bases
reflecting the best currently available estimates and good faith judgments of
the Company's management at the time and through the date hereof as to the
future financial performance of the Company, and (b) that such projections
provide a reasonable basis upon which we can form our opinion. With respect to
the Consideration payable to Shareholders, we have assumed the Company's actual
indebtedness and transaction costs and expenses at the closing will be the same
as the estimates of those amounts that were previously provided to us by the
Company's management. In rendering our opinion, we express no view as to the
reasonableness of the forecasts provided to us by the Company's management or
the assumptions on which such forecasts are based. The management of the Company
has advised us and we have assumed that they are not aware of any facts or
circumstances that would make the information reviewed by us inaccurate or
misleading. We have relied on advice of the Company's counsel and the
independent accountants to the Company as to all legal, financial and tax
reporting matters with respect to the Company, the Merger and the Merger
Agreement. We have assumed that the Merger will be consummated in a manner that
complies in all respects with the applicable provisions of the Securities Act of
1933, as amended (the "Securities Act"), the Securities Exchange Act of 1934, as
amended, and all other applicable federal and state statutes, rules and
regulations including any applicable foreign laws. In addition, we have not been
requested to make, and have not assumed responsibility for making, an
independent evaluation, appraisal or physical inspection of any of the assets or
liabilities (contingent or otherwise) of the Company, nor have we been furnished
with any such appraisals. At the instruction of the Company's Board of
Directors, we approached third parties to solicit indications of interest in
acquiring the Company as well as other possible strategic alternatives, and we
had discussions with a number of parties expressing interest in an acquisition
of the Company. Finally, our opinion is based on economic, monetary, currency
exchange, financial markets and other conditions as in effect on, and the
information made available to us as of, the date hereof. Accordingly, although
subsequent developments may affect this opinion, we do not assume any obligation
to update, revise or reaffirm this opinion.
We have further assumed with your consent that the representations and
warranties of each party in the Merger Agreement are true and correct, that each
party to the Merger Agreement will perform all of the covenants and agreements
required to be performed by such party under the Merger Agreement, and that the
Merger will be consummated in accordance with the terms described in the Merger
Agreement, without any further amendments thereto, and without waiver by the
Company of any of the conditions to its obligations thereunder. We have assumed
that in the course of obtaining the necessary regulatory or other consents or
approvals (contractual or otherwise) for the Merger, no restrictions, amendments
or modifications, will be imposed that will have a material adverse effect on
the contemplated benefits of the Merger.
Based upon and subject to the foregoing, we are of the opinion that as
of the date hereof the Consideration to be received by the Shareholders pursuant
to the Merger Agreement is fair to such holders from a financial point of view.
This opinion is directed to the Board of Directors for use in
connection with its consideration of the Merger and is not a recommendation to
any shareholder as to how such shareholder should vote with respect to the
Merger or otherwise. Further, this opinion addresses only the financial fairness
of the Consideration to be received by the Shareholders as of the date hereof,
and it does not address any other aspect of the Merger including, without
limitation, the relative merits of the Merger, any alternatives to the
C-2
Merger or the Company's underlying business decision to proceed with or effect
the Merger, including the benefits to be obtained from ongoing independent
operations. This opinion may not be used or referred to by the Company, or
quoted or disclosed to any person in any manner, without our prior written
consent provided that this opinion may be reprinted in full in the Company's
proxy statement with respect to the Merger.
Respectfully,
RELATIONAL ADVISORS LLC
C-3
ANNEX D
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002 COMMISSION FILE NO. 1-12410
-----------------
SIMULA, INC.
(Exact name of Registrant as specified in its charter)
ARIZONA 86-0320129
(State of Incorporation) (I.R.S. Employer Identification No.)
2625 SOUTH PLAZA DRIVE, SUITE 100
TEMPE, ARIZONA 85282
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (602) 631-4005
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
Common Stock, par value $.01 per share American Stock Exchange
8% Senior Subordinated Convertible Notes Due 2004 American Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in the definitive Proxy incorporated by
reference in Part III of this Form 10-K [X]
Indicate by checkmark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act.
Yes [ ] No [x]
The aggregate market value of the Common Stock (based on the closing price
as quoted on the American Stock Exchange on June 28, 2002) excluding all shares
held by executive officers, directors and non-institutional holders of five
percent or more of the voting power of the Registrant was $29,695,119. As of
April 9, 2003, the number of shares of Common Stock outstanding was 13,014,071.
DOCUMENTS INCORPORATED BY REFERENCE:
Certain exhibits are incorporated in Item 15 of this report by reference to
other reports and registration statements of the Registrant which have been
filed with the Securities and Exchange Commission. Exhibit index is at page 31.
================================================================================
D-1
PART I
ITEM 1. BUSINESS
The matters discussed in this report on Form 10-K may include estimates
or forward-looking statements that describe matters that involve risks and
uncertainties. Our actual results could differ materially from those discussed
herein. See "Item 7. Management's Discussion and Analysis and Financial
Condition and Results of Operations - Forward Looking Information and Risks and
Uncertainties in our Business."
References to "we," "our," or "us" refer to Simula, Inc. and all
entities owned or controlled by Simula, Inc.
THE COMPANY
Simula is a world-recognized safety technology company and supplier of
human safety and survival systems. We provide high-technology products and
services to all branches of the United States military, major aerospace and
defense prime contractors, international military forces, and consumer markets.
We have served the defense industry for almost 30 years. We are a provider of
military helicopter seating systems, aircraft and land vehicle armor systems,
protective equipment for military personnel, safety systems and devices utilized
in the automotive industry, and other technologies used to protect humans in a
variety of life-threatening or catastrophic situations.
Our products are deployed on a wide range of high-profile military
platforms such as the AH-64 Apache and the UH-60 Black Hawk helicopters, the
C-17 Globemaster III Transport Aircraft, the M1117 Guardian Armored Security
Vehicle, the M998 High Mobility Multipurpose Wheeled Vehicle ("HMMWV") and
body-worn equipment for personal protection of the United States Army, Marine
Corps, and Air Force Special Operations Forces. Primary Aerospace and Defense
customers include Boeing, Sikorsky, Bell Helicopter, Oshkosh Truck, General
Motors, the U.S. Military Services, and the U.S. Coast Guard. We also provide
products to prominent automakers such as BMW and Ford Range Rover.
A key part of our strategy has been to develop state-of-the-art safety
solutions for aerospace and defense applications and to migrate that technology
to commercial markets. These defense-related development programs have
frequently been funded by the U.S. Government under circumstances where we
retain commercial and patent rights. As a result of our extensive background in
human safety, we are in a position to understand our customers' needs and are
able to achieve innovative solutions in our laboratories and test facilities.
Simula's success is largely due to our commitment to this strategy. The vast
majority of our revenue today comes from products created through our
innovation.
We operate in two primary business segments, as discussed in the
footnotes to our financial statements. The Aerospace and Defense segment
includes technology development and manufacturing operations for military
aircraft seating, armor, and crew safety systems sold principally for branches
of the United States armed forces and foreign armed forces. The Commercial
Products segment includes technology development, products and safety systems
for automobiles and trucks. All other activity, included in Other, represents
technology sales and royalties and general corporate operations, including
unallocated interest.
In the fourth quarter 2002, the Board of Directors and the executive
management announced that Simula was exploring all strategic options including
sale or merger of the Company. See "Item 7. Management's Discussion and Analysis
of Results of Operations and Financial Condition - Our Balance Sheet and
Strategic Alternatives".
MARKET AREAS
We develop, manufacture, license, and sell products and technologies
for a number of different applications for both military and commercial
customers. We align these applications with our customers' needs in the
following markets:
o Aviation Safety Systems
o Land and Marine Safety Systems
o Military Personnel Safety Systems
o Automotive Safety Systems
D-2
o Technology Development and Licensing
Aviation Safety Systems
Our core capabilities and technologies in the aircraft safety market
include protective seating, inflatable restraints, and armor.
We have been a major supplier of crash-resistant, energy-absorbing
seating systems for military helicopters and other military aircraft to various
branches of the United States military and their prime defense contractors, and
foreign customers for over 25 years. We currently supply approximately 75% of
the new and replacement crew seating systems for U.S. military helicopters. The
seating systems focus on reducing injury and increasing survivability in
aircraft crashes. These crash-resistant seating systems contain proprietary
energy-absorbing devices that activate upon impact to absorb shock that
otherwise would be absorbed by the seat occupant and restrain the body through
the high force levels experienced in a crash.
As an outgrowth of our military aircraft seating systems, we have
developed an expertise in high performance, lightweight armor systems.
Typically, crew armor on aircraft is located on, or adjacent to, the crewmember
seat to minimize weight. Thus, many of our seating systems incorporate our
advanced armor systems.
As a result of our crash-resistant, energy-absorbing technologies,
coupled with our high-strength, lightweight armor capability, we are the leading
provider of energy-absorbing helicopter seats purchased by the United States and
foreign militaries. We are the sole supplier of crew seats for 13 different
helicopter models and other variants of these aircraft. Military helicopters for
which we have designed and manufactured crew seat assemblies include the AH-64
Apache attack helicopter; UH-60 Black Hawk utility helicopter; SH-60 Sea Hawk
ASW helicopter; SH/UH-3 Sea King ASW/utility helicopter; CH-53 Super Sea
Stallion transport and cargo helicopter; V-22 Osprey tilt-rotor aircraft; AH-1Z
Cobra Venom Attack helicopter; UH-1Y Super Huey utility helicopter; C/MH-47
Chinook Transport Helicopter; Japan's OH-1 Observation helicopter; Australia's
SH-2G (A) Shipboard/ASW helicopter; England's EH101 Merlin Mk1 and Merlin Mk3
ASW and Transport helicopters; Italy's EH101 MMI ASW and Transport helicopters;
Canada's CH-149 Cormorant Search-and-Rescue helicopter; and Norway's Sea King
Multi-role helicopters. Aircraft manufacturers in our customer base include
Boeing Helicopters, Sikorsky Aircraft Corporation, Bell Helicopter Textron,
Inc., and Kaman Aerospace, Kawasaki Heavy Industries, Mitsubishi Heavy
Industries, Hindustan Aeronautics, and Agusta Westland. We also supply crew
seats directly to various agencies of the U.S. Department of Defense and various
foreign militaries.
Our expertise in military seating systems also extends to troop seats
for both helicopters and fixed-wing aircraft. Simula has produced or is
currently producing troop seats for the UH-60 Black Hawk, CH-47 Chinook, SH-60
Seahawk, and the C-130 and C-17 transport aircraft. In 2001, we were the sole
supplier selected by the U.S. Air Force to develop a common wall-mounted troop
seat for its C-130, C-141, and KC-135 aircraft. The common troop seat also has
application to a range of transport helicopters and various fixed-wing aircraft
flown by other U.S. services and foreign militaries. We believe troop seating
will become one of our fastest growing product lines.
Our expertise in helicopter crash safety led to the development of
cockpit airbag systems ("CABS") with U.S. Army funding over the last five years.
Our role has evolved into the position as a system integrator incorporating
airbags, gas generators, and complex three-dimensional crash sensors into
helicopter cockpits. In 2001, we were awarded the first ever production
contracts for aircraft airbag systems. These are currently being produced for
the U.S. Army's UH-60 Black Hawk and OH-58 Kiowa Warrior helicopters. We believe
there is significant demand both domestically and throughout the world for
various helicopters and fixed-wing aircraft, and that we are uniquely positioned
to provide system design and aircraft integration expertise to a wide range of
potential customers. We received one production contract in 2002 and two
production contracts in 2001 and both represent less than 5 percent of the
potential world market for CABS, thus we believe there is substantial growth
potential in this business area.
Land and Marine Safety Systems
Our expertise in military vehicle safety systems focuses on two areas:
armor protection for the vehicle and crew, and crash-safety systems.
Our experience in high-performance, lightweight armor for aircraft has
enabled us to build a business
D-3
around armoring thin-skinned vehicles for priority missions during peacekeeping
operations. Work in this area includes ballistic and mine-blast kits for HMMWVs,
5-ton trucks, and large off-road trucks such as the HEMTT. We have responded to
urgent armor requirements in most major conflicts involving U.S. peacekeepers in
the last 10 years. For example, we supplied approximately 186 HEMTT kits for
U.S. troops in Bosnia conducting resupply and humanitarian missions.
In 2001, our ground vehicle armor business continued to mature as we
completed the initial contracts for production armor kits for the M1117 Guardian
Armored Security Vehicle for the U.S. Army. The U.S. Army subsequently awarded
us a follow-on contract for the Guardian. In 2002, we provided armor for the
U.S. Army's new Stryker IAV.
We believe ground vehicle armor is an area of significant growth
potential for us. The U.S. Army and Marine Corps, as well as forces around the
world, are undergoing significant fleet transformation to procure
high-performance, air deployable, wheeled vehicles for transport of ground
troops. The stringent weight limits on these vehicles and the expanding threat
base in many countries argue for high-performance, lightweight armor systems.
Our 25 year experience with these armor systems, and recent manufacturing base
expansion in this area, positions us to capture a sizeable portion of the
vehicle applique armor contracts to be let over the next 10 years.
In the area of ground vehicle crash safety, we have worked closely with
the U.S. Army to analyze vehicular accidents within its combat vehicle fleet.
This work has led to safety improvements in the vehicle cabs to delethalize the
interiors and to install improved restraints. We believe future improvements may
include inflatable restraint systems. Our expertise in automotive inflatable
restraints and helicopter cockpit airbags provides us with a unique experience
base to capture military vehicle upgrades in the future.
In 2002, we developed a business plan and hired new personnel to expand
this business area and to develop new and advanced vehicle safety technologies
and products.
Military Personnel Safety Systems
Our core competencies and technologies in personnel safety include
ballistic vest body armor, pilot and crew bailout parachutes, flotation collars,
survival vests, and integrated ensembles incorporating multiple capabilities.
We supply numerous products to protect military and police personnel,
including armor protection, parachutes, and flotation collars. Our armor
business includes a range of body armors designed to minimize injury from
handgun bullets, rifle bullets and fragments from explosive warheads. This
business, including new body armor products for personnel, has grown
significantly and we anticipate, in light of current world events, that we will
devote continuing and additional efforts to increase our market share in both
defense and civilian personnel armor markets. Over the past several years, we
have been awarded multiple contracts to produce Small Arms Protective Inserts
("SAPI") for the U.S. Army and U.S. Marine Corps. We also see significant
opportunities for our armor business in non-military applications.
Under contract with the U.S. Navy, we have applied our technologies
and overall knowledge of materials and structures to develop a parachute system
that solves numerous functional problems attendant to traditional military
bailout parachutes. Our Thin-Pack Parachute ("TPP"), 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. Our patented environmental sealing technology
reduces repackaging and maintenance costs, and extends the service life of the
parachute without jeopardizing user safety. To date, we have supplied over 5,000
TPPs to the U.S. Navy. In 2001, Simula laid the groundwork for supply of the TPP
to U.S. Air Force and foreign military sales ("FMS") customers. At the same time
as the business base with the U.S. military has increased, our Durachute
parachute system, the commercial configuration of the TPP, has completed
certification testing with the Federal Aviation Administration and we have made
our first commercial sales.
We have also developed a line of flotation collars that are designed to
provide additional buoyancy for a person that enters water in an emergency. The
basic configuration of the product, called the Low Profile Flotation Collar, can
fit a wide range of applications. For example, it can be used by aviators that
eject or bailout over water, rescue swimmers, divers and naval personnel. In
addition, it can be worn with a wide range of other equipment and clothing for
ground troops being ferried over water and also by commercial personnel who work
around water. There are variations in the basic configuration including
automatic inflation and face covers. Our system has been
D-4
adopted by the U.S. Navy and U.S. Air Force. To date, we have supplied over
20,000 collars.
We have seen a trend among our customers to integrate various armor,
survival and flotation technologies in a common vest ensemble. Our expertise in
this area positions us to be a potential integrator of ensembles for systems
such as the U.S. Army's Air Warrior, Land Warrior and Objective Task Warrior,
and various Navy, Air Force, and civilian law enforcement equipment needs.
Automotive Safety Systems
Our core competencies and technologies in automotive safety include
inflatable restraint systems and airbag inflator devices.
We design, develop, license, manufacture and market a family of
automotive restraint devices that offer passengers high levels of protection and
security. At the core of our patented technology is the Inflatable Tubular
Structure ("ITS(R)"). In 1994, we made a strategic decision to enter the
inflatable restraint market for automobiles utilizing ITS(R) in an application
to protect the head in a side-impact collision. We completed our development and
began commercial production of this technology in late 1996. Since that time,
our automotive safety product line has been a growing and profitable business.
We have delivered over six million ITS(R) units to date.
The ITS(R) provides protection beyond that of 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 stowed position
and form a tight inflatable structure across the side window. The system has an
extended inflation time, enabling the unit to offer protection in the event of
secondary impacts or rollovers. The ITS(R) deploys in a non-aggressive manner,
minimizing the possibility of injury during inflation that is present in
conventional frontal airbags. Tests conducted by the Insurance Institute for
Highway Safety and the National Highway Traffic Safety Administration ("NHTSA")
have conclusively demonstrated that the ITS(R) system delivers extensive head
and neck protection, as well as significantly mitigating occupant ejection
during rollovers.
As a result of government regulations and consumer demand for greater
occupant safety, the worldwide market for frontal and side-impact airbags in all
vehicle positions (front and rear) is expected to surpass $12 billion, according
to industry reports. Over the next three to five years, we believe dynamic side
impact restraints will be the fastest growing segment of this market, expanding
from approximately four million units in 1999 to over 35 million units in 2004.
In anticipation of increased demand, we have developed several strategic
partnerships with first tier automotive suppliers, resulting in our receipt of
contracts for various automotive platforms. We have license and manufacturing
agreements with Autoliv, TRW, Inc. and Delphi Automotive Systems, Inc. for the
marketing, development and production of ITS(R) for automotive platforms. We
have entered into a license agreement with Indiana Mills & Manufacturing, Inc.
("IMMI"), which grants IMMI the right to manufacture and sell the ITS(R) to
heavy and medium duty truck manufacturers. Entering into such strategic
alliances with first tier component suppliers allows us to leverage off the size
and industry strength of such large manufacturers, and to benefit from their
market access to original equipment manufacturers ("OEMs").
Historically, we have relied on strategic relationships with first tier
suppliers for the adoption of inflatable restraint technology by OEMs. Under the
resulting supply agreements for our ITS(R), we would only manufacture the actual
inflatable structure and our distributor partner would create the other parts
needed for the unit (e.g., sensor, inflator, etc.). The recent internal
development of our Distributed Charge Inflator ("DCI(TM)"), a patented inflator
mechanism that allows airbags to inflate upon impact or collision, will allow us
to position ourselves as an integrated systems supplier. The DCI(TM) offers
unique advantages over competitive products in the marketplace. These advantages
include faster inflation times, simplified vehicle integration of the airbag
system, and substantial weight savings. The combination of our ITS(R) and
DCI(TM) technology will enable us to manufacture and sell the entire ITS(R) unit
to be installed in an automotive platform. This move up in the supply chain will
allow us to supply OEMs directly and to sell product outside of arrangements
with traditional first tier distributors. By providing a fully integrated
product, we anticipate better ability to manage our operating margins. See "Item
7. Management's Discussion and Analysis of Results of Operations and Financial
Condition - Forward Looking Information and Risks and Uncertainties in our
Business"
D-5
Technology Development and Licensing
An important part of our business is a growing portfolio of licensed
technologies. Our principal licenses include soft armor and a patented family of
transparent polymers.
Simula has developed 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 and dye compatible, while possessing the ability to
withstand extreme temperatures and chemical attack. 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, medical products and sun, sport and ophthalmic
lenses. We have taken significant steps to commercialize the transparent polymer
material through our own products and through licenses in other markets. We have
licensed our optical polymer for use in ophthalmic lenses with PPG Industries,
Inc. and for sun and sport lenses and motorcycle helmets with Intercast Europe.
PPG introduced Simula's polymer in 2001 under the tradename of Trivex. Intercast
introduced a product tradenamed NXT(TM) to the sunglass market in early 2002.
In 2002, we completed a license with the prime contractor for the
Joint Services General Purpose Gas Mask ("JSGPM") to develop a lens with
chemical agent resistance and ballistic properties. The design will utilize our
patented transparent urethane technology. We expect that several million units
of the JSGPM will be built over the next 10 years for U.S. and foreign military
customers as well as first responders (police, firemen, etc.).
We currently license our patented SimuLITE(TM) material to Second
Chance Body Armor, Inc., the nation's largest manufacturer of soft, concealable
personal body armor used by police forces. Sales of Second Chance Body Armor
incorporating Simula's technology have grown rapidly over the last year.
Simula benefits from these licenses in the form of technology transfer
fees and ongoing royalties.
PROPRIETARY TECHNOLOGY
We maintain a research and testing facility dedicated to the
development of new products and applications, and the modification and
improvement of existing products. We employ an interdisciplinary team of
biomedical experts, crash safety analysts, mechanical engineers, chemists, and
physicists that perform a variety of functions including ballistics and crash
dynamics. Our research and testing facilities support intra-company projects and
also generate revenue from external services contracting.
We retain proprietary rights in the products and services we develop,
including many of those initially financed under government contracts. As an
integral component of our strategy, we seek to transfer all of our technology to
product applications. Our costs for research and development in 2002, 2001, and
2000 were approximately $7 million, $11 million, and $14 million, respectively.
These amounts include government-funded, other customer-funded, and
Company-funded research and development contracts.
Since much of our research and development generates proprietary
technology, we seek patent protection on products that we develop. We have a
total of 38 U.S. and 64 foreign patents and we have received notices of
allowance on 2 U.S. and 3 foreign patents. We currently have an additional 14
U.S. and 81 foreign patents pending. United States patents protect inventions
for a period of 20 years after the application is first filed. Our ability to
compete effectively depends, in part, on our ability to maintain the proprietary
nature of our technologies. We also rely on unpatented proprietary information
and know-how, typically protecting such information as trade secrets, but there
can be no assurance that others will not develop such information and know-how
independently or otherwise obtain access to our technology. See "Item 7.
Management's Discussion and Analysis of Results of Operations and Financial
Condition - Forward Looking Information and Risks and Uncertainties in our
Business"
CUSTOMERS
Sales of our products to all branches of the United States military and
its prime contractors represented approximately 30% of our revenue, while sales
to automotive customers represented approximately 34% of our revenue in fiscal
year 2002. Only two customers, the U.S. Army and Autoliv accounted for more than
10% of our revenues in 2001 and 2002. Our businesses have relied to a great
extent on relatively few major customers, although 2002 saw the development of
additional major customers. We believe that historical customers, such as the
U.S. Army and other branches of the United States military, to which we have
supplied products for approximately 25 years, will continue to represent major
customers. As we have applied our technologies to
D-6
additional products and markets and grown through strategic acquisitions, the
list of customers for our commercial products has expanded in recent years.
Current commercial customers include Autoliv, Boeing, BMW, Delphi Automotive,
TRW, Bell Helicopter Textron, Second Chance Body Armor, PPG Industries,
Intercast Europe, and Avon Rubber Company. The loss of or significant reduction
in sales to a major customer could potentially harm our business, operations and
financial condition.
COMPETITION
Numerous suppliers compete for government defense contracts as prime
contractors or subcontractors. Competition relates primarily to technical
know-how, cost, and marketing efforts. The competition for government contracts
relates primarily to the award of contracts for the development of proposed
products. Contracts for supply of products primarily tends to follow the
development contracts because of the extensive investment necessary to develop
and qualify new products. Our principal competitors in the crash-resistant
military seating market are Martin-Baker (England) and Israeli Aircraft
Industries (Israel). Our military product lines in armor, parachutes, and
flotation collars have a number of competitors, with none dominating the market.
The worldwide automobile airbag market is currently dominated by four
large suppliers, Autoliv, TRW, Takata, and Delphi, all of which are producing
airbag systems in commercial quantities. The market served by our inflatable
restraint systems is intensely competitive. We have entered into strategic
alliances with most of the largest suppliers of conventional automotive airbags,
including Autoliv, TRW, Delphi, and others, to market our products. Under our
Agreement with Autoliv, Autoliv has the royalty-free right to manufacture a
certain amount of ITS(R) units.
Many of our competitors have greater marketing capabilities and
financial resources than we do. Our competitive strategy is to be a technology
innovator and strategic partner to first tier suppliers and OEMS. Our present or
future products could be rendered obsolete by technological advances by one or
more of our competitors or by future entrants into our markets.
PRODUCTION AND MANUFACTURING
Our 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. Our 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 our facilities to monitor quality assurance. All of our
operating units are certified by the International Organization for
Standardization.
We conduct manufacturing operations in three geographic locations. Our
aircraft seat, body and vehicle armor and aircraft cockpit airbag systems are
manufactured in the metropolitan Phoenix, Arizona, area. We have historically
maintained manufacturing operations in Asheville, North Carolina, for personnel
safety equipment (parachutes, flotation collars, etc.), but in 2003 are
transferring this business and consolidating operations into one of our Phoenix
facilities. Our automotive safety device business operates a high volume,
just-in-time manufacturing plant in the United Kingdom to support customers
located in Europe.
DISTRIBUTION, MARKETING AND SALES
Most of our products are distributed as a component supplier to OEMs or
a subcontractor to prime contractors. We do not directly serve mass consumer
markets and supply directly from manufacturing facilities, which does not
involve significant inventory, warehousing or shipping methodologies.
Depending upon the product, we typically employ one of four methods for
marketing: (i) direct sales, (ii) technical teams, typically comprised of a
combination of sales personnel and engineers, which are utilized in the
marketing of automotive safety devices, (iii) strategic alliances with first
tier component suppliers, which are utilized in the marketing to automotive
OEMs, and (iv) responses to formal request for proposals in bidding for
government contracts.
D-7
In marketing our safety restraint and seating products, we endeavor to
maintain close relationships with existing customers and to establish new
customer relationships. Ongoing relationships and repeat customers are an
important source of business for our current and new products. Similarly, we
will rely in part on forming strategic alliances to gain the established
marketing capabilities of first tier component suppliers in connection with the
distribution of our automobile restraint systems.
Our marketing and sales activities in the government sector focus
primarily upon identifying research and development and other contract
opportunities with various agencies of the United States government or with
others acting as prime contractors on government projects. Key members of our
engineering and project management staffs maintain close working relationships
with representatives of the United States military and their prime contractors.
Through these relationships, we monitor needs, trends, and opportunities within
current military product lines.
Approximately 37% of our total revenue in fiscal 2002 resulted from
products sold internationally. We anticipate that our international sales will
remain strong. The initial customer of the ITS(R) has been Autoliv, a European
first tier automobile supplier that is supplying to BMW. We believe that there
are opportunities for additional sales of the ITS(R) in Europe and Asia.
Military procurement has traditionally had a large international base. Countries
in which we are actively marketing include Germany, Canada, France, Italy, the
United Kingdom, Ireland, Japan, India, Korea, and Australia. Sales of our
products to all branches of the United States military (and its prime
contractors) represented approximately 30% of our revenue in fiscal year 2002.
RAW MATERIALS AND SUPPLIES
We purchase raw materials, components, devices, and subassemblies from
a wide variety of sources. Principal raw materials used by us include plastics,
urethanes, ceramics, Kevlar(TM), Spectra(TM), aluminum, steel, airbag materials,
hoses, woven materials, upholstery and fabric products. Components include
aluminum subassemblies, restraints and related hardware, harnesses, and gas
generators for inflatable restraint products. We generally purchase supplies and
components pursuant to individual or blanket purchase orders. Blanket purchase
orders usually provide for the purchase of a large amount of items at fixed
prices for delivery and payment on specific dates. Most of the raw materials we
use are widely available.
BACKLOG
Our backlog consists of contract backlog in the Aerospace and Defense
business, which is comprised of Funded and Unfunded Backlog. Funded Backlog
consists of aggregate contract values for firm product orders, exclusive of any
portion previously included in operating revenue utilizing the
percentage-of-completion method. Unfunded Backlog consists of estimated
aggregate contract values that the customer may elect to purchase as an option
or maximum amount under an existing contract or basic ordering agreement.
The following table summarizes the Funded, Unfunded and Total Backlog
at year-end.
-------------------------------------------------------------------------------
DATE FUNDED UNFUNDED TOTAL BACKLOG
-------------------------------------------------------------------------------
December 31, 2002 $26.6 million $128.1 million $154.7 million
-------------------------------------------------------------------------------
GOVERNMENT CONTRACTS
Our government contracts are obtained through the federal procurement
process as governed by the Federal Acquisition Regulations and related agency
supplements, and are typically fixed-price contracts. This means that the price
is agreed upon before the contract is awarded and we assume complete
responsibility for any difference between estimated and actual costs.
Under the Truth in Negotiations Act of 1962, the U.S. Government has
the right for three years after final payment on certain negotiated contracts,
subcontracts and modifications thereto, to determine whether we furnished the
U.S. Government with complete, accurate and current cost and pricing data. In
the event we fail to satisfy this requirement, the U.S. Government has the right
to adjust a contract or subcontract price by the amount of any overstatement.
D-8
U.S. Government contracts typically contain terms permitting the
contract to be terminated at the convenience of the government. In such event,
the contractor is entitled to reimbursement for certain expenditures and
overhead as provided for in applicable government regulations. Generally, this
results in the contractor being reasonably compensated for work actually done,
but not for anticipated profits. The government may also terminate contracts for
cause if a contractor fails to perform in strict accordance with contract terms.
We have never had a contract terminated by the U.S. Government for failure to
perform in accordance with contract terms. Nonetheless, termination of, or
elimination of appropriation for, a significant government contract could have a
material adverse effect on our business, financial condition, and results of
operations. U.S. Government contracts also typically permit the government to
change, alter or modify the contract at its discretion. In such event, the
contractor is generally entitled to reimbursement of all allowable and allocable
costs incurred in making the change, as well as a reasonable profit.
The U.S. Government typically finances a substantial portion of our
contract costs through progress payments. We receive progress payments in
accordance with contract terms at rates between 75% and 90% of costs incurred.
EMPLOYEES
As of December 31, 2002, we had approximately 500 full-time employees.
We believe that our continued success depends on our ability to attract and
retain highly qualified personnel. Our employees are not unionized.
REGULATORY MATTERS
Our operations are subject to a variety of federal, state, and local
environmental regulations, including laws regulating air and water quality and
hazardous materials and regulations implementing those laws. Our principal
environmental focus is the handling and disposal of paints, solvents, and
related materials in connection with product finishes, welding, and composite
fabrication. We contract with qualified waste disposal companies for services.
We regard our business as being subject to customary environmental regulations.
As we prepare to produce the DCI(TM), we will be subject to additional safety
and related environmental laws, including those related to the transportation,
usage, and disposal of explosives. The cost to us of complying with
environmental regulations is not significant.
We are also subject to laws and regulations governing our relationships
with employees, including minimum wage requirements, overtime, work and safety
conditions and regulations governing employment.
ACCESS TO INFORMATION
Our Internet address is www.simula.com. We make available at this
address, free of charge, our annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934 as soon as reasonably practicable after we electronically file such
material with, or furnish it to, the Securities and Exchange Commission.
Information contained on our Internet web site is not part of this Report.
ITEM 2. PROPERTIES
Our corporate headquarters are located in Tempe, Arizona. In 2002, we
conducted operations in two U.S. states and in the United Kingdom. Manufacturing
facilities are located in Tempe, Arizona; Phoenix, Arizona; Asheville, North
Carolina; and Ashington, England. In addition, we maintain extensive research
and development labs and testing facilities in Phoenix. We lease the following
facilities:
---------------------------------------------------------------------------------------
LOCATION: SIZE (SQ.FT.): DESCRIPTION: SEGMENT
---------------------------------------------------------------------------------------
Tempe, Arizona 12,000 Office Other
---------------------------------------------------------------------------------------
Phoenix, Arizona 188,140 Manufacturing/Office Aerospace and Defense
---------------------------------------------------------------------------------------
Tempe, Arizona 37,454 Manufacturing/Office Commercial Products
---------------------------------------------------------------------------------------
Ashington, England 33,000 Manufacturing Commercial Products
---------------------------------------------------------------------------------------
Phoenix, Arizona 25,312 Testing/Office Commercial Products
---------------------------------------------------------------------------------------
D-9
In addition, in 2002 we owned a 55,000 square foot office and manufacturing
facility in Asheville, North Carolina, included in the Aerospace and Defense
segment. In connection with the move of operations to Phoenix, we completed a
sales transaction of this facility on April 8, 2003.
We believe that our current facilities are sufficient for our current
levels of operations.
ITEM 3. LEGAL PROCEEDINGS
We are subject to claims and litigation in the ordinary course of our
business from time to time. We presently are not a party to any threatened or
pending litigation, the adverse outcome of which would be material to us.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of fiscal 2002 to a
vote of security holders, through the solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock is listed on the American Stock Exchange under the
symbol "SMU." The following table sets forth the high and low closing prices of
our Common Stock for each calendar quarter of the year indicated.
High Low
------ ------
2001:
First Quarter................................... $ 3.06 $ 1.56
Second Quarter.................................. $ 3.87 $ 1.50
Third Quarter................................... $ 3.79 $ 1.62
Fourth Quarter.................................. $ 6.66 $ 2.36
2002:
First Quarter................................... $ 5.80 $ 3.65
Second Quarter.................................. $ 5.58 $ 3.40
Third Quarter................................... $ 3.60 $ 2.32
Fourth Quarter.................................. $ 2.36 $ 1.14
The number of holders of our Common Stock, including beneficial holders
of shares held in street name, as of the close of business on April 9, 2003, is
estimated to be greater than 5,000.
EQUITY COMPENSATION PLAN INFORMATION
Simula maintains the 1992 Stock Option Plan (the "1992 Plan"), the 1992
Restricted Stock Plan (the "1992 Restricted Plan"), the 1994 Stock Option Plan
(the "1994 Plan") and the 1999 Stock Option Plan (the "1999 Plan") pursuant to
which it may grant equity awards to eligible persons. The following table
summarizes our equity compensation plan information as of December 31, 2002.
Information is included for both equity compensation plans approved by Simula's
shareholders and equity plans not approved by our shareholders.
D-10
Common shares to be Weighted-average Common shares remaining
issued upon exercise exercise price of available for future
of outstanding outstanding issuance under equity
options, warrants and options, warrants compensation plans
rights and rights (excluding shares reflected
in column (a))
------------------------ --------------------- -----------------------------
Plan Category (a) (b) (c)
------------------------ --------------------- -----------------------------
Equity compensation plans
approved by Simula
shareholders (1) (2) 4,690,562 $ 7.54 164,320
Equity compensation plans
not approved by Simula
shareholders - - -
------------------------ --------------------- -----------------------------
Total 4,690,562 $ 7.54 164,320
======================== ===================== =============================
(1) Of these shares, 3,348 shares were outstanding under the 1992 Restricted
Plan, 112,592 option shares were outstanding under the 1992 Plan, 2,250,005
option shares were outstanding under the 1994 Plan and 2,324,617 option shares
were outstanding under the 1999 Plan.
(2) Of these shares, 0 shares were available for issuance under the 1992
Restricted Plan, 0 shares were available for issuance under the 1992 Plan,
85,937 shares were available for issuance under the 1994 Plan and 78,383 were
available for issuance under the 1999 Plan.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The Selected Consolidated Financial Data presented below has been
derived from our historical audited consolidated financial statements for each
of the five years ended December 31, 2002. The following data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our Consolidated Financial Statements and the
Notes thereto.
AS OF DECEMBER 31,
------------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(Dollars in thousands, except per share data)
INCOME STATEMENT DATA:
Revenue $114,554 $106,794 $ 97,296 $131,392 $100,645
Cost of revenue 74,556 70,295 65,225 102,984 85,724
-------- -------- -------- -------- --------
Gross margin 39,998 36,499 32,071 28,408 14,921
Administrative expenses 18,516 16,907 20,163 22,329 17,038
Research and development 5,108 4,776 4,660 4,350 3,383
Restructuring and other costs 1,269 1,383 6,765 18,377 --
-------- -------- -------- -------- --------
Operating income (loss) 15,105 13,433 483 (16,648) (5,500)
Interest expense (10,438) (10,350) (9,975) (7,246) (5,099)
Income (loss) before taxes 4,667 3,083 (9,492) (23,894) (10,599)
Income tax (expense) benefit (38,356) (1,933) 2,584 8,437 3,786
-------- -------- -------- -------- --------
Income (loss) before discontinued
operations and extraordinary items(1) (33,689) 1,150 (6,908) (15,457) (6,813)
Income (loss) from discontinued
operations(1) (347) -- 879 (7,238) (20,896)
Extraordinary gain (loss) on early
retirement of debt -- (2,183) 1,109 (151) --
-------- -------- -------- -------- --------
Net loss (34,036) (1,033) (4,920) (22,846) (27,709)
Dividends on preferred stock -- -- 1,083 280 --
-------- -------- -------- -------- --------
Net loss available for common shareholders $(34,036) $ (1,033) $ (6,003) $(23,126) $(27,709)
======== ======== ======== ======== ========
PER SHARE AMOUNTS - BASIC (2):
Earnings (loss) per common share - basic:
Income (loss) before discontinued operations
and extraordinary item $ (2.61) $ 0.09 $ (0.70) $ (1.54) $ (0.69)
Discontinued operations (0.03) -- 0.08 (0.71) (2.11)
Extraordinary gain (loss) on early
retirement of debt -- (0.18) 0.10 (0.01) --
-------- -------- -------- -------- --------
Net loss $ (2.64) $ (0.09) $ (0.52) $ (2.26) $ (2.80)
======== ======== ======== ======== ========
D-11
PER SHARE AMOUNTS - DILUTED (2):
Earnings (loss) per common share - diluted:
Income (loss) before discontinued operations
and extraordinary item $ (2.61) $ 0.09 $ (0.70) $ (1.54) $ (0.69)
Discontinued operations (0.03) -- 0.08 (0.71) (2.11)
Extraordinary gain (loss) on early
retirement of debt -- (0.17) 0.10 -- --
-------- -------- -------- -------- --------
Net loss $ (2.64) $ (0.08) $ (0.52) $ (2.25) $ (2.80)
======== ======== ======== ======== ========
OTHER DATA:
Research and development
Funded by Simula $ 5,108 $ 4,776 $ 4,660 $ 4,350 $ 3,383
Costs incurred on funded contracts $ 2,079 $ 6,414 $ 9,297 $ 7,642 $ 10,066
BALANCE SHEET DATA:
Assets
Current assets $ 35,067 $ 37,699 $ 35,648 $ 52,907 $ 62,424
Property and equipment, net 11,773 10,545 8,346 13,947 21,495
Deferred income taxes - non-current (3) -- 34,985 34,340 33,438 20,550
Deferred financing costs 2,419 4,060 3,535 4,898 2,628
Intangibles - net 3,534 3,334 3,115 1,788 3,452
Other 2,086 2,030 915 362 430
-------- -------- -------- -------- --------
Total assets $ 54,879 $ 92,653 $ 85,899 $107,340 $110,979
======== ======== ======== ======== ========
Liabilities:
Current liabilities $ 59,698 $ 32,753 $ 47,064 $ 47,895 $ 45,176
Long-term debt 32,313 60,772 36,751 53,820 47,233
Other long-term 1,296 1,768 2,745 -- --
-------- -------- -------- -------- --------
Total liabilities 93,307 95,293 86,560 101,715 92,409
Redeemable convertible preferred debt -- -- -- 2,250 --
-------- -------- -------- -------- --------
Shareholders' (deficit) equity (4) (38,428) (2,640) (661) 3,375 18,570
-------- -------- -------- -------- --------
Total liabilities and shareholders'
(deficit) equity $ 54,879 $ 92,653 $ 85,899 $107,340 $110,979
======== ======== ======== ======== ========
(1) In 1998, our board of directors adopted a plan to dispose of our 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.
(2) SFAS No. 128 requires the dual presentation of basic and diluted earnings
per share and requires a reconciliation of the numerators and
denominators of basic and diluted earnings per share calculations. Basic
earnings per share amounts for the year ended December 31, 2002 is
calculated using the weighted average outstanding shares of 12,926,967.
Diluted earnings per share amounts for the year ended December 31, 2002,
does not include the effect of 227,142 weighted average outstanding
shares related to stock options to purchase common stock and does not
include the effect of 1,774,074 shares of common stock to be issued upon
conversion of the 8% Notes because the result would be anti-dilutive.
Earnings per share amounts for the years ended December 31, 2000, 1999,
1998, and 1997 are calculated using only weighted average outstanding
shares of 12,299,996, 11,450,810, 10,230,720, and 9,880,283,
respectively. Diluted earnings per share amounts, for the year ended
December 31, 2001, include the effect of 381,893 weighted average
outstanding shares related to stock options and warrants to purchase
common stock. Options and stock warrants to purchase common stock and
shares to be issued upon conversion of the 8% Notes totaling 1,774,074
and 7,134,621 for the year ended December 31, 2001 and 2000,
respectively, were not used for computing diluted earnings per share
because the results would be anti-dilutive. Options to purchase common
stock and shares to be issued upon conversion of the Preferred Stock, 8%
Notes and the 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 the 10% Notes
totaling 4,546,065 for the year ended December 31, 1998 were not used for
computing diluted earnings per share because the result would be
anti-dilutive.
(3) As discussed in the Our Balance Sheet and Strategic Alternatives and the
Results of Operations sections of Management's Discussion and Analysis,
the Company has approximately $30 million of debt maturing in 2003,
excluding its Revolving Line of Credit. As a result, the December 31,
2002 financial statements include disclosures relating to the Company's
ability to continue as a going concern. Although management is confident
that a refinancing or sale or merger of the Company is likely to occur,
it can not be assured. Additionally,
D-12
management is confident the operations will continue to be profitable,
however that also can not be assured. As such, at December 31, 2002 it
appears more likely than not that the deferred tax asset may not be fully
usable in the future. The Company has recorded a full valuation allowance
on the deferred tax asset as of December 31, 2002 which has been
reflected in income tax expense and has the effect of reducing the
deferred tax asset to zero on the balance sheet.
(4) We have not paid any cash dividends on our common stock since our April
1992 initial public offering.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
GENERAL
The following discussion and analysis provides information that our
management believes is relevant to an assessment and understanding of our
results of operations and financial condition for the three years ended December
31, 2002 compared to the same periods of the prior years. You should read this
discussion 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," "expect," "intend," or similar terms) that are
made pursuant to safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements involve risks and uncertainties
and our actual results could differ materially from those anticipated in
forward-looking statements. See "Forward Looking Information and Risks and
Uncertainties in our Business" included at the end of Item 7.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of
operations are based upon our financial statements, which have been prepared in
accordance with generally accepted accounting principles (GAAP) in the United
States. During preparation of these financial statements, we are required to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenue and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates and judgments,
including those related to revenue recognition, bad debts, inventories, fixed
assets, intangible assets, income taxes, pensions and contingencies. We base our
estimates on historical experience and on various other assumptions that we
believe are reasonable under the circumstances. The results form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our financial
statements.
We use the percentage-of-completion method to recognize revenue
related to fixed price contracts in our Aerospace and Defense segment. The
percentage-of-completion is determined based upon the percent of total costs
incurred to total estimated costs to be incurred in connection with the
underlying contract being measured. This percentage is then applied to the total
contract sales price to determine the amount of revenue to be recognized under
the contract. We continually evaluate and adjust total estimated costs. The
effect of adjustments to total estimated costs on the percentage-of-completion
and revenue recognized is accounted for in the period such estimated costs are
adjusted. Increases in total estimated costs would cause a decrease in the rate
of total recognized revenue while decreases in total estimated costs would cause
an increase in the rate of total recognized revenue. Provisions for any
estimated total contract losses on uncompleted contracts are recorded in full in
the period in which it is determined that such losses will occur. Revenue
derived from the sale of commercial products is recognized when persuasive
evidence of an arrangement exists, delivery has occurred, the fee is fixed and
determinable and collectibility probable. Generally, all of these conditions are
met when the company ships products to its customers. Revenue related to
nonrefundable license fees that are payable at the initiation of a licensing
agreement are recognized immediately in income when received or when
collectibility is reasonably assured, provided that there are no future
obligations or performance requirements. Nonrefundable license fees that are, in
essence, a prepayment of future royalties are recognized as revenue on a
straight-line basis over the term of the initial license.
D-13
We maintain an allowance for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. We
determine the adequacy of this allowance by regularly evaluating individual
customer receivables and considering a customer's financial condition, credit
history, and current economic conditions. If the financial condition of our
customers were to deteriorate, additional allowances may be required.
We write down our inventory for estimated obsolescence or unmarketable
inventory. We write down our inventory to estimated market value based upon
assumptions about future demand and market conditions. If actual market
conditions are less favorable than those projected by us, additional inventory
write-downs may be required.
Pursuant to Financial Accounting Standards Board ("FASB") Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes",
income taxes are recorded based on current year amounts payable or refundable,
as well as the consequences of events that give rise to deferred tax assets and
liabilities. We base our estimate of current and deferred taxes on the tax laws
and rates that are currently in effect in the appropriate jurisdiction. Changes
in tax laws or rates may affect the current amounts payable or refundable as
well as the amount of deferred tax assets or liabilities.
As discussed in the "Our Balance Sheet and Strategic Alternatives" and
the "Results of Operations" sections of Management's Discussion and Analysis,
the Company has approximately $30 million of debt maturing in 2003, excluding
its Revolving Line of Credit. As a result, the December 31, 2002 financial
statements include disclosures relating to the Company's ability to continue as
a going concern. Additionally, the Company has recorded a full valuation
allowance on the deferred tax asset as of December 31, 2002 which has been
reflected in income tax expense and has the effect of reducing the deferred tax
asset to zero on the balance sheet.
Long-term assets, such as Property, Plant and Equipment, Intangibles,
and Intangible Assets, are originally recorded at cost. On an on-going basis, we
assess these assets to determine if their current recorded value is impaired.
When assessing these assets, we examine future cash flows to determine if
impairment is applicable. These cash flows are evaluated for objectivity by
using weighted probability techniques and also comparisons of past performance
against projections. Assets may also be evaluated by identifying independent
market values. If we were to believe that an asset's value was impaired, we
would write down the carrying value of the identified asset and charge the
impairment as an expense in the period in which the determination was made.
OUR BALANCE SHEET AND STRATEGIC ALTERNATIVES
In December 2002, we announced that to address leverage issues, Simula was
continuing to explore the strategic options of selling assets or refinancing and
was adding the option of potential sale or merger of the Company. We are
pursuing parallel paths to keep all strategic options open. This announcement is
not a sign of lack of confidence in our future. Management and the Board of
Directors believe that the potential sale or merger of Simula represents a
prudent and logical next step for Simula. Since 2000, we have carried out our
plan to restructure and focus the business and return to profitability as
reflected most recently by our 2002 pretax profits from continuing operations.
We have focused on creating value in Simula and have successfully grown revenues
and pretax income from continuing operations. We think our next step must be to
either capture that value by reducing our debt through sales of assets and
refinancing the remaining debt, or selling the Company to a stronger financial
partner. Despite our operational turnaround, the debt incurred in the 1990's,
and the approaching maturities of that debt, now stand as a hurdle to our future
financial success.
With regard to a sale or merger of the Company or debt refinancing, we have
retained investments bankers, structured a process, completed preliminary steps,
and have received considerable interest in pursuing a transaction. The Company
believes that upon successful completion in 2003 of a sale, merger or
refinancing, under the terms of the new structure or refinancing our existing
debt will be repaid or refinanced and the uncertainty about our ability to
continue as a going concern would be eliminated.
In management's view it is noteworthy that strategic investors and potential
acquirers understand the current capital structure of the Company and the
context of the going concern disclosures as of December 31, 2002. It is also
relevant that, on a tax basis, the net operating loss underlying the deferred
tax asset carries forward and may be available to an acquirer as an offset to
future taxes, subject to limitations imposed by the tax code.
D-14
We began execution on deleveraging alternatives in 2001, and announced the sale
or merger strategy in 2002 over a year in advance of any significant debt
maturities. In this way, we believe we have given ourselves ample time to
negotiate competitive transactions. Management expects to complete relevant
transactions in the third quarter 2003.
RESULTS OF OPERATIONS
For the year ended December 31, Change from Previous Year
--------------------------------------------------------------------------- -------------------------
(Dollars in Thousands) 2002 2001 2000 2002 2001
-------- -------- ------- ------- -------
REVENUE:
Aerospace and Defense $73,368 $ 64,037 $50,790 $ 9,331 $13,247
Commercial Products 39,235 42,331 46,115 (3,096) (3,784)
Other 1,951 426 390 1,525 36
-------- -------- ------- ------- -------
Total $114,554 $106,794 $97,295 $ 7,760 $ 9,499
======== ======== ======= ======= =======
GROSS MARGIN:
Aerospace and Defense $25,818 $ 22,777 $15,794 $ 3,041 $ 6,983
Commercial Products 12,229 13,296 15,887 (1,067) (2,591)
Other 1,951 426 390 1,525 36
-------- -------- ------- ------- -------
Total $ 39,998 $ 36,499 $32,071 $ 3,499 $ 4,428
======== ======== ======= ======= =======
ADMINISTRATIVE EXPENSES:
Aerospace and Defense $11,943 $ 9,359 $10,963 $ 2,584 $(1,604)
Commercial Products 4,738 6,658 7,081 (1,920) (423)
Other 1,835 891 2,119 944 (1,228)
-------- -------- ------- ------- -------
Total $ 18,516 $ 16,908 $20,163 $ 1,608 $(3,255)
======== ======== ======= ======= =======
OPERATING INCOME (LOSS):
Aerospace and Defense $11,985 $ 10,636 $ 1,503 $ 1,349 $ 9,133
Commercial Products 4,150 3,680 2,931 470 749
Other (1,030) (884) (3,951) (146) 3,067
-------- -------- ------- ------- -------
Total $ 15,105 $ 13,432 $ 483 $ 1,673 $12,949
======== ======== ======= ======= =======
RESULTS OF OPERATIONS (CONTINUED 2002 2001 2000
-------- -------- -------
GROSS MARGIN AS A PERCENTAGE
OF REVENUE:
Aerospace and Defense 35% 36% 31%
Commercial Products 31% 31% 34%
ADMINISTRATIVE EXPENSES AS A
PERCENTAGE OF REVENUE:
Aerospace and Defense 16% 15% 22%
Commercial Products 12% 16% 15%
2002 Compared with 2001
During 2002 Simula continued to focus on its core competencies which
led to operational profitability while staying strategically focused. In an
effort to gain continued operational efficiencies, Simula reduced its workforce
and continued to narrow its operational focus. In December of 2002, Simula
announced that it was exploring all of its strategic options including the sale
or merger of the Company. Subsequent to December 31, 2002, Simula announced that
it was closing its Asheville facility and moving the operations to its Phoenix
facility. We have been successful in providing operational profits over the last
year and believe that in the current business environment we are well positioned
for further growth.
Revenue for the year ended December 31, 2002 increased by 7% to $114.6 million
from $106.8 million for the same period in 2001. Aerospace and Defense revenues
for the period grew 15% from $64.0 million to $73.4 million, primarily due to
increased production and contract fulfillment with respect to our armor product
line and troop seating. Revenues were negatively impacted, however, by a
production slowdown of our SAPI product line
D-15
during the third and fourth quarters of 2002. The SAPI slowdown was due to the
Company's agreement to complete a design change, rework approximately 6,000 SAPI
plates and deliver the remaining plates under the contract according to the new
design. Revenues from our Commercial segment declined 7% primarily due to the
disposal in 2001 of our airline soft goods manufacturing operation in Atlanta,
Georgia, which contributed revenue of $5.0 million during the twelve month
period ended December 31, 2001. Revenues in our Commercial segment were
positively impacted by a $3.0 million settlement with one of the Company's Tier
1 automotive customers related to a supply agreement. Additionally, Simula's
continued focus on technology and licensing sales generated approximately $2.0
million in revenue for the year ended December 31, 2002 compared to $0.4 million
in 2001.
For the year ended December 31, 2002, gross margins increased as a percent of
sales to 35% from 34% for the same period in 2001, or to $40.0 million from
$36.5 million. Gross margin from the Aerospace and Defense segment decreased to
35% of revenue in 2002 from 36% in 2001. The higher margin in 2001 is attributed
to the favorable impact of our Cockpit Air Bag System ("CABS") revenue recorded
in the second quarter of 2001, which was a one time payment by the customer for
development costs related to CABS of approximately $1.0 million with no
associated cost of revenue, as well as the SAPI rework costs of approximately
$1.4 million in 2002. Gross margin from the Commercial segment remained
consistent in 2002 compared to 2001 at 31%. Commercial segment gross margins
experienced decreases attributed to continued pricing pressure on existing
platforms and a shift in product mix to next generation products where our cost
reduction efforts did not keep pace with pricing pressure and those decreases
were offset by the settlement with the Tier 1 automotive customer discussed
above that had no associated costs of revenues. Technology and licensing sales,
which generated approximately $2.0 million in revenue, positively impacted gross
margins as there are no associated costs of revenues. This compares with $0.1
million in revenue for 2001.
Administrative expenses for the year ended December 31, 2002 increased $1.6
million or 10% compared to the same period in 2001. The increase is primarily
attributed to Simula's continued efforts to grow the business through focused
efforts related to sales and marketing in the Aerospace and Defense segment and
the increase in technology licensing activities and company wide premium
increases related to insurance premiums company-wide. The increase has been
partially offset by cost savings related to the sale in 2001 of the airline soft
goods division and other cost reductions company-wide. 2001 administrative
expenses benefited from the reversal of approximately $1 million in reserves
related to the disposal of our airline seating business and the termination or
our self-insured employee health plan. Administrative expenses as a percentage
of revenue were 16% for both years.
Operating income increased $1.7 million from $13.4 million in 2001 to $15.1
million for the year ended December 31, 2002. The increase is attributable to
increased revenues and gross margins achieved in the 2002 period and the effect
of the one-time $3.0 million settlement with the Tier 1 customer discussed
above. Operating income was negatively impacted by $.9 million restructuring
charge related primarily to employee severance, the $.4 million write-down of
assets related to restructuring activities and additional design costs and
rework costs of approximately $1.4 million discussed above related to a certain
SAPI contract. In 2001, operating income includes a restructuring charge of $.4
million related to headcount reductions and facility shutdown costs, a $.5
million charge related to employee severance and a $.5 million charge for the
loss on the sale of airline soft goods business. These charges were offset by
$1.0 million of revenue recognized from the recovery of CABS development costs
and the $1.0 million benefit of reserve reversals discussed above.
Interest expense increased 1% from $10.4 million to $10.5 million for the year
ended December 31, 2002. The increase related to increased borrowings under our
revolving line of credit and quarterly accruals of principal in kind interest
described below. Cash payments for interest increased $0.4 million to $8.4
million for the 2002 period as compared to $8.0 million for the comparable 2001
period.
As discussed in Item 6 and the footnotes to our financial statements, the
December 31, 2002 financial statements include disclosures relating to the
Company's ability to continue as a going concern. Additionally, the Company has
recorded a full valuation allowance on the deferred tax asset as of December 31,
2002 which has been reflected in income tax expense and has the effect of
reducing the deferred tax asset to zero on the balance sheet.
2001 Compared with 2000
Entering into 2001, Simula underwent several positive operational
changes. In October 2000, we named a new CEO. We adopted a restructuring plan
that included narrowing the focus of our operation, consolidation of certain
operating units to reduce overhead costs, a reduction in workforce, elimination
of nonessential internal
D-16
research and development costs and a plan for refinancing our debt structure. At
December 31, 2001, we had made significant progress. We consolidated two of our
operating units eliminating cost duplication of facility and back office
expenses. We critically reviewed our internal research and development projects
placing an emphasis on those we believe have the greatest market potential in
the near term. We put in place a reduction in workforce. We successfully
refinanced our Senior Secured Notes in September 2001 and disposed of
substantially all the assets of our non-core airline softgoods operation in
Atlanta, Georgia in November 2001. We had been successful in narrowing the focus
of our operation to our core competencies, identifying and eliminating cost in
our overhead structure, and positioning the Company in growth markets.
On a comparative basis, revenue for the year ended December 31, 2000
included revenues from the legal settlement of $3.0 million in our Commercial
Products segment ("Autoliv Payment"). Revenue for the year ended December 31,
2001 increased 10% from $97.3 million to $106.8 million. Revenue for the period
grew 26% in the Aerospace and Defense segment from $50.8 million to $64.0
million primarily due to increases in the armor and parachute product lines.
Excluding the effect of the Autoliv Payment in 2000, revenue for the period
remained flat in the Commercial Products segment as increases in revenue from
our automotive airbags business as a result of increased volume was offset by
the decrease from the prior year revenue from our airline new seat manufacturing
business which was disposed of in January 2000.
Gross margins for the year ended December 31, 2001 includes the effect
of $1.0 million in revenues received from the reimbursement of development costs
on the CABS contract ("CABS Payment"). Gross margins for the year ended December
31, 2000 includes the effect of the license revenues from the Autoliv Payment
discussed above. These revenues had no associated expenses. Gross margins
excluding these items for the year ended December 31, 2001, grew $6.8 million
and gross margin as a percent of sales increased to 34% from 31%. Gross margin
in the Aerospace and Defense segment, excluding the effect of the CABS Payment,
grew $6.3 million, and gross margin as a percent of sales increased from 31% to
34% for the 2001 period. The increase in gross margin is attributable to
increased manufacturing efficiencies as a result of increased business volume
primarily in our armor product lines. Gross margin in the Commercial Products
segment, excluding the effect of the Autoliv Payment, grew $0.5 million, and
gross margin as a percent of sales increased from 30% in 2000 to 32% in 2001.
The increase in gross margin percentage is primarily attributable to improved
margins in our airline soft goods business.
Administrative expenses for the year ended December 31, 2001 includes
the reversal of $0.8 million in medical reserves related to the termination of
our self-funded health plan and $0.3 million related to a lease termination
reserve. Administrative expenses for the year ended December 31, 2000 includes
charges of $1.5 million related to the termination of our self-funded health
plan and $0.4 million related to building repair costs in connection with a
facility lease termination. Excluding these items, administrative expenses
decreased $0.3 million as compared to the 2000 period. Aerospace and Defense
administrative expenses for the 2001 period decreased $1.6 million as compared
to the comparable 2000 period. This decrease is attributable to focused cost
reductions principally through consolidation of operating units and headcount
reductions. The decrease is also attributable to recording a lease termination
reserve reversal of approximately $0.3 million in 2001 of which $0.4 million had
been provided for during the 2000 period ended. Commercial Products segment
administrative expenses for 2001 decreased $0.4 million compared to 2000.
Corporate administrative expenses decreased $1.2 million compared to 2000. This
decrease is principally due to recognizing the reversal of $0.8 million of
previously recorded medical reserves related to our terminated employee health
plan.
Operating income increased $12.9 million from $0.5 million to $13.4
million for the year ended December 31, 2001. This increase is attributable to
our increased revenues and gross margins achieved in the 2001 period, the effect
of large special charges recorded in the previous year to write-down long-lived
assets and to record executive severance and restructuring charges, offset
partially by special charges in the 2001 period related to employee severance,
loss on sale of assets and restructuring charges.
Interest expense increased 3.8% from $10.0 million to $10.4 million for
the year ended December 31, 2001. Cash payments for interest increased $0.5
million to $8.0 million for 2001 as compared to $7.5 million for 2000. The
increase in interest and cash payments for interest is due to paying default
interest totaling approximately $0.8 million on our previous $20.0 million
Senior Secured Notes which were replaced with our $25.0 million Senior Secured
Note in September 2001.
The effective income tax rate for 2001 approximated 41% and 2000
approximated 22%. The 2001 tax rate reflects the effect of a $0.8 million
valuation reserve related to the realization of the deferred tax benefit of
certain
D-17
tax credits and net operating loss carryforwards. The 2000 tax rate reflects the
effect of a $0.7 million valuation reserve associated with state net operating
loss carryforwards for which realization is uncertain.
DISCONTINUED OPERATIONS
Our board of directors adopted a plan to dispose of our rail and mass
transit seating operations in 1998. Accordingly, the operating results of this
operation, including a provision for loss upon disposition, was segregated from
continuing operations and was reported as discontinued operations.
On April 25, 2002, the purchaser of our rail and mass transit seating
business filed for Chapter 7 Bankruptcy. Although the purchaser assumed all
obligations at the time of the sale in August 1999, we remained liable as
guarantor under the facility lease and certain equipment operating leases. As of
September 30, 2002, we recorded a reserve of $650,000 for potential settlements
of the facility and equipment leases under guarantees and recorded a loss of
$347,000, net of related taxes in discontinued operations. We have reached an
agreement on the principal leases and subsequent to December 31, 2002 settled
the remaining guarantees.
In August 2000, we agreed to amend and restate the Asset Purchase and Sale
Agreement for our disposed rail and mass transit seating operation. The amended
and restated agreement adjusted the total sales price to $4,062,500 to be paid
in $2,000,000 cash and a promissory note in the amount of $2,062,500. The
promissory note provided for interest at 8 1/2% payable quarterly with the
outstanding principal and accrued interest due on August 31, 2004. The
$2,000,000 cash receipt was recorded as a recovery in discontinued operations
and the remaining note balance continued to be
accounted for under the cost recovery method of accounting. The $2,000,000 cash
recovery, offset by additional settlement charges of $370,000 resulted in a gain
on disposal of discontinued operations of $879,000, net of tax expense of
$751,000, during the year ended December 31, 2000.
INFLATION
We do not believe that we are significantly impacted by inflation.
RESEARCH AND DEVELOPMENT
Our 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-of-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. We anticipate that future
fluctuations may also occur and that absent government funded research, we will
directly fund research and development efforts to expand our core businesses. As
noted in Note 16 to the Consolidated Financial Statements, our costs for
research and development to advance our technologies were $7.2 million in 2002,
of which $5.1 million was internally funded.
LIQUIDITY AND CAPITAL RESOURCES
In the fourth quarter 2002, the Board of Directors and our executive
management announced that Simula was exploring all strategic options, including
sale or merger of the Company. From 2000 through 2002, management carried out a
plan to restructure the business, return to profitability and focus on core
business. Despite this successful operational turnaround, the debt incurred in
the 1990's stands as a hurdle to continued financial success. In the current
environment and with debt maturities advancing, management determined that the
next step to capture the value created was to reduce and refinance debt and find
resources for future growth, or sell the Company to a stronger financial
partner. See, "Our Balance Sheet and Strategic Alternatives - in Managements
Discussion and Analysis"
As of December 31, 2002, Simula incurred a net loss of $34.0 million in
2002. This loss is due to the additional valuation allowance of $35.9 million
placed on our deferred tax assets in the fourth quarter of 2002. Other
restructuring activities and write-downs of assets negatively impacted our
business; however, the operational turnaround discussed above provided for
income from continuing operations before taxes of $4.7 million.
D-18
Current maturities of our debt as of December 31, 2002 are $41.3 million
and primarily consists of $11.3 million with our revolving line of credit
("RLC") due September 30, 2003, $3.2 million with our 9.5% Senior Subordinated
Notes due September 30, 2003 and $26.6 million for our Senior Secured Note due
December 31, 2003. In order to meet future quarterly covenants and long-term
debt maturities, we will need asset sales proceeds or recapitalization
transactions. On March 25, 2003, we completed an amendment for certain
provisions of the RLC and Senior Secured Note to increase allowable capital
expenditures for the fourth quarter of 2002. Additionally, due to the deferred
tax asset valuation allowance discussed above, the Company was not in compliance
with the net income covenant for the fourth quarter 2002 with its RLC. On April
9, 2003 the Company received a waiver for this technical, non-monetary default.
During the first quarter of 2003, Simula is in technical, non-monetary default
of a certain monthly covenant with its RLC. On April 9, 2003 the Company
received a waiver for this technical, non-monetary default
With regard to a sale or merger of the Company or debt refinancing, we have
retained investments bankers, structured a process, completed preliminary steps,
and have received considerable interest in pursuing a transaction. In the event
that the Company is successful in completing a sale, merger or refinancing, the
terms of the new structure or financing would allow the Company to repay or
refinance the debt coming due in 2003. However, because Simula's ability to
achieve the potential transactions cannot be assured, the impact on liquidity
raises substantial doubt about the ability to meet debt maturities and thus
continue as a going concern.
Upon completion of any of the potential transactions in 2003, we expect
that our current debt will be repaid or refinanced and the uncertainty about our
ability to continue as a going concern will be eliminated.
Because of our management, operational re-alignment and operational
profitability, we believe that operating cash flows generated and existing
availability under our RLC will be adequate to fund our operations, excluding
the principal payments on the current debt previously discussed.
We believe we have sufficient manufacturing capacity, at December 31,
2002, to meet our anticipated future delivery requirements. We may, however,
seek strategic partners for the joint development of capital intensive
manufacturing capacity for new high technology products. We may also seek to
obtain additional capital should demand for our products exceed current
capacity. The raising of capital in public markets will be primarily dependent
upon prevailing market conditions and the demand for our products and
technologies.
We define liquidity as the ability to access cash to meet operating and
capital needs. Our primary source of cash in 2002 was from our revolving line of
credit ("RLC"), our operations and a $3.0 million settlement with a Tier 1
automotive customer.
Our ability to generate sufficient cash flow from operations is
principally dependent upon our ability to continue to increase revenue and
contain operating expenses. At December 31, 2002, the Aerospace and Defense
segment had total backlog of $154.7 million, of which $26.6 million is funded
and $128.1 million is unfunded (see "Backlog"). A factor that could impact our
ability to generate Aerospace and Defense revenue would be limitations on
acquiring certain raw materials. Our supply contracts for the ITS(R) are based
upon the production requirements of the OEMs. Our ability to maintain Commercial
Products revenue will be predominately related to our ability to maintain
volumes and margins and properly hedge our foreign currency transaction risk as
the majority of this revenue is Euro dollar denominated. We are continually
reviewing our revenue and cost forecasts so that we can react to changes in our
operations and liquidity position.
Our borrowing availability under the RLC is dependent upon the relative
balances of trade accounts receivable, contract costs and estimated earnings in
excess of billings and inventories and each of their relative advance
percentages and advance limits. The revolving line of credit accrues interest at
the Chase Manhattan prime rate or LIBOR plus 2.4%, based upon the rate we
select, matures September 30, 2003 and renews automatically unless terminated by
either party with proper notice. At December 31, 2002, the RLC had an
outstanding balance of $11.3 million with an average interest rate of 5.25% and
additional borrowing availability of $1.3 million.
On September 26, 2001, we completed a financing with an accredited
investor of $25,000,000 in a Senior Secured Note due December 31, 2003. The
financing allowed us to repay the lender under our previous Term Notes for which
we had been in non-monetary default since December 31, 2000. In connection with
the repayment of this debt, an extraordinary loss on early extinguishment of
debt of $2,182,900, net of an income tax benefit of $1,633,000, has been
recorded. The pre-tax extraordinary loss of $3,815,900 included pre-payment
penalties and interest charges of $1,361,590, and unamortized deferred finance
fees and loan discounts totaling $2,454,309.
D-19
The $25,000,000 Senior Secured Note accrues interest payable quarterly
at 12.5% and accrues additional principal in kind ("PIK") interest at 6%, which
at our option may be paid quarterly, provided we are in compliance with certain
covenants, or capitalized into the note balance. The PIK rate may also be
reduced as our leverage ratio is reduced. The PIK rate was 6% throughout 2002.
The Senior Secured Note contains covenants that require the maintenance of
certain defined financial ratios and limits additional borrowings and capital
expenditures. In addition to other remedies, the Senior Secured Note provides
for a fee of $1,000,000 if we are unable to meet our debt leverage ratio
requirement as of June 30, 2003. The Senior Secured Note is secured by a lien on
our assets.
On December 30, 1999, we executed agreements with an accredited
investor for two Senior Secured Notes totaling $20.0 million. The 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 was
subsequently repriced to $1.625. These Term Notes were retired on September 26,
2001 from the proceeds received from the $25,000,000 Senior Secured Note. We had
recorded an original issue discount of $2,300,000 and a repricing discount of
$407,000 related to the stock warrant. The discounts were being amortized over
the term of the underlying notes using the effective interest method. The Term
Note A originally matured on September 30, 2000 and was subsequently extended to
October 1, 2001. The Term Note A accrued interest payable monthly at 15% and
provided for an additional monthly bridge fee of $25,000. The Term Note A was
redeemable with a 30-day notice at any time without penalty. The Term Note B
original maturity was June 30, 2003 and provided for cash interest to be paid
monthly at 12.25% and interest to be capitalized into the note principal balance
at 3% per annum. The Term Note B was redeemable with a 30-day notice at 105% of
principal on or before December 31, 2001.
In November 1998, we completed a private placement to accredited
investors of $3,238,000 of our 9 1/2% Senior Subordinated Notes (the "9 1/2%
Notes") and received proceeds of $1,025,000 and exchanged $2,213,000 of our 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 our
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.
During 1997, we completed the public offering of $34.5 million of our
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 our common stock at a price of $17.55 per
share of common stock. The 8% Notes may be redeemed at our 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.
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, we 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 9 1/2% Notes and the 8% Notes become
due upon successful acceleration of $10 million or more in senior debt. We were
in compliance with all of the covenants of this indenture at December 31, 2002.
A summary of our contractual obligations and commercial commitments is
provided below:
---------------------------------------------------------------
Long-Term Capital Lease Operating
Contractual Obligations Debt Obligations Leases TOTAL
------------- ------------- ------------- -------------
2003 $29,988,315 $7,590 $2,159,149 $32,155,054
2004 31,350,123 1,955,563 33,305,686
2005 962,964 1,791,433 2,754,397
2006 1,725,566 1,725,566
2007 1,587,043 1,587,043
Thereafter 4,802,285 4,802,285
------------- ------------- ------------- -------------
Total Contractual Cash
Obligations $62,301,402 $7,590 $14,021,039 $76,330,031
============= ============= ============= =============
D-20
------------------------------------------------------------
Commercial Obligations Lines of Credit Lease Guarantees TOTAL
--------------- ---------------- -------------
2003 $11,283,393 $50,000 $11,333,393
2004 --
2005 --
Thereafter --
--------------- ---------------- -------------
Total Commercial Obligations $11,283,393 $50,000 $11,333,393
=============== ================ =============
In addition, in contemplation of a potential sale, merger or other
transfer of the Company, we have entered into retention agreements ("the
agreements") with certain key employees whereby the Company agreed to pay either
a bonus payment, or a retention payment and insurance benefit under the terms
provided within the agreements. The potential range for the bonus or retention
payment is between $2.6 million and $3.2 million.
Operating activities provided approximately $5.5 million of cash during
the year ended December 31, 2002, compared to using $1.0 million of cash during
the same period in 2001. The increase is primarily attributable to continued
operational improvement, the one time settlement of the with a Tier 1 automotive
customer for $3.0 million and less overall working capital required as compared
to 2001.
Investing activities used approximately $4.7 million during the period
ended December 31, 2002, compared to using $4.9 million of cash during same
period in 2001. The uses in 2002 were principally attributable to the purchase
of manufacturing equipment in both of our business segments and additional
investments in our patent portfolio. In 2001, the uses were primarily for
leasehold improvements made in relation to the relocation of our largest
manufacturing division and additional investment in our patent portfolio,
partially offset by proceeds received from the sale of substantially all the
assets of our airline softgoods manufacturing subsidiary.
Financing activities used net cash of approximately $0.9 million during
2002, compared to providing net cash of approximately $5.5 million for the same
period in 2001. Cash used in financing activities during 2002 primarily related
to reduced borrowings under the RLC and scheduled payments under other debt
arrangements. In 2001 the cash provided by financing activities principally came
from proceeds received under our line of credit which had been paid down
considerably in the previous year from the proceeds received in connection with
the legal settlement in 2000 mentioned above. In September 2001, we replaced our
previous two Senior Secured Notes with a face amount of approximately $20.2,
million and for which we were in non-monetary default, with a $25.0 million
Senior Secured Note.
SEASONALITY
We do not believe that we are currently significantly impacted by
seasonal factors.
NEW ACCOUNTING PRONOUNCEMENTS
In April 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS 145, "Rescission of FASB Statements No.4, 44 and 64, amendment of FASB
Statement No.13, and Technical Corrections." SFAS No. 145, among other things,
no longer allows for the classification of gains and losses from extinguishment
of debt as extraordinary. We will adopt SFAS No. 145 effective January 1, 2003
and upon adoption, gains and losses on certain future debt extinguishment, if
any, will be recorded in pre-tax income. In addition, the $2.2 million
extraordinary loss and the $1.1 million extraordinary gain from early
extinguishment of debt for the years ended December 31, 2001 and 2000,
respectively, will be reclassified to income before extraordinary loss to
conform to the requirements under SFAS No. 145.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities", which addresses financial
accounting and reporting for costs associated with exit or disposal activities.
SFAS No. 146 also nullifies Emerging Issues Task Force ("EITF") No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)". SFAS
No. 146 is effective for exit or disposal activities initiated after December
31, 2002, with early application encouraged. We will adopt SFAS No. 146
effective January 1, 2003 and do not anticipate that the new standard will have
a material impact on our financial position or results of operations.
In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." This
D-21
Interpretation addresses the disclosures to be made by a guarantor in its
financial statements and its obligations under guarantees. The Interpretation
also clarifies the requirements related to the recognition of a liability by the
guarantor at the inception of a guarantee. Per the interpretation, initial
recognition of a liability shall be applied only on a prospective basis to
guarantees issued or modified after December 31, 2002. We have adopted the
disclosure provisions of this interpretation as of December 31, 2002, as
discussed in Note 14, concerning our guarantees on certain leases.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation--Transition and Disclosure". This Statement amends SFAS
No. 123 to provide alternative methods of transition for a voluntary change to
the fair value method of accounting for stock-based employee compensation.
Specifically, SFAS No. 148 prohibits companies from utilizing the prospective
method of transition, the only method offered under the original SFAS No. 123,
in fiscal years beginning after December 15, 2003. However, the statement
permits two additional transition methods for companies that adopt the fair
value method of accounting for stock-based compensation, which include the
modified prospective and retroactive restatement methods. Under the prospective
method, expense is recognized for all employee awards granted, modified, or
settled after the beginning of the fiscal year in which the recognition
provisions are first applied. The modified prospective method recognizes
stock-based employee compensation cost from the beginning of the fiscal year in
which the provisions are first applied, as if the fair value method had been
used to account for all employee awards granted, modified, or settled in fiscal
years beginning after December 15, 1994. Under the retroactive restatement
method, all periods presented are restated to reflect stock-based employee
compensation cost under the fair value method for all employee awards granted,
modified, or settled in fiscal years beginning after December 15, 1994. In
addition, this Statement amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results using a prescribed specific
tabular format and requiring disclosure in the "Summary of Significant
Accounting Policies" or its equivalent. We have adopted the new disclosure
requirements for 2002, and are currently evaluating the impact if we were to
adopt the fair value method of accounting for stock-based employee compensation
under all three methods.
FORWARD LOOKING INFORMATION AND RISKS AND UNCERTAINTIES IN OUR BUSINESS
A wide variety of factors affect our projected operating and financial
results and can adversely impact our revenues, profitability and cash flows. Our
liquidity and available working capital depend upon our cash flow from
operations and, potentially, upon proceeds from asset sales or licensing,
refinancing of our debt, or potential sale or merger of the Company. Improved
cash flow from operations will depend on our ability to continue to implement
our cost cutting initiatives. Continued compliance with our debt covenants is
necessary to avoid loan defaults and is a requirement for maintaining access to
funds available under our RLC.
With respect to our product offerings many of our products are
subassemblies in final products. We act as subcontractor to defense industry
prime contractors and as a component supplier to automotive ("OEM") and first
tier systems suppliers. Accordingly, we are reliant on others to gain and retain
market acceptance for our products, and we must continue to demonstrate that our
products will provide advantages to the manufacturers of final products,
including increasing product safety and providing such manufacturers with
competitive cost advantages
Although we have long established relationships with a number of our
Aerospace and Defense customers, we do not have significant long-term supply
contracts with any of these customers. Our customers typically do not commit to
long-term production schedules and, as a result, customer orders generally are
subject to cancellation or delay. Reliance upon defense contracts involves
certain risks, including dependence on congressional appropriations and changes
in governmental policies that reflect military and political developments.
In our Commercial Products segment, we operate in the highly
competitive automotive safety industry. As most of our competitors have greater
resources than we do and since products become commoditized over time, our
success in this industry is largely dependent on our ability to innovate. Our
ability to compete effectively in this industry also depends on our ability to
remain competitive in pricing, service, and performance. In addition, automotive
OEMs continually exert downward pressure on prices, forcing us to cut costs and
to innovate in order to maintain margins and projected volumes from year to
year.
D-22
Factors pertinent to our ability to meet our current and future
financial projections include:
o our ability to refinance our debt or achieve acceptable valuations in a
process to sell or merge the Company;
o our relationship with our senior lenders and on-going compliance with loan
terms and covenants;
o our relationship with significant customers and maintenance of preferred
supplier relationships with them that are renegotiated frequently;
o our leveraged status and the level and cost of our debt;
o the continued reduction of our fixed expenses;
o ability to monetize assets including through sales of certain assets or
technologies at a favorable price;
o our ability to continue to provide design and manufacturing services,
products and new product applications that compare favorably on the basis of
time to introduction, cost, and performance with those of our competitors;
o the cyclical nature of the automobile industry and other markets addressed by
our products;
o the level and makeup of military expenditures;
o contract mix and shifting production and delivery schedules among our market
segments;
o the amount of resources available for independent research and development;
o proof of concept and production validation of certain of our new technologies
and proposed products, as well as our financial ability to establish
manufacturing capacity for such products; and
o technological changes introduced by competitors and customers.
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. We undertake no obligation to update any of these forward-looking
statements to reflect events or circumstances after the date on which such
statements were made or to reflect the occurrence of unanticipated events.
Actual results and trends may differ materially. Risks include those described
herein and in our registration statements and periodic reports filed with the
U.S. Securities and Exchange Commission.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
INTEREST RATE RISK
We have short-term borrowings supported by a long-term revolving
Financing Agreement which subjects us to the risk of loss associated with
movements in market interest rates.
At December 31, 2002, we had $11.3 million in short-term borrowings
outstanding and $62.3 million in long-term debt outstanding, of which,
approximately $30.0 million has been classified as current. The long-term debt
is fixed-rate debt and, accordingly, does not expose us to risk of earnings loss
due to changes in market interest rates (see Note 8 to the our Consolidated
Financial Statements). The short-term borrowings of $11.3 million are variable
rate obligations.
If the variable rates were to change by 10% from December 31, 2002,
annual interest expense associated with the variable-rate debt would change by
approximately $1.1 million pretax.
CURRENCY EXCHANGE RATE RISK
We have currency exposures related to buying and selling in currencies
other than the local currency in which we operate. These exposures may impact
future earnings and/or operating cash flows. Currently, our most significant
exposure relates to the Euro and the British Pound. We have supply contracts for
our ITS(R) and AHPS that are Euro denominated. We also maintain a manufacturing
facility in the United Kingdom for which we fund its operating expenses in
British Pounds. During the second quarter of 2002, we entered into foreign
currency hedge transactions to mitigate our associated risks. The magnitude of
the exposure varies over time and we enter into agreements from time to time by
which we seek to manage certain portions of our foreign exchange exposure in
accordance with established policy guidelines. These arrangements primarily
hedge cash flows for forecasted transactions involving receivables and payables.
We have hedged transactions through March 31, 2003 and currently do not
anticipate any existing gains or losses currently classified in Other
Comprehensive Income to be reclassified into earnings.
D-23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data are set forth in this
report on Form 10-K commencing on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
D-24
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information about the Directors
of the Company and includes additional information about the Company's executive
officers.
NAME AGE POSITION
---- --- --------
Bradley P. Forst 49 Chief Executive Officer, President and Director
Joseph W. Coltman 45 Chief Development Officer and Executive Vice President
John A. Jenson(1) 39 Chief Financial Officer and Treasurer
Jack A. Henry(2) 59 Lead Director
John M. Leinonen 65 Director
Robert D. Olliver 76 Director
Jean E. Boyle 55 Director
S. Thomas Emerson 62 Director
James C. Withers 68 Director
Lon A. Offenbacher 49 Director
DIRECTORS
Bradley P. Forst. Mr. Forst has served as President and Chief Executive
Officer of the Company since October 2000. Mr. Forst joined the Company as Vice
President, General Counsel, Secretary, and Director in 1995 and became Executive
Vice President in December 1998. Prior to being President and Chief Executive
Officer, he served in a variety of business capacities with the Company,
including the completion of several rounds of public and private debt and equity
offerings, the acquisition and disposition of businesses, the transfer and
licensing of multiple technologies developed or acquired by the Company, and as
president of one of the Company's business units. Prior to joining the Company,
Mr. Forst was engaged in the private practice of law in Phoenix, Arizona, from
1985 to 1995. His clients included the Company. Mr. Forst received his J.D. in
1978 from Tulsa University and his LL.M. from Columbia University School of Law
in 1981.
Jack A. Henry. Mr. Henry has served as a Director since February 2001
and was appointed the Company's Lead Director on June 20, 2002. In 2000, Mr.
Henry formed Sierra Blanca Ventures, LLC, a private advisory and investment
firm. Mr. Henry currently serves on the Board of Directors of Harris Trust Bank
of Arizona, an Arizona Bank; Vodavi Technology, Inc., a provider of business
telecommunications solutions including telephony products, voice processing
products and computer-telephony products; and SOS Staffing Services, a provider
of staffing services throughout the western United States. Mr. Henry serves on
the Regional Advisory Board of AON Risk Services, the multifaceted retail
brokering and risk management services arm of AON Corporation, a publicly traded
insurance company. Mr. Henry also is active in the Phoenix community. He is past
Chairman of the Arizona Chamber of Commerce and Greater Phoenix Leadership, and
he has served on several other civic-oriented boards and committees. Mr. Henry
retired as the Managing Partner of the Phoenix, Arizona office of Arthur
Andersen LLP in 2000, a position he had held for 18 years. Mr. Henry commenced
employment with Arthur Andersen in 1966. Mr. Henry holds Bachelor's and Master's
Degrees in Business Administration from the University of Michigan. He was
elected to the Audit Committee and the Nominating and Corporate Governance
Committee of the Board of Directors, and serves as Chairman of the Audit
Committee.
John M. Leinonen. Mr. Leinonen has served as a Director since June
1997. Mr. Leinonen is past Vice President, Automotive Business Development, for
Exponent Failure Analysis Associates, Inc., an analytical, testing, and safety
engineering services firm. From 1960 to 1995, Mr. Leinonen was employed by Ford
Motor Company, where for over a 22 year period he directed all activities in
Ford's automotive safety office, including vehicle safety assurance, safety
regulations and planning, and production vehicle safety and compliance. Mr.
Leinonen was President of the Society of Automotive Engineers ("SAE") in 1995,
and has served six years as a member of SAE's Board of Directors. Mr. Leinonen
is a Registered Professional Engineer.
Robert D. Olliver. Mr. Olliver has served as a Director since 1992. Mr.
Olliver is the Director of Risk Management Services for Acordia of Arizona, an
insurance brokerage firm. Mr. Olliver has over 50 years experience in the
insurance business. Acordia of Arizona has been the general agent for the
Company's insurance programs since 1987.
-----------
1 Mr. Jenson served as the Company's Controller and as Director of Business
Operations in fiscal year 2002. He was appointed the Company's Chief
Financial Officer and Treasurer on January 1, 2003, replacing John S.
Hodgson.
2 Mr. Henry was elected as Lead Director on June 20, 2002.
D-25
Jean (John) E. Boyle. General Boyle has served as a Director since June
2002. General Boyle, CAF ret., served a distinguished 30 year career in the
Canadian military, culminating in his service as Chief of the Defense Staff of
Canada's Armed Forces, the equivalent to the Chairman of the U.S. Joint Chiefs
of Staff. Following his military retirement, General Boyle was Boeing Company's
Vice-President, International Business Development from 1997 to 1999. From 1999
to 2001, General Boyle served as Managing Director of Boeing International
Corporation-Europe. In 2001, General Boyle joined the SPECTRUM Group, a
strategic consulting and lobbyist organization serving defense companies, and in
that capacity he has assisted the Company in preparing an international business
development strategy for Simula's Cockpit Airbag Systems (CABS) product. The
Company is a client of the SPECTRUM Group.
S. Thomas Emerson. Dr. Emerson has served as Director of the Company
since June 1999. He is the Director of the Donald H. Jones Center for
Entrepreneurship at Carnegie Mellon University. Prior to that, Dr. Emerson was
the President and CEO of the Arizona Technology Incubator ("ATI") based in
Scottsdale, Arizona. From 1992 to 1998, Dr. Emerson was President, CEO, and
Chairman of Xantel Corporation, a provider of software products for computer
telephone integration systems. From 1984 to 1992, Dr. Emerson was President,
Chief Executive Officer, and Chairman of Syntellect Inc., a manufacturer of
voice processing systems for computer and telephone communications. Dr. Emerson
holds degrees in physics from the Massachusetts Institute of Technology and Rice
University.
James C. Withers. Dr. Withers has served as a Director of the Company
since 1992. Dr. Withers is the Chief Executive Officer of Materials and
Electrochemical Research Corporation based in Tucson, Arizona. He has served in
that capacity since 1985. From 1986 to 1988, Dr. Withers was President and Chief
Executive Officer of Keramont Research Corporation, also based in Tucson,
Arizona.
Lon A. Offenbacher. Mr. Offenbacher has served as a Director since
September 1998 and is a member of the Audit Committee and the Compensation
Committee. He is the Business Line Executive--Occupant Protection Systems for
Delphi Corporation and has held that position since 1999. Mr. Offenbacher has 31
years of experience in the development, engineering, and supply of automotive
components and systems. Prior to 1999, Mr. Offenbacher held key leadership
positions at Delphi and its former parent General Motors Corp., including
Director of Product Engineering, Director of Interior Engineering and Sales
Director. He was appointed in 1988 as a Congressional Fellow and served on the
U.S. Congress House Ways and Means Committee. Mr. Offenbacher holds a Bachelor's
degree in Chemical Engineering from Purdue University and a Masters of Business
Administration from the University of Dayton. He is the Chairman of the Board of
the Automotive Occupant Restraint Council, an industry trade association.
The Board of Directors is divided into three classes, with each class
serving a staggared 3 year term. The current Board of Directors terms are as
follows and will expire at the Company's Annual Meeting in the applicable year
unless the respective Director is reelected for an additional 3 year term:
TERM EXPIRING 2003 TERM EXPIRING 2004 TERM EXPIRING 2005
------------------ ------------------ ------------------
John M. Leinonen Lon A. Offenbacher S. Thomas Emerson
Robert D. Olliver Jack A. Henry Bradley P. Forst
Jean E. Boyle(1) James C. Withers
OTHER EXECUTIVE AND STATUTORY OFFICERS
Joseph W. Coltman. Mr. Coltman has served as Executive Vice President
and Chief Development Officer since April 2001. Mr. Coltman has served as a
corporate executive officer since February 2000 and President of Simula's
research, development and testing subsidiary, Simula Technologies, Inc., since
January 1997. He also acted as interim President of Simula Safety Systems, Inc.,
the Company's Aerospace and Defense business, from October 2000 to May 2001.
Prior to January 1997, Mr. Coltman spent 17 years in Simula's government and
defense business working in various R&D, business development and executive
management capacities. Mr. Coltman has authored over 30 major technical reports
related to human tolerance, crash survivability and ballistic protection and is
an inventor on two patents. Mr. Coltman received his B.S. degree in Mechanical
Engineering and M.S.M.E. degree from Pennsylvania State University.
--------
1 General Boyle was appointed to the Board of Directors for a one-year term,
which expires July 2003 unless he is re-elected for an additional term.
D-26
John A. Jenson. Mr. Jenson was named Chief Financial Officer and
Treasurer of the Company in January 2003. Mr. Jenson served as Controller and
then as the Director of Business Operations for the Company from June 2001 to
January 2003. From 1996 to 2001, Mr. Jenson served as the Director of Finance
and Administration for the Company's Automotive division. Before joining the
Company, Mr. Jenson was an independent financial management consultant. Mr.
Jenson also held the position of Chief Financial Officer at Wick Pilcher
Insurance and NAB Nursery. From 1986 to 1991, Mr. Jenson was with Deloitte
Touche in Phoenix, Arizona leaving as a manager of Auditing Services. Mr. Jenson
received his B.S. in Accountancy from Northern Arizona University and is a
Certified Public Accountant in the State of Arizona.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires each Director and Executive Officer of the Company,
and each person who owns more than ten percent (10%) of a registered class of
the Company's equity securities to file by specific dates with the Securities
and Exchange Commission (the "SEC") reports of ownership and reports of change
of ownership of equity securities of the Company. The SEC requires Executive
Officers, Directors, and 10% Stockholders to furnish the Company with copies of
all Section 16(a) forms they file. The Company is required to report any failure
of its Directors, Executive Officers and 10% Stockholders to file by the
relevant due date any of these reports during the Company's fiscal year.
Based solely upon a review of the copies of such forms furnished to the
Company, the Company believes that for the fiscal year ended December 31, 2002,
all Section 16(a) filing requirements applicable to its Directors, Executive
Officers and 10% Stockholders were complied with.
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table summarizes the compensation we paid to the
Company's "Named Executive Officers," comprised of the Chief Executive Officer
and the three other most highly compensated executive officers who participate
in a company policy capacity as of the end of 2002 whose salary and bonus
exceeded $100,000 for services rendered in all capacities to the Company.
Annual Compensation Long-Term Compensation All Other
Awards Compensation
-------------- -------------- ------------------------ ----------------
Securities Underlying
Name and Principal Position Year Salary(1) Bonus Options
---------------------------------- ---------- -------------- -------------- ------------------------ ----------------
Bradley P. Forst 2002 $285,112 $75,000(3) 100,000 --
Chief Executive Officer and 2001 254,544 -- -- --
President 2000 205,000 -- 320,000 --
John A. Jenson(1) 2002 132,167 -- 5,000 --
Director of Operations 2001 115,801 7,053 -- --
2000 91,555 -- 5,000 --
Joseph W. Coltman 2002 208,882 -- 10,000 --
Chief Development Officer and 2001 181,953 -- -- --
Executive Vice President 2000 161,000 -- 175,000 --
John S. Hodgson(2) 2002 171,726 -- 95,000 --
Chief Financial Officer,
Executive Vice President and Treasurer
-------------
(1) In addition to salary, nominal amounts are contributed by the Company as
a match to the 401(k) accounts of Named Executive Officers.
(2) Mr. Hodgson's employment as Chief Financial Officer, Executive Vice
President and Treasurer commenced in February 2002 and ended on January
1, 2003. Mr. Jenson was appointed Chief Financial Officer and Treasurer
of the Company on January 1, 2003.
(3) Mr. Forst was paid a bonus of $75,000 in September 2002 in respect of the
Company's performance in 2001. The Company has accrued $50,000 of bonus
in respect of performance during 2002, but to date has not paid any bonus
to Mr Forst, in respect of 2002.
D-27
STOCK OPTION AND BENEFIT PLANS
In 1992, the Company adopted the Simula 1992 Stock Option Plan. The
1992 Plan provided for the issuance of up to 360,000 shares of the Company's
Common Stock pursuant to grants made under the Plan. In August 1994, the Board
of Directors adopted the 1994 Stock Option Plan, which was subsequently approved
by the stockholders of the Company at the Annual Meeting in June 1995. The 1994
Plan reserved up to 2,500,000 shares of Common Stock for issuance under the
Plan. In February 1999, the Board of Directors adopted the 1999 Incentive Stock
Option Plan, which was subsequently approved by the stockholders of the Company
at the Annual Meeting in June 1999. The 1999 Plan reserved up to 2,000,000
shares of Common Stock for issuance under the Plan, and an increase to 2,450,000
was subsequently approved by the stockholders of the Company at the Annual
Meeting in June 2001.
In the fiscal year ended December 31, 2002, the Company granted a total
of 353,000 stock options to employees under its stock option plans. The
following table sets forth information regarding options granted in 2002 to
Named Executive Officers identified in the Summary Compensation Table:
OPTION GRANTS IN FISCAL YEAR 2002
INDIVIDUAL GRANTS
Potential Realizable
Value at Assumed Annual
Number of Percent of Total Rates of Stock
Securities Options Price Appreciation
Underlying Granted to Exercise or for Option Term(1)
Name Options Employees in Base Price Expiration --------------------------
Granted Fiscal Year ($/SH) Date 5% ($) 10%($)
------------------------ ----------------- ----------------- ------------- ------------- ------------- ------------
Bradley P. Forst 100,000 28% 3.90 3/28/2012 $237,124 $608,591
John S. Hodgson 95,000 27% 3.91 2/11/2012 $233,603 $591,996
Joseph W. Coltman 10,000 3% 3.40 7/30/2012 $21,382 $54,187
John A. Jenson 5,000 1% 3.76 4/1/2012 $11,823 $29,962
(1) Calculated from a base price equal to the exercise price of each
option, which was the fair market value of the Common Stock on the date
of grant. The amounts represent only certain assumed rates of
appreciation. Actual gains, if any, on stock option exercises and
Common Stock holdings cannot be predicted, and there can be no
assurance that the gains set forth on the table will be achieved.
The following table sets forth information with respect to the
exercised and unexercised options to purchase Common Stock granted under the
Company's stock option plans to the Named Executive Officers identified in the
Summary Compensation Table and held by them at December 31, 2002:
FISCAL YEAR END OPTIONS VALUES
Number of Unexercised
Options Value of Unexercised
Shares at Fiscal Year End In-The-Money Options at
Acquired on Value Realized (#) Fiscal Year End
Name Exercise (#) ($) Exercisable/Unexercisable ($) Exercisable/Unexercisable
------------------------ ---------------- ------------------ --------------------------- ------------------------------
Bradley P. Forst N/A N/A 740,000 / 110,000 - / -
John S. Hodgson N/A N/A 31,667 / - - / -
Joseph W. Coltman N/A N/A 156,250 / 40,000 - / -
John A. Jenson N/A N/A 23,500 / 5,000 - / -
EMPLOYEE STOCK PURCHASE PLAN
The Company maintains an Employee Stock Purchase Plan ("ESPP" or
"Plan"). The ESPP provides eligible employees with the opportunity to acquire a
stock ownership interest in the Company through periodic payroll deductions. The
purpose of the Plan is to provide incentive to employees of the Company to
perform in a manner that enhances the value of the Company's Common Stock by
providing a direct ownership stake in the Company. The ESPP initially reserved
400,000 shares of the Company's Common Stock to be issued under the Plan. In
December 2001, the Company registered 200,000 additional shares for issuance
under the Plan. Employees of the Company and its subsidiaries are eligible to
participate in the Plan following 30 days of continuous service with the
Company, provided that such employees work in excess of 20 hours per week and
greater than five months per calendar year.
D-28
Eligible employees invest in the Plan through regular payroll
deductions of up to 10% of their gross earnings, deducted net of taxes, for each
semi-annual period of participation, provided that no employee may purchase more
than $25,000 worth of the Company's Common Stock in any given calendar year.
Payroll deductions are credited to an account established in each participating
employee's name and shares of the Company's Common Stock are automatically
issued on behalf of participating employees on the last business day of each
semi-annual period of participation at the lesser of (i) 85% of the market price
per share of Common Stock on an individual's entry date into the Plan (subject
to certain limitations), or (ii) 85% of the market price per share on the
semi-annual purchase date. The Plan purchase dates are May 31 and November 30
each year.
DEFINED BENEFIT PENSION PLAN
The Company adopted a non-contributory defined benefit pension plan as
of November 1, 1980. To be eligible, participants must have completed six months
of continuous service and have attained the age of 21. Benefits are based on the
length of service and the participants' final pay (averaged over the five
highest consecutive years of the participant's last ten years of participation).
The Company makes contributions to the plan based on actuarially determined
amounts. The defined benefit plan was frozen to new participants July 1, 1999.
Messrs. Forst, Coltman and Jenson are participants in the plan consistent with
the normal terms and conditions of the plan.
The following table sets forth the estimated annual benefits payable on
retirement for specified compensation and years of service categories for
participants.
PENSION PLAN TABLE(1)
YEARS OF SERVICE(2)
--------------------------------------------------------------------------------------------------------------------
Remuneration 15 20 25 30 35
--------------------------------------------------------------------------------------------------------------------
$ 50,000 $17,500 $17,500 $17,500 $17,500 $17,500
100,000 35,000 35,000 35,000 35,000 35,000
150,000 52,500 52,500 52,500 52,500 52,500
200,000 70,000 70,000 70,000 70,000 70,000
250,000 87,500 87,500 87,500 87,500 87,500
300,000 105,000 105,000 105,000 105,000 105,000
350,000 122,500 122,500 122,500 122,500 122,500
------------
(1) The benefits illustrated above are payable from the Simula, Inc. Defined
Benefit Pension Plan and the unfunded nonqualified Supplemental
Retirement Plan of Simula, Inc. Benefits are calculated on a straight
life annuity basis. The compensation covered by the retirement plan
includes all wages and salaries but excludes bonuses. Benefits under the
retirement plan are not subject to deduction for Social Security or other
offset amounts.
(2) As of December 31, 2002, Messrs. Forst's, Coltman's and Jenson `s
credited years of service were 7, 22 and 7, respectively. Mr. Hodgson did
not participate in the Company's Defined Benefit Plan.
401(K) PROFIT SHARING PLAN
The Company's 401(k) Profit Sharing Plan (the "PSP") is qualified under
Sections 401(a) and 401(k) of the Internal Revenue Code. The PSP was adopted
effective November 1, 1989. The PSP is administered under a trust, and the
Company's Directors are currently serving as its trustees. All employees of the
Company who are 21 years or older, including named Executive Officers, are
eligible to participate in the PSP.
Under the PSP, participating employees can elect to contribute to the
PSP through payroll reductions. In addition, the Company at its discretion can
make contributions to the PSP up to a certain percentage of a participant's
annual compensation. In 2002, the Company match on all participant 401(k)
contributions, including those of its Named Executive Officers, was 15% up to
the first 6% of compensation. Participating employees are entitled to full
distribution of their share of the Company's contributions under the PSP upon
death, disability or when they reach retirement age. If a participant's
employment is terminated earlier, his or her share of the Company's
contributions will depend on the number of years of employment with the Company.
All participating employees have the right to receive 100% of their own
contributions to the PSP upon any termination of employment.
D-29
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Leinonen (Chairman), Offenbacher, Olliver and Withers, all of
whom are non-employee members of the Company's Board of Directors, were members
of the Company's Compensation Committee for the fiscal year 2002. Effective as
of December 31, 2002 the members of the Compensation Committee are Messrs.
Leinonen (Chairman), Offenbacher and Boyle. No member of the Compensation
Committee was, during the fiscal year ended December 31, 2002, or currently is
an officer, former officer or employee of the Company. None of the Company's
Named Executive Officers served as a member of:
- the compensation committee of another entity of which one of the
executive officers of such entity served on the Company's
Compensation Committee;
- the board of directors of another entity, one of whose executive
officers served on the Company's Compensation Committee; or
- the compensation committee of another entity of which one of the
executive officers of such entity served as a member of the
Company's Board of Directors.
EMPLOYMENT AND CHANGE OF CONTROL AGREEMENTS WITH NAMED EXECUTIVE OFFICERS
The Company is party to employment agreements with its Chief Executive
Officer and one of its other Named Executive Officers, Joseph W. Coltman. Mr.
Forst's employment agreement is for a three-year term commencing October 2000
and automatically renews for additional three-year terms unless notice of
termination is given at least one year in advance of the end of any term. The
Company has entered into a similar employment agreement with Mr. Coltman. The
term of the employment agreement with Mr. Coltman is two years. The term of each
agreement is subject to early termination upon the disability or death of the
executive.
During the term of the employment agreements, the Company is to pay
each executive his base salary, which is subject to review and adjustment by the
Compensation Committee of the Company's Board of Directors on an annual basis.
In addition to his base salary, each executive is entitled to participate in any
and all additional compensation or benefit plans of the Company now in place or
later adopted, such as annual bonus or option plans, incentive, savings and
retirement plans, and welfare benefit plans.
Each employment agreement includes provisions that are triggered upon a
change of control of the Company. For purposes of these agreements, the term
"change of control" means the occurrence of any of the following events: (i) the
acquisition, directly or indirectly, of ownership of more than 20% of the
Company's Common Stock; (ii) a merger or consolidation in which voting power of
the Company's securities changes or the Company is not the surviving
corporation; (iii) the sale, transfer, or other disposition in one or more
transactions, of all or substantially all of the assets of the Company; or (iv)
a change in the membership of one-third of the Board of Directors in one or more
contested elections. In the event of a change of control, if the Company
terminates the executive's employment without cause (as defined in each
employment agreement), or the executive resigns for good reason (as defined in
each employment agreement), the Company will pay such executive a severance
payment. For Mr. Forst, the severance payment is an amount equal to three times
his then current salary plus average annual bonus. For Mr. Coltman the
multiplier is two times.
Mr. Forst's employment agreement provides that in the event that it is
determined that any payment under the agreement is subject to the excise tax
imposed by Section 4999 of the Internal Revenue Code or parallel state or local
tax laws, Mr. Forst is entitled to receive from the Company a "gross-up" payment
in an amount equal to the excise tax and related penalties, interest and other
charges. The employment agreement with Mr. Coltman caps all benefits such that
no excise tax will be imposed by Section 4999.
Upon promotion to Chief Financial Officer and due to the Company's
pursuit of various strategic alternatives (including ongoing sale of assets,
refinancing or sale of the Company, on January 10, 2003, the Company entered
into a retention agreement with Mr. JensonThe retention agreement provides that
in the event that Mr. Jenson is terminated at any time up to one year following
the sale, merger or other transfer for value of all or substantially all of the
Company's stock or assets, Mr. Jenson is entitled to receive a retention payment
equivalent to eighteen months of his salary and continued health benefits
coverage for a period of eighteen months. However, if the Company's successor
retains Mr. Jenson in a comparable position for a period of one year and one
day, Mr. Jenson is entitled to receive a bonus payment equivalent to twelve
months of his salary in lieu of the retention payment and health benefit
described above. The retention agreement terminates on December 31, 2003 or the
date the Company notifies Mr. Jenson of its decision not to pursue a
transaction, whichever is earlier.
D-30
DEATH BENEFIT PLAN AGREEMENTS
The Company has also entered into a death benefit plan agreement with
Mr. Forst. Under this agreement, the Company has made an unfunded and unsecured
promise to pay to his beneficiary ten (10) years' worth of his base annual
salary in quarterly installments. The Company has taken out life insurance
policies on Mr. Forst's life, with benefits in excess of the liabilities
thereunder. Under the death benefit plan agreement, benefits are payable only
from general corporate assets, and neither Mr. Forst nor his estate has any
right to the proceeds of such policies or any other assets of the Company.
DIRECTOR COMPENSATION
The Company's non-employee, outside directors, General Boyle, Dr.
Emerson, Dr. Withers, and Messrs. Olliver, Leinonen and Offenbacher, (the
"Outside Directors"), each receive $3,000 cash compensation per Board meeting
plus reasonable expense reimbursements, plus $1,500 per committee meeting. In
addition, the Outside Directors receive an initial grant of options to purchase
15,000 shares when they become directors and an annual grant of 3,000 options
each year thereafter. In 2002, Outside Directors also received $5,000 worth of
shares of Simula common stock on a quarterly basis under the Simula, Inc.
Outside Directors' Equity Plan. This quarterly stock grant will not be awarded
in 2003. Directors other than Outside Directors do not receive separate
compensation for their services as Directors.
In 2002, the Lead Director of the Company, Jack Henry, received a
one-time, up-front cash payment of $10,000 for assuming this position and its
responsibilities. Tthe Lead Director also received a stipend of $10,000 ($5,000
cash and $5,000 in restricted stock of the Company) in fiscal year 2002. In
2003, the Lead Director will be compensated $4,500 cash per Board meeting plus
reasonable expense reimbursements, plus $1,500 per committee meeting.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The following table sets forth information regarding the beneficial
ownership of the Company's Common Stock by: (i) each of the Named Executive
Officers as defined in SEC Regulation S-K 402(a)(3), including persons who are
no longer employed with the Company but who in fiscal 2002 were Named Executive
Officers pursuant to SEC Regulation S-K 402(a)(3)(i) and (iii); (ii) each
director of the Company; (iii) all of the Company's executive officers and
directors as a group; and (iv) each person known to the Company to be a
beneficial owner of more than 5% of the outstanding Common Stock, all as
determined in accordance with Rule 13d-3 under the Securities Exchange Act of
1934 based on information furnished by such persons. Unless otherwise indicated,
as of March 31, 2003, shares indicated as beneficially owned are held with sole
voting and investment power.
Shares Owned
-----------------------------
Number(1) Percentage(2)
NAME OF BENEFICIAL OWNER -----------------------------
DIRECTORS AND NAMED EXECUTIVE OFFICERS(3):
Bradley P. Forst(5) 799,153 6%
Joseph W. Coltman(6) 172,470 1%
John A. Jenson(7) 35,315 *
James C. Withers(8) 66,812 *
Robert D. Olliver(9) 67,523 *
John M. Leinonen(10) 58,093 *
Lon A. Offenbacher(11) 55,349 *
S. Thomas Emerson(12) 54,308 *
Jack A. Henry(13) 46,833 *
John S. Hodgson(14) - *
Jean E. Boyle(15) 7,764 *
All directors and executive officers as a group (11 persons) 1,355,856 10%
Stanley P. Desjardins(4) 3,102,974 24%
Kennedy Capital Management, Inc.(16) 1,610,100 12%
Tennenbaum Capital Partners, LLC(17) 829,003 6%
D-31
-----------
(1) The number of shares shown in the table, including the notes thereto,
have been rounded to the nearest whole share. The number includes, when
applicable, shares owned of record by such person's spouse and by other
related individuals, trusts, and entities over whose shares of Common
Stock such person has custody, voting control or power of disposition.
The number also includes shares of Common Stock that the identified
person had the right to acquire within 60 days of March 31, 2003 by the
exercise of stock options other than options pursuant to the Employee
Stock Purchase Plan, without regard to whether such options are
in-the-money.
(2) An * indicates ownership of less than 1% of the outstanding Common Stock.
The percentages shown include the shares of Common Stock that the person
will have the right to acquire within 60 days of March 31, 2003 other
than through the Employee Stock Purchase Plan. In calculating the
percentage of ownership, all shares of Common Stock that the identified
person has the right to acquire, or will have the right to acquire within
60 days of March 31, 2003, upon the exercise of stock options are deemed
to be outstanding for the purpose of computing the percentage of shares
of Common Stock owned by such person, but are not deemed to be
outstanding for the purpose of computing the percentage of the shares of
Common Stock owned by any other person.
(3) The address of all Directors and executive officers is 2625 South Plaza
Drive, Suite 100, Tempe, Arizona 85282.
(4) Based on information provided in Form 4 of the Statement of Changes in
Beneficial Ownership by Simula, Inc. with the Securities and Exchange
Commission on May 20, 2002. Mr. Desjardins is the founder and former
Chairman of Simula, Inc. Mr. Desjardins' address is 5200 S. Lakeshore
Drive #240, Tempe, Arizona 85283.
(5) Includes options to purchase 795,000 shares of Common Stock.
(6) Includes options to purchase 171,250 shares of Common Stock.
(7) Includes options to purchase 33,500 shares of Common Stock.
(8) Includes options to purchase 57,750 shares of Common Stock.
(9) Includes options to purchase 55,437 shares of Common Stock.
(10) Includes options to purchase 46,500 shares of Common Stock.
(11) Includes options to purchase 45,000 shares of Common Stock.
(12) Includes options to purchase 39,000 shares of Common Stock.
(13) Includes options to purchase 18,000 shares of Common Stock.
(14) Mr. Hodgson is no longer an employee of the Company.
(15) Includes options to purchase -0- shares of Common Stock.
(16) Based on the information provided in Amendment 1 to Schedule 13G filed by
Kennedy Capital Management, Inc. with the Securities and Exchange
Commission on February 18, 2003. Kennedy Capital Management, Inc. is an
investment adviser registered under the Investment Advisers Act of 1940
and reported that it has sole voting power with respect to 1,547,600
shares of the Company's common stock and sole dispositive power with
respect to 1,610,100 shares of the Company's common stock. Kennedy
Capital Management's address is 10829 Olive Boulevard, St. Louis,
Missouri 63141.
(17) Based on information provided in Schedule 13G filed jointly by Tennenbaum
Capital Partners, LLC ("TCP"), Tennenbaum & Co., LLC ("TC") and Michael
E. Tennenbaum (:MET") with the Securities and Exchange Commission on
January 17, 2003. TCP is an investment adviser registered under the
Investment Advisers Act of 1940 and is an investment adviser or manager
to two funds and a separate account which are the registered holders of
8% senior convertible notes due May 2004 issued by the Company; such
notes are convertible into 829,003 shares of the Company's common stock.
Each of TCP, TC and MET report shared voting and dispositive power with
respect to 829,003 shares of the Company's common stock. The address of
principal business office of each of TCP, TP and MET is 11100 Santa
Monica Boulevard, Suite 210, Los Angeles, California 90025.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Board of Directors has a policy that provides that all transactions
between the Company and its executive officers, Directors, employees and
affiliates are subject to the approval of a majority of disinterested Directors
of the Board of Directors and will be on terms that are no less favorable to the
Company than those that could be negotiated with unaffiliated parties. No such
transactions occurred in fiscal year 2002.
ITEM 14. CONTROLS AND PROCEDURES
Within 90 days prior to the date of the filing of this report, our
Chief Executive Officer and Chief Financial Officer have reviewed and evaluated
the effectiveness of our disclosure controls and procedures, which included
inquires made of certain other of our employees. Based on their evaluation, our
Chief Executive Officer and Chief Financial Officer have each concluded that our
disclosure controls and procedures are effective. Disclosure controls and
procedures are designed to ensure that information required to be disclosed by
us in our reports filed under the Securities Exchange Act of 1934 are recorded,
processed, summarized and reported within the time periods specified by the
Securities and Exchange Commission's rules and forms.
Subsequent to the date of the evaluation, there have not been any
significant changes in our internal controls or in other factors that could
significantly affect the disclosure controls.
D-32
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements: Financial Statements appear beginning at page
F-1.
(a)(2) Financial statement schedules: None.
(a)(3) Exhibits: The following Exhibits are included pursuant to Item 601 of
Regulation S-K.
NO. DESCRIPTION REFERENCE
3.1 Articles of Incorporation of Simula, Inc., as amended and restated................................ (2)
3.2 Bylaws of Simula, Inc., as amended and restated................................................... (1)
4.7 Indenture dated April 1, 1997, in connection with the Company's issuance of the 8% Senior
Subordinated Convertible Notes due May 1, 2004.................................................... (6)
10.11 1992 Stock Option Plan, as amended effective September 15, 1998................................... (3)
10.12 1992 Restricted Stock Plan........................................................................ (1)
10.21 1994 Stock Option Plan, as amended effective September 15, 1998................................... (3)
10.26 Simula, Inc. Employee Stock Purchase Plan......................................................... (2)
10.27 Outside Directors Equity Plan .................................................................... (9)
10.37 Simula, Inc. 1999 Incentive Stock Option Plan..................................................... (4)
10.41 Financing Agreement with The CIT Group/Business Credit, Inc. dated December 30,1999............... (5)
10.41A Amendment Number Three to Financing Agreement between the Company and The CIT
Group/Business Credit, Inc. dated September 26, 2001.............................................. (7)
10.41B Amendment Number Five to Financing Agreement between the Company and The CIT Group/Business
Credit, Inc. dated June 30, 2002.................................................................. (10)
10.41C Amendment Number Seven to Financing Agreement between the Company and The CIT
Group/Business Credit, Inc. dated October 22, 2002................................................ (10)
10.41D Amendment Number Nine to Financing Agreement between the Company and The CIT Group/Business
Credit, Inc. dated March 25, 2003................................................................. *
10.41E Waiver to Certain Financial Covenants to Financing Agreement between the Company and The
CIT Group/Business Credit, Inc. dated April 9, 2003............................................... *
10.45 Loan Agreement between the Company and Allied Capital Corporation dated September 26, 2001........ (7)
10.45A Waiver and Amendment No. 1 to Loan Agreement between the Company and Allied Capital
Corporation dated August 19, 2002................................................................. (10)
10.45B Consent and Amendment No. 2 to Loan Agreement between the Company and Allied Capital
Corporation dated March 25, 2003.................................................................. *
10.46 Employment Agreement between the Company and Bradley P. Forst dated November 12, 2001,
effective October 1, 2000......................................................................... (7)
10.48 Employment Agreement between the Company and Joseph Coltman dated December 13, 2001,
effective October 13, 2000........................................................................ (8)
10.49 Employment Agreement between the Company and John S. Hodgson dated February 1, 2002,
effective February 11, 2002....................................................................... (8)
10.50 Retention Agreement between the Company and John A. Jenson dated December 20, 2002... ............ *
21 Subsidiaries of the Company....................................................................... *
23 Consent of Deloitte & Touche LLP.................................................................. *
99.1 Certification by Chief Executive Officer pursuant to section 906 of Sarbanes-Oxley Act *
99.2 Certification by Chief Financial Officer pursuant to section 906 of Sarbanes-Oxley Act *
* Filed herewith
(1) Filed with Registration Statement on Form S-18, No. 33-46152-LA, under
the Securities Act of 1933, effective April 13, 1992.
(2) Filed with 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 for the quarter ended September 30,
1998.
D-33
(4) Filed with Definitive Proxy on May 14, 1999, for the Company's Annual
Meeting of Shareholders held on June 17, 1999.
(5) Filed with report on Form 10-K for the year ended December 31, 1999.
(6) Filed with report on Form 10-Q for the quarter ended March 31, 2000.
(7) Filed with report on Form 10-Q for the quarter ended September 30,
2001.
(8) Filed with report on Form 10-K for the year ended December 31, 2001.
(9) Filed with Registration Statement on Form S-8, effective March 28,
2002.
(10) Filed with report on Form 10-Q for the quarter ended September 30,
2002.
(b) Reports on Form 8-K:
(1) Report on Form 8-K dated August 14, 2002, furnishing notification of
late filing on Form 12b-25
(2) Report on Form 8-K dated August 26, 2002, discussing certain revisions
to the Company board charter
D-34
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 Tempe, State of Arizona, on April 15, 2003.
SIMULA, INC.
By /s/ Bradley P. Forst
-----------------------
Bradley P. Forst, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Form 10-K has been signed by the following persons in the capacities and on
the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Bradley P. Forst President, Chief Executive Officer April 15, 2003
--------------------------------- and Director
Bradley P. Forst
/s/ John A. Jenson Chief Financial Officer and Treasurer April 15, 2003
--------------------------------- (Principal Financial and
John A. Jenson Accounting Officer)
* Lead Director April 15, 2003
---------------------------------
Jack A. Henry
* Director April 15, 2003
---------------------------------
James C. Withers
* Director April 15, 2003
---------------------------------
Robert D. Olliver
* Director April 15, 2003
---------------------------------
John M. Leinonen
* Director April 15, 2003
---------------------------------
Lon A. Offenbacher
* Director April 15, 2003
---------------------------------
S. Thomas Emerson
* Director April 15, 2003
---------------------------------
Jean E. Boyle
* Director April 15, 2003
---------------------------------
*By: /s/ Mari I. Valenzuela
----------------------------
Mari I. Valenzuela
D-35
CERTIFICATIONS
I, Bradley P. Forst, certify that:
1. I have reviewed this annual report on Form 10-K of Simula, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations, and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of the date within 90 days prior to the
filing date of the annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize, and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in the
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
/s/ Bradley P. Forst
---------------------------
Bradley P. Forst
Chief Executive Officer
April 15, 2003
D-36
CERTIFICATIONS
I, John A. Jenson, certify that:
1. I have reviewed this annual report on Form 10-K of Simula, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations, and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
(d) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
(e) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of the date within 90 days prior to the
filing date of the annual report (the "Evaluation Date"); and
(f) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
(c) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize, and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(d) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in the
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
/s/ John A. Jenson
----------------------
John A. Jenson
Chief Financial Officer
April 15, 2003
D-37
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Simula, Inc. (the "Company") on
Form 10-K for year ended December 31, 2002 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Bradley P. Forst,
Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that:
(1) the Report fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and result of
operations of the Company.
/s/ Bradley P. Forst
--------------------------
Bradley P. Forst
Chief Executive Officer
April 15, 2003
D-38
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Simula, Inc. (the "Company") on
Form 10-K for the year ended December 31, 2002 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, John A. Jenson, Chief
Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(3) the Report fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(4) the information contained in the Report fairly presents, in all
material respects, the financial condition and result of
operations of the Company.
/s/ John A. Jenson
--------------------------
John A. Jenson
Chief Financial Officer
April 15, 2003
D-39
Exhibit 21
STATE OF INCORPORATION OR PERCENTAGE OWNED DIRECTLY OR
NAME OF SUBSIDIARY JURISDICTION INDIRECTLY BY SIMULA, INC.
----------------------------------------------- -------------------------------------- ------------------------------
SIMULA, INC. Arizona corporation 100%
SIMULA AEROSPACE & DEFENSE GROUP, INC. Arizona corporation 100%
SIMULA AUTOMOTIVE SAFETY DEVICES, INC. Arizona corporation 100%
SIMULA AUTOMOTIVE SAFETY DEVICES, LTD. United Kingdom limited company 100%
SIMULA POLYMER SYSTEMS, INC. Arizona corporation 100%
INTERNATIONAL CENTER FOR SAFETY EDUCATION Arizona corporation 100%
NAME OF SUBSIDIARY STATE OF INCORPORATION OR PERCENTAGE OWNED DIRECTLY OR
(CORPORATE SHELLS) JURISDICTION INDIRECTLY BY SIMULA, INC.
----------------------------------------------- -------------------------------------- ------------------------------
SIMULA TECHNOLOGIES, INC. Arizona corporation 100%
SIMULA TRANSPORTATION EQUIPMENT CORPORATION Arizona corporation 100%
CCEC CAPITAL CORP. Arizona corporation 100%
AI CAPITAL CORP. Arizona corporation 100%
SAI CAPITAL CORP. Arizona corporation 100%
SIMULA COMPOSITES CORPORATION Delaware corporation 100%
D-40
Exhibit 10.50
December 20, 2002
MR. JOHN A. JENSON
Simula, Inc.
2625 South Plaza Drive
Suite 100
Tempe, Arizona 85282
Re: Retention Agreement ("Agreement")
Dear John:
As we discussed, on behalf of Simula, Inc. ("the "Company"), this
letter confirms our desire and offer to retain you as a key employee of the
Company.
1. RETENTION OR BONUS PAYMENT. The Company wants to assure that it retains its
key employees for the normal operation of business while a potential sale,
merger or other transfer for value of all or substantially all of the assets or
stock of Simula, Inc. (a "Transaction") is considered. The Company agrees to pay
you either a retention payment ("Retention Payment") and insurance benefit
("Insurance Benefit"), or a bonus payment ("Bonus Payment"), if a Transaction is
consummated, provided that you continue your employment with the Company as set
forth in this letter. The date a Transaction is completed is referred to in this
letter as the "End Date." The period from the date of this letter until the End
Date is referred to in this letter as the "Retention Period."
You shall be entitled to the following compensation and benefits if
your employment is terminated (a) by the Company during the Retention Period at
any time up to the date of a Transaction for any reason except "for cause," or
(b) by the Company's successor in ownership within one year of the Transaction:
(i) A Retention Payment in an amount equal to eighteen (18) months of
your annual base salary as of the End Date, less applicable
withholdings; and
(ii) Continuation of your health benefits coverage for you and your
eligible dependents for eighteen (18) months from the date of
termination, under the same terms and conditions of the health
benefits plan maintained by the Company for its employees
generally or, if a plan does not permit participation by
non-employees, then another plan as similar as possible to the
plan for the Company employees generally (the "Insurance
Benefit").
In the event that the Company through its successor continues to employ
you in a comparable position for a period of at least one year and one day
following the Transaction, you shall be entitled to a Bonus Payment equivalent
to twelve (12) months of your monthly base compensation as of the one year and
one day anniversary, less applicable withholdings, in lieu of any Retention
Payment and Insurance Benefit.
2. ELIGIBILITY CONDITIONS. Your eligibility for the payments described
in Paragraph 1 is subject to your continued satisfactory performance in Simula's
sole discretion including, without limitation, your cooperation with the
Company's efforts to sell the business of Simula, Inc., and your compliance with
the Company's policies, rules and guidelines.
3. OFFER OF ANOTHER POSITION. The Company will propose and attempt to
secure your employment with the successor, but no assurances can be given.
4. TIME OF PAYMENT. The Company will pay you the Retention Payment in a
lump sum, less applicable tax withholdings, within ten (10) business days of
termination of your employment.
In the event that you continue to be employed in a comparable position
for a period of at least one year and one day by the Company through its
successor, the Company shall pay you the Bonus Payment in a lump sum, less
applicable tax withholdings, within ten (10) business days of such one year and
one day anniversary.
D-41
5. EMPLOYMENT AGREEMENT. This Agreement constitutes an employment
agreement between you and the Company. During the term of this agreement, you
will maintain your current or comparable position and title and shall continue
all of your current duties, as modified from time-to-time. Additionally, you
will assist the Company in its efforts to sell the business of Simula, Inc. to
the extent necessary. During the term, the Company will continue to pay you your
current compensation and benefits. You are advised that the foregoing rights,
whether to the Retention Payment, the Insurance Benefit, or the Bonus Payment
(or any or all of them) will be forfeited if your employment is terminated "for
cause," or if you voluntarily terminate employment. For purposes of this
Agreement, termination "for cause" shall mean termination resulting from: (1)
conduct that has caused demonstrable injury to the Company, monetary or
otherwise; (2) continued failure for thirty (30) days to perform your essential
job functions, duties or responsibilities, as defined by your supervisor and in
the sole discretion of Simula, including your cooperation with the Company's
efforts to sell the business; (3) a violation of the Company's established
policies and procedures in effect while employed which could subject you to
disciplinary action by the Company; or (4) a criminal conviction, as evidenced
by a binding and final judgment, order or decree of a court of competent
jurisdiction, in effect after exhaustion or lapse of all rights of appeal.
6. CONFIDENTIALITY. You must keep the existence of this Agreement and
its terms completely confidential. You must also keep all discussions relating
to a possible Transaction, including terms and negotiations, completely
confidential. If you fail to maintain this confidentiality, the Company may, at
its option, terminate this Agreement and you will not receive any payments
described herein. You will not violate this confidentiality requirement,
however, merely by discussing this Agreement or the terms of any prospective
Transaction with the executive management of Simula, Inc.
7. NO TRANSACTION. In the event the Company decides, in its sole
discretion, not to pursue a Transaction, it may so notify you. Upon receipt of
such notice, this Agreement will terminate, you will not be entitled to any
payment hereunder, and you will return to at-will employment status.
8. TERMINATION. Unless terminated pursuant to Paragraphs 5 or 7, this
Agreement shall terminate on December 31, 2003. However, if a Transaction is
consummated on or before December 31, 2003, this Agreement shall terminate on
the date on which the Company or the Company's successor shall have made any
payments required to be made hereunder in respect of your employment with the
Company.
9. MISCELLANEOUS. This Agreement constitutes your complete
understanding concerning your retention and employment during the Retention
Period, and supercedes all other agreements between you and the Company,
specifically including any Employment Agreement between you and the Company but
specifically excluding any non-disclosure, invention assignment, Option
Agreement and any agreement for the sole benefit of the Company, if any. No
other agreements, promises or inducements, or any modifications to this
Agreement, will be binding unless reduced to writing and signed by you and an
authorized representative of the Company. This Agreement shall be binding upon a
successor in ownership of the Company.
If you agree to the terms listed in this letter, please sign where
indicated below. This letter will constitute your Retention Agreement once
executed by you.
Sincerely,
SIMULA, INC.
By /s/ Bradley P. Forst
-----------------------
Bradley P. Forst
President and
Chief Executive Officer
I agree to the terms of this Agreement.
/s/ John A. Jenson 1/10/03
------------------------------- --------
D-42
Exhibit 10.41D
THE CIT GROUP/ BUSINESS CREDIT, INC.
300 South Grand Avenue, Third Floor
Los Angeles, California 90071
Dated as of
March 25, 2003
SIMULA, INC. AND SUBSIDIARIES
2700 North Central Avenue, Suite 1000
Phoenix, Arizona 85004
Re: Amendment Number Nine to Financing Agreement
Ladies and Gentlemen:
Reference is made to the Financing Agreement between The CIT Group/Business
Credit, Inc. as lender thereunder ("CITBC"), and Simula, Inc. and its
subsidiaries, as borrowers thereunder (collectively, the "Companies"), dated as
of December 31, 1999, as the same may be amended from time to time (the
"Financing Agreement"). Initially capitalized terms used herein and not
otherwise defined herein shall have the meanings ascribed to such terms in the
Financing Agreement.
The Companies have requested, and CITBC has agreed, subject to the satisfaction
of each of the terms and conditions hereof, to modify and amend certain
provisions of the Financing Agreement.
Therefore, pursuant to mutual agreement, it is hereby agreed as follows:
I. AMENDMENT OF DEFINITIONS. The definitions of "ASD Capital Expenditures"
and "ASD Capitalized Lease Obligations" are hereby deleted and replaced
with the following:
"ASD Capital Expenditures" means Capital Expenditures made by the
Companies in connection with the operation of Simula Automotive Safety
Devices, Inc. and/or Simula Automotive Safety Devices, Ltd.; provided,
however, that in calculating such amounts, the Companies shall be
permitted to deduct therefrom the net amount of tooling reimbursements
and grants related to any such Capital Expenditures and in each case
either (i) received by a Company in cash within thirty (30) days of the
incurrence of such Capital Expenditures or (ii) approved in writing by
CITBC.
"ASD Capitalized Lease Obligations" means capitalized lease obligations
incurred by the Companies in connection with the operation of Simula
Automotive Safety Devices, Inc. and/or Simula Automotive Safety
Devices, Ltd.; provided, however, that in calculating such amounts, the
Companies shall be permitted to deduct therefrom the net amount of
tooling reimbursements and grants related to any such capitalized lease
obligations and in each case either (i) received by a Company in cash
within thirty (30) days of the incurrence of such capitalized lease
obligations or (ii) approved in writing by CITBC.
II. AMENDMENT TO SUBSECTION (B) OF SECTION 7, PARAGRAPH 11. Subsection
(b) of Section 7, Paragraph 11 is hereby deleted in its entirety and
replaced with the following:
D-43
"(b) make any ASD Capital Expenditure or enter into any ASD Capitalized
Lease Obligation, if the sum of (i) the aggregate amount of all ASD
Capital Expenditures (including the ASD Capital Expenditure in
question) made by the Companies and their Subsidiaries during such
fiscal quarter period of the Companies ending as of the dates set forth
below, plus (ii) the aggregate amount of all ASD Capitalized Lease
Obligations (including the ASD Capitalized Lease Obligation in
question) made or required to be made by the Companies and their
Subsidiaries during such fiscal quarter period of the Companies ending
as of the dates set forth below, would exceed the amount set forth
below opposite each such date:
Fiscal Quarter ended 12/31/02 - $650,000
Fiscal Quarter ended 3/31/03 - $400,000
Fiscal Quarter ended 6/30/03 - $250,000
Fiscal Quarter ended 9/30/03 and thereafter - $200,000;"
III. CONSENT TO SALES. The Companies have requested that CITBC consent to
the Companies' proposed sales of (i) that certain equipment described
on Exhibit "A" attached hereto, (ii) that certain real and personal
property consisting of SEI's former office located at 537 Sweeten Creek
Industrial Park, Asheville, North Carolina, and (iii) that certain real
estate located at 10008 South 50th Place, Phoenix, Arizona
(collectively, the "Sales"). CITBC has agreed to consent to the Sales
as currently contemplated by the Companies and as set forth in drafts
of the purchase and sale documents submitted to CITBC to date. Except
as expressly provided herein, the foregoing consent shall not
constitute (a) a modification or alteration of the terms, conditions or
covenants of the Financing Agreement or any document entered into in
connection therewith, or (b) a waiver, release or limitation upon the
exercise by CITBC of any of its rights, legal or equitable, hereunder
or under the Financing Agreement or any Loan Document. Except as set
forth above, CITBC reserves any and all rights and remedies which it
has had, has or may have under the Financing Agreement and each Loan
Document.
IV. CONFIRMATION OF GUARANTY. The Companies, as Guarantors, hereby confirm
that the Guaranty, dated December 30, 1999, executed by the Guarantors
in favor of CITBC guarantying the repayment of the Obligations remains
in full force and effect notwithstanding this Amendment and the waiver
contained herein.
V. GENERAL TERMS.
1. To the extent any of the terms and provision of the Financing
Agreement and/or the Loan Documents conflict or are inconsistent
with the terms hereof, the terms of this Amendment shall govern.
2. The effectiveness of the waiver, modification, and consent set
forth in this Amendment is expressly conditioned upon:
a) receipt by CITBC of an executed counterpart of this Amendment
executed by the Companies;
b) receipt by CITBC of an amendment fee of $10,000;
c) receipt by CITBC of the execution drafts of the purchase and
sale documents for each sale prior to the consummation of a
Sale;
d) receipt by CITBC of fully executed copies of the purchase and
sale documents for each Sale;
e) 100% of the net cash proceeds of each Sale shall be paid to
CITBC for application against the outstanding Revolving
Loans;
f) receipt by CITBC of payment in full of all costs, fees and
expenses of CITBC incurred in connection with this Amendment;
and
g) the receipt by CITBC of evidence satisfactory to CITBC, in
its sole discretion, that Allied Capital Corporation (i) has
consented to the waiver, modification and consent set forth
herein, as prescribed by the terms of the Intercreditor
Agreement, on terms satisfactory to CITBC, in its sole
discretion, and (ii) has amended the Allied Loan Documents
and consented to the Sales on terms consistent with those set
forth herein (the "Allied Amendment").
D-44
3. This Amendment may be executed in two (2) or more counterparts,
each of which shall constitute an original but all of which when
taken together shall constitute but one (1) agreement, and shall
become effective when copies hereof which, when taken together,
bear the original signatures of each of the parties hereto are
delivered to CITBC.
VI. CONSENT UNDER INTERCREDITOR AGREEMENT. CITBC hereby consents to the
execution and delivery of the Allied Amendment by and between Allied
and the Companies, to the extent such consent is required pursuant to
the terms of the Intercreditor Agreement.
Except as set forth herein no other amendment, waiver, consent or
change in the terms or provisions of the Financing Agreement or any
other Loan Document is intended or implied. By execution hereof, the
Companies represent and warrant to CITBC that, except as disclosed to
CITBC, no material adverse change has occurred in the financial
condition, business, prospects, profits, operations or assets of the
Companies.
If the foregoing is in accordance with your understanding, please so
indicate by signing and returning the enclosed copy of this Amendment.
Very truly yours,
THE CIT GROUP/BUSINESS CREDIT, INC.
By: /s/ James Karnowski
-----------------------
Title: Vice President
--------------------
D-45
AGREED AND ACCEPTED BY:
SIMULA, INC.,
an Arizona corporation
By: /s/ John A. Jenson
-----------------------
Title: CFO
--------------------
SAI CAPITAL CORP.,
an Arizona corporation
By: /s/ Mari Valenzuela
-----------------------
Title: Secretary
--------------------
AI CAPITAL CORP.,
an Arizona corporation
By: /s/ Mari Valenzuela
-----------------------
Title: Secretary
--------------------
SIMULA TRANSPORTATION EQUIPMENT CORPORATION,
an Arizona corporation
By: /s/ Mari Valenzuela
-----------------------
Title: Secretary
--------------------
INTERNATIONAL CENTER FOR
SAFETY EDUCATION, INC.,
an Arizona corporation
By: /s/ Mari Valenzuela
-----------------------
Title: Secretary
--------------------
SIMULA AUTOMOTIVE SAFETY DEVICES, INC.,
an Arizona corporation
By: /s/ Mari Valenzuela
-----------------------
Title: Secretary
--------------------
SIMULA COMPOSITES CORPORATION,
a Delaware corporation
By: /s/ Mari Valenzuela
-----------------------
Title: Secretary
--------------------
D-46
SIMULA POLYMER SYSTEMS, INC.,
an Arizona corporation
By: /s/ Mari Valenzuela
-----------------------
Title: Secretary
--------------------
SIMULA AEROSPACE & DEFENSE GROUP, INC.,
an Arizona corporation, f/k/a Simula Safety Systems, Inc.
By: /s/ Mari Valenzuela
-----------------------
Title: Assistant Secretary
--------------------
SIMULA TECHNOLOGIES, INC.
an Arizona corporation
By: /s/ Mari Valenzuela
-----------------------
Title: Secretary
--------------------
SIMULA AUTOMOTIVE SAFETY DEVICES, LIMITED,
a United Kingdom limited company
By: /s/ Mari Valenzuela
-----------------------
Title: Secretary
--------------------
CCEC CAPITAL CORP.,
an Arizona corporation
By: /s/ Mari Valenzuela
-----------------------
Title: Secretary
--------------------
D-47
Exhibit 10.41E
THE CIT GROUP/ BUSINESS CREDIT, INC.
300 South Grand Avenue, Third Floor
Los Angeles, California 90071
Dated as of
April 9, 2003
SIMULA, INC. AND SUBSIDIARIES
2625 S. Plaza Drive, Suite 100
Tempe, Arizona 85282
Re: Waiver of Certain Financial Covenants
Ladies and Gentlemen:
Reference is made to the Financing Agreement between The CIT
Group/Business Credit, Inc. as lender thereunder ("CITBC"), and Simula, Inc. and
its subsidiaries, as borrowers thereunder (collectively, the "Companies"), dated
as of December 31, 1999, as the same may be amended from time to time (the
"Financing Agreement"). Initially capitalized terms used herein and not
otherwise defined herein shall have the meanings ascribed to such terms in the
Financing Agreement.
It has come to CITBC's attention that the Companies have failed to meet
certain of the financial covenants under the Financing Agreement, including,
without limitation, the following (collectively, the "Defaults"): (i) net income
for the quarter ended December 31, 2002 was ($34,177,000) which fails to satisfy
the covenant of $0 required under Subsection (a) of Paragraph 10 of Section 7 of
the Financing Agreement; and (ii) EBITDA for the months ended January 31, 2003
and February 28, 2003 was $215,000 and $319,000, respectively, each of which
fail to satisfy the $500,000 minimum monthly EBITDA covenant required under
Subsection (d) of Paragraph 10 of Section 7 of the Financing Agreement.
The Companies have requested, and CITBC has agreed, to waive the
Defaults subject to the following terms and conditions:
1. Payment by the Companies to CITBC of a fee in the aggregate amount
of $25,000, such fee to be charged to the Companies' loan account
pursuant to the Financing Agreement;
2. Payment by the Companies in full of all fees and expenses of CITBC
incurred in connection with this waiver; and
3. Receipt by CITBC of the Companies' executed counterpart of this
letter.
The limited waiver set forth herein shall be limited precisely as
written and shall not be deemed to be (a) a waiver or modification (i) of any
other term or condition of the Financing Agreement or (ii) for any other
measurement period, or (b) prejudice any right or remedy which CITBC may now or
in the future have under or in connection with the Financing Agreement.
This letter may be executed in counterparts and by different parties on
separate counterparts, including by facsimile signature, each of which when so
executed and delivered shall be deemed to be an original. All such counterparts,
taken together, shall constitute but one and the same letter. This letter shall
become effective upon the execution of a counterpart of this letter by each of
the parties hereto.
D-48
Please acknowledge your receipt of this letter and acceptance of the
foregoing terms and conditions by signing and dating the enclosed counterpart of
this letter where indicated below and returning the same to the undersigned as
soon as possible.
Very truly yours,
THE CIT GROUP/BUSINESS CREDIT, INC.
By /s/ James Karnowski
-------------------------------
Title: Vice President
-----------------------------
D-49
AGREED AND ACCEPTED BY:
SIMULA, INC.,
an Arizona corporation
By: /s/ John A. Jenson
------------------------------
Title: Chief Financial Officer
---------------------------
SAI CAPITAL CORP.,
an Arizona corporation
By: /s/ Mari I. Valenzuela
------------------------------
Title: Secretary
---------------------------
AI CAPITAL CORP.,
an Arizona corporation
By: /s/ Mari I. Valenzuela
------------------------------
Title: Secretary
---------------------------
SIMULA TRANSPORTATION EQUIPMENT CORPORATION,
an Arizona corporation
By: /s/ Mari I. Valenzuela
------------------------------
Title: Secretary
---------------------------
INTERNATIONAL CENTER FOR
SAFETY EDUCATION, INC.,
an Arizona corporation
By: /s/ Mari I. Valenzuela
------------------------------
Title: Secretary
---------------------------
SIMULA AUTOMOTIVE SAFETY DEVICES, INC.,
an Arizona corporation
By: /s/ Mari I. Valenzuela
------------------------------
Title: Secretary
---------------------------
SIMULA COMPOSITES CORPORATION,
a Delaware corporation
By: /s/ Mari I. Valenzuela
------------------------------
Title: Secretary
---------------------------
SIMULA POLYMER SYSTEMS, INC.,
an Arizona corporation
By: /s/ Mari I. Valenzuela
------------------------------
Title: Secretary
---------------------------
D-50
SIMULA AEROSPACE & DEFENSE GROUP, INC.,
an Arizona corporation, f/k/a Simula Safety Systems, Inc.
By: /s/ Mari I. Valenzuela
------------------------------
Title: Assistant Secretary
---------------------------
SIMULA TECHNOLOGIES, INC.
an Arizona corporation
By: /s/ Mari I. Valenzuela
------------------------------
Title: Secretary
---------------------------
SIMULA AUTOMOTIVE SAFETY DEVICES, LIMITED,
a United Kingdom limited company
By: /s/ Mari I. Valenzuela
------------------------------
Title: Secretary
---------------------------
CCEC CAPITAL CORP.,
an Arizona corporation
By: /s/ Mari I. Valenzuela
------------------------------
Title: Secretary
---------------------------
D-51
Exhibit 10.45B
CONSENT AND AMENDMENT NO. 2 TO LOAN AGREEMENT
This CONSENT AND AMENDMENT NO. 2 TO LOAN AGREEMENT (this "Amendment") is dated
as of March 25, 2003 by and among Allied Capital Corporation, a Maryland
corporation ("Holder"), Simula, Inc., an Arizona corporation ("Simula"), and the
direct and indirect subsidiaries of Simula listed on the signature pages hereof.
WHEREAS, Simula, the Subsidiaries of Simula (collectively with Simula, the
"Companies") and Holder are parties to a certain Loan Agreement dated as of
September 26, 2001 (as amended, supplemented or otherwise modified from time to
time, the "Loan Agreement");
WHEREAS, Simula has advised Holder that Simula desires to sell, or to contract
to sell, its owned real properties (the "Properties") located as (i) 537 Sweeten
Creek Industrial Park Drive, Asheville, North Carolina 28803 and (ii) 10008
South 50th Place, Phoenix, Arizona 85044, which property is subject to a Lien in
favor of Holder pursuant to that certain Junior Deed of Trust, Assignment of
Rents, Security Agreement and Fixture Filing dated as of September 26, 2001
executed by Simula in favor of Holder.
WHEREAS, Simula has further advised Holder that Simula desires to sell, or to
cause one of its Subsidiaries to sell, the equipment described on Exhibit A
hereto (the "Designated Equipment"), which Designed Equipment is subject to a
Lien in favor of Holder pursuant that certain Security Agreement dated as of
September 26, 2001.
WHEREAS, Absent the prior written consent of Holder, disposition of the
Properties and the Designated Equipment by Simula would constitute separate
breaches of Section 5.3 of the Loan Agreement and separate Events of Default
pursuant to Section 7.1(c) of the Loan Agreement. Simula has requested that
Holder consent to the disposition of the Properties and the Designated Equipment
by Simula and its Subsidiaries, free and clear of any Lien in favor of Holder.
WHEREAS, Simula has further requested that Holder agree to amend the Loan
Agreement in certain respects.
NOW THEREFORE, in consideration of the mutual conditions and agreements set
forth in the Loan Agreement and this Amendment, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto hereby agree as follows:
DEFINITIONS. Capitalized terms used in this Amendment, unless otherwise defined
herein, shall have the meanings ascribed to such terms in the Loan Agreement.
CONSENT. Notwithstanding any provisions of the Loan Agreement to the contrary,
in reliance on the representations, warranties, covenants and agreements set
forth herein, and subject to the consummation of the conditions precedent set
forth herein, Holder hereby consents to the disposition of the Properties and
the Designated Equipment by Simula or its Subsidiaries, free and clear of any
Lien in favor of Holder; provided, however, that the Simula or its Subsidiaries
shall use any and all net proceeds available to Simula and its Subsidiaries in
connection with such dispositions to repay Debt that is pari passu with, or
ranks superior to, the Obligations. Except as expressly provided herein, the
foregoing consent shall not constitute (a) a modification or alteration of the
terms, conditions or covenants of the Loan Agreement, any Security Document or
any document entered into in connection therewith, or (b) a waiver, release or
limitation upon the exercise by Holder of any of its rights, legal or equitable,
hereunder or under the Loan Agreement, any Security Document or any Loan
Document. Except as set forth above, Holder reserves any and all rights and
remedies which it has had, has or may have under the Loan Agreement, each
Security Document and each Loan Document.
AMENDMENTS. In reliance on the representations, warranties, covenants and
agreements set forth herein, and subject to the consummation of the conditions
precedent set forth herein,, the Loan Agreement is hereby amended as follows:
D-52
Paragraph (e) of Section 4.13 of the Loan Agreement is hereby amended and
restated in its entirety, as follows:
(e) ASD Capital Expenditures and Capitalized Leases. No Company will, nor
will any Company permit any of its Subsidiaries to, make any ASD
Capital Expenditure or enter into any ASD Capitalized Lease Obligation,
if the sum of (i) the aggregate amount of all ASD Capital Expenditures
(including the ASD Capital Expenditure in question) made by the
Companies and their Subsidiaries during each fiscal quarter of the
Companies ending as of the dates set forth below, plus (ii) the
aggregate amount of all ASD Capitalized Lease Obligations (including
the ASD Capitalized Lease Obligation in question) made or required to
be made by the Companies and their Subsidiaries during each such fiscal
quarter of the Companies ending as of the dates set forth below, would
exceed the amount set forth below opposite each such date:
FISCAL QUARTER ENDING AMOUNT
--------------------- ------
December 31, 2002 $650,000
March 31, 2003 $400,000
June 30, 2003 $250,000
September 30, 2003 $200,000
December 31, 2003 $200,000
If the Companies and their Subsidiaries do not utilize the entire amount of ASD
Capital Expenditures and ASD Capitalized Lease Obligations permitted in any
fiscal quarter set forth above, the Companies may carry forward to the
immediately following fiscal quarter only the unutilized amount of such ASD
Capital Expenditures and ASD Capitalized Lease Obligations (with the amounts
expensed or made by the Companies in such succeeding fiscal quarter applied last
to such carried forward amount).
Section 20.1 of the Loan Agreement is hereby amended by amending and restating
the following definitions set forth therein as follows:
"ASD Capital Expenditures" means Capital Expenditures made by the Companies in
connection with the operation of Simula Automotive Safety Devices, Inc. and/or
Simula Automotive Safety Devices, Ltd.; provided, however, that in calculating
such amounts, the Companies shall be permitted to deduct therefrom the net
amount of tooling reimbursements and grants related to any such Capital
Expenditures and in each case either (i) received by a Company in cash within
thirty (30) days of the incurrence of such Capital Expenditures or (ii) approved
in writing by Holder;
"ASD Capitalized Lease Obligations" means capitalized lease obligations incurred
by the Companies in connection with the operation of Simula Automotive Safety
Devices, Inc. and/or Simula Automotive Safety Devices, Ltd.; provided, however,
that in calculating such amounts, the Companies shall be permitted to deduct
therefrom the net amount of tooling reimbursements and grants related to any
such capitalized lease obligations and in each case either (i) received by a
Company in cash within thirty (30) days of the incurrence of such capitalized
lease obligations or (ii) approved in writing by Holder;
CONDITIONS. The effectiveness of this Amendment is subject to the following
conditions precedent: Each Company shall have delivered to Holder a manually
executed original of this Amendment; The Companies shall have paid to Holder the
amount set forth in that certain letter agreement of even date herewith between
the Companies and Holder;
The Companies shall have delivered to Holder an agreement executed by each
Company and CIT in form and substance satisfactory to Holder (the "CIT
Amendment"), pursuant to which, among other things, CIT shall have consented to
the disposition of the Properties and the Designated Equipment on substantially
the same terms and conditions as those set forth herein;
After giving effect to the amendments contemplated hereby, no Default or Event
of Default shall be in existence as of the date hereof; and
After giving effect to the CIT Amendment, no Default or Event of Default (as
such terms are defined in the CIT Financing Agreement) shall be in existence as
of the date hereof under the CIT Financing Agreement.
D-53
REPRESENTATIONS AND WARRANTIES. To induce Holder to enter into this Amendment,
the Companies represent and warrant to Holder that (a) the execution, delivery
and performance of this Amendment has been duly authorized by all requisite
corporate action on the part of the Companies and that this Amendment has been
duly executed and delivered by the Companies, and (b) after giving effect to the
amendments contemplated hereby, no Default or Event of Default shall have
occurred and be continuing before and immediately after giving effect to this
Amendment.
DCI CAPITAL EXPENDITURES. Notwithstanding anything contained in this Amendment
or in the Loan Agreement to the contrary, Holder and Companies hereby agree that
no Company shall make any DCI Capital Expenditures, or incur any DCI Capitalized
Lease Obligations, during the Companies' 2003 fiscal year in an aggregate
amount, with respect to all Companies, in excess of $225,000.
CONSENT UNDER INTERCREDITOR AGREEMENT. Holder hereby consents to the execution
and delivery of the CIT Amendment by CIT and the Companies, to the extent such
consent is required pursuant to the terms of the Intercreditor Agreement.
SEVERABILITY. Any provision of this Amendment held by a court of competent
jurisdiction to be invalid or unenforceable shall not impair or invalidate the
remainder of this Amendment and the effect thereof shall be confined to the
provision so held to be invalid or unenforceable.
REFERENCES. Any reference to the Loan Agreement contained in any document,
instrument or agreement executed in connection with the Loan Agreement shall be
deemed to be a reference to the Loan Agreement as modified by this Amendment.
COUNTERPARTS. This Amendment may be executed in one or more counterparts, each
of which shall constitute an original, but all of which taken together shall be
one and the same instrument.
RATIFICATION. The terms and provisions set forth in this Amendment shall modify
and supersede all inconsistent terms and provisions of the Loan Agreement and
shall not be deemed to be a consent to the modification or waiver of any other
term or condition of the Loan Agreement. Except as expressly modified and
superseded by this Amendment, the terms and provisions of the Loan Agreement are
ratified and confirmed and shall continue in full force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly
executed and delivered by their respective duly authorized officers on the date
first written above.
SIMULA, INC.,
an Arizona corporation
By /s/ John A. Jenson
------------------------------------
Its Chief Financial Officer
------------------------------------
THE SUBSIDIARIES OF SIMULA, INC.:
AI CAPITAL CORP.,
an Arizona corporation
By /s/ Mari I. Valenzuela
------------------------------------
Its Secretary
------------------------------------
D-54
CCEC CAPITAL CORP.,
an Arizona corporation
By /s/ Mari I. Valenzuela
------------------------------------
Its Secretary
------------------------------------
INTERNATIONAL CENTER FOR SAFETY EDUCATION, INC.,
an Arizona corporation
By /s/ Mari I. Valenzuela
------------------------------------
Its Secretary
------------------------------------
SAI CAPITAL CORP.,
an Arizona corporation f/k/a Simula Artcraft
Industries, Inc.
By /s/ Mari I. Valenzuela
------------------------------------
Its Secretary
------------------------------------
SIMULA AUTOMOTIVE SAFETY DEVICES, INC.,
an Arizona corporation
By /s/ Mari I. Valenzuela
------------------------------------
Its Secretary
------------------------------------
SIMULA COMPOSITES CORPORATION,
a Delaware corporation
By /s/ Mari I. Valenzuela
------------------------------------
Its Secretary
------------------------------------
SIMULA POLYMER SYSTEMS, INC.,
an Arizona corporation
By /s/ Mari I. Valenzuela
------------------------------------
Its Secretary
------------------------------------
SIMULA AEROSPACE & DEFENSE GROUP, INC.,
an Arizona corporation f/k/a Simula Safety Systems, Inc.
By /s/ Mari I. Valenzuela
------------------------------------
Its Assistant Secretary
------------------------------------
D-55
SIMULA TECHNOLOGIES, INC.,
an Arizona corporation
By /s/ Mari I. Valenzuela
------------------------------------
Its Secretary
------------------------------------
SIMULA TRANSPORTATION EQUIPMENT CORPORATION,
an Arizona corporation
By /s/ Mari I. Valenzuela
------------------------------------
Its Secretary
------------------------------------
SIMULA AUTOMOTIVE SAFETY DEVICES, LTD.,
a United Kingdom limited company
By /s/ Mari I. Valenzuela
------------------------------------
Its Secretary
------------------------------------
HOLDER:
ALLIED CAPITAL CORPORATION
By /s/ Peter Fidler
------------------------------------
Its Vice President
------------------------------------
D-56
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
333-85158, 333-74440, 333-42972, 333-57541, 333-22989, 333-14021 and 33-93928 of
Simula, Inc. on Form S-8 of our report dated March 21, 2003, except for Notes 7
and 8, as to which dates are March 25, 2003 and April 9, 3003 (which report
expresses an unqualified opinion and includes an explanatory paragraph relating
to the Simula, Inc.'s ability to continue as a going concern), appearing in this
Annual Report on Form 10-K of Simula, Inc. for the year ended December 31, 2002.
DELOITTE & TOUCHE LLP
Phoenix, Arizona
April 15, 2003
D-57
SIMULA, INC.
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report.........................................................................F-2
Consolidated Balance Sheets as of December 31, 2002 and 2001.........................................F-3
Consolidated Statements of Operations for each of the three years ended December 31, 2002.........F-4
Consolidated Statements of Shareholders' Deficit and Comprehensive Loss
for each of the three years ended December 31, 2002..........................................F-5
Consolidated Statements of Cash Flows for each of the three years ended December 31, 2002...F-6 - F-7
Notes to Consolidated Financial Statements....................................................F-8 - F-25
F-1
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, 2002 and 2001, and the related
consolidated statements of operations, shareholders' deficit and comprehensive
loss, and cash flows for each of the three years in the period ended December
31, 2002. 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 auditing standards generally accepted
in the United States of America. 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, 2002 and 2001, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2002 in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the uncertainty relating to the Company's ability to
refinance certain of its debt raises substantial doubt about its ability to
continue as a going concern. Management's plans concerning these matters are
also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Deloitte & Touche LLP
March 21, 2003, except for Notes 7 and 8, as to which dates are March 25, 2003
and April 9, 2003
Phoenix, Arizona
F-2
SIMULA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
----------------------------------------------------------------------------------------------------
2002 2001
------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 212,053 $ 362,319
Contract and trade receivables - Net (including costs and estimated
earnings in excess of billings of $14,216,255 and $10,620,110,
respectively) 27,381,930 26,441,295
Inventories 5,767,604 7,384,222
Deferred income taxes -- 2,596,000
Prepaid expenses and other 1,704,873 915,547
------------ ------------
Total current assets 35,066,460 37,699,383
PROPERTY, EQUIPMENT, and LEASEHOLD IMPROVEMENTS -Net 11,773,247 10,545,449
DEFERRED INCOME TAXES -- 34,985,000
DEFERRED FINANCING COSTS 2,419,054 4,059,630
INTANGIBLES - Net 3,534,478 3,333,896
OTHER ASSETS 2,086,245 2,029,933
------------ ------------
TOTAL $ 54,879,484 $ 92,653,291
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
Revolving line of credit $ 11,283,393 $ 11,488,639
Trade accounts payable 6,170,585 6,972,576
Other accrued liabilities 9,247,644 8,394,234
Deferred revenue 898,503 1,540,247
Accrued restructuring costs 1,140,444 1,313,931
Liabilities of discontinued operations 20,672 --
Advances on contracts 940,752 2,049,645
Current portion of long-term debt 29,995,905 993,682
------------ ------------
Total current liabilities 59,697,898 32,752,954
DEFERRED REVENUE 489,582 1,367,002
DEFERRED LEASE COST 807,156 400,914
LONG-TERM DEBT - Less current portion 32,313,087 60,772,414
------------ ------------
Total liabilities 93,307,723 95,293,284
------------ ------------
SHAREHOLDERS' DEFICIT
Preferred stock, $.05 par value- authorized 50,000,000 shares;
none outstanding
Common stock, $.01 par value- authorized 50,000,000 shares;
issued 13,014,395 and 12,892,858 respectively 130,144 128,929
Additional paid-in-capital 62,715,713 62,412,546
Accumulated deficit (97,412,584) (63,377,118)
Accumulated other comprehensive loss (3,861,512) (1,804,350)
------------ ------------
Total shareholders' deficit (38,428,239) (2,639,993)
------------ ------------
TOTAL $ 54,879,484 $ 92,653,291
============ ============
See notes to consolidated financial statements.
F-3
SIMULA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE YEARS ENDED DECEMBER 31, 2002
----------------------------------------------------------------------------------------------------------------
2002 2001 2000
--------------- --------------- ---------------
Revenue $ 114,553,968 $ 106,794,159 $ 97,295,471
Cost of revenue 74,555,569 70,294,828 65,224,828
--------------- --------------- ---------------
Gross margin 39,998,399 36,499,331 32,070,643
Administrative expenses 18,515,624 16,907,571 20,163,228
Research and development 5,108,172 4,775,966 4,659,875
Restructuring charges 851,465 367,000 375,000
Executive severance expense -- 473,000 2,222,619
Write-off of long-lived assets 417,449 -- 4,167,386
Loss on sale of assets -- 543,000 --
--------------- --------------- ---------------
Operating income (loss) 15,105,689 13,432,794 482,535
Interest expense, net (10,438,307) (10,350,188) (9,974,864)
--------------- --------------- ---------------
Income (loss) before income taxes, discontinued operations
and extraordinary items 4,667,382 3,082,606 (9,492,329)
Income tax (expense) benefit (38,355,848) (1,933,000) 2,584,000
--------------- --------------- ---------------
(Loss) income before discontinued operations and
extraordinary items (33,688,466) 1,149,606 (6,908,329)
(Loss) income from discontinued operations, net of related
income tax benefit (expense) of $303,000 and ($751,000) (347,000) -- 879,000
Extraordinary (loss) gain on early retirement of debt, net of
related income tax benefit (expense) of $1,633,000 and
($415,000) -- (2,182,900) 1,108,933
--------------- --------------- ---------------
Net loss (34,035,466) (1,033,294) (4,920,396)
Dividends on preferred stock -- -- 1,082,802
--------------- --------------- ---------------
Net loss attributable to common shareholders $ (34,035,466) $ (1,033,294) $ (6,003,198)
=============== =============== ===============
(Loss) income per common share - basic:
(Loss) income before discontinued operations and
extraordinary item $ (2.61) $ 0.09 $ (0.70)
(Loss) income from discontinued operations (0.03) -- 0.08
Extraordinary (loss) gain on early extinguishment of debt -- (0.18) 0.10
--------------- --------------- ---------------
Net loss $ (2.64) $ (0.09) $ (0.52)
=============== =============== ===============
(Loss) income per common share - diluted:
(Loss) income before discontinued operations and
extraordinary item $ (2.61) $ 0.09 $ (0.70)
(Loss) income from discontinued operations (0.03) -- 0.08
Extraordinary (loss) gain on early extinguishment of debt -- (0.17) 0.10
--------------- --------------- ---------------
Net loss $ (2.64) $ (0.08) $ (0.52)
=============== =============== ===============
See notes to consolidated financial statements.
F-4
SIMULA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT AND COMPREHENSIVE LOSS
THREE YEARS ENDED DECEMBER 31, 2002
------------------------------------------------------------------------------------------------------------------------------------
Accumulated
Common Stock Additional Other Total
------------------------
Paid-in Accumulated Comprehensive Shareholders' Comprehensive
Shares Amount Capital Deficit Loss Deficit Loss
------------ ----------- -------------- --------------- --------------- --------------- --------------
Balance, January 1, 2000 11,103,827 $ 111,038 $ 59,987,309 $(56,340,626) $ (382,815) $ 3,374,906
Net loss (4,920,396) (4,920,396) $ (4,920,396)
Issuance of common shares 180,584 1,806 323,151 324,957
Conversion of redeemable
convertible Series A
Preferred Stock and accrued
dividends thereon 905,600 9,056 1,298,095 1,307,151
Preferred Stock dividends (1,082,802) (1,082,802)
Minimum pension liability
adjustment (94,969) (94,969) (94,969)
Stock option compensation 129,726 129,726
Warrants repriced 407,000 407,000
Tax benefit from employee
stock option plans 4,000 4,000
Currency translation
adjustment (110,609) (110,609) (110,609)
------------ ----------- -------------- --------------- ---------------- --------------- -------------
Balance, December 31, 2000 12,190,011 121,900 62,149,281 (62,343,824) (588,393) (661,036) $ (5,125,974)
=============
Net loss (1,033,294) (1,033,294) $ (1,033,294)
Issuance of common shares,
net of expenses of $12,000 702,847 7,029 202,865 209,894
Minimum pension liability
adjustment (1,215,411) (1,215,411) (1,215,411)
Stock option compensation 79,400 79,400
Repurchase stock options (19,000) (19,000)
Currency translation
adjustment (546) (546) (546)
------------ ----------- -------------- --------------- ---------------- --------------- -------------
Balance, December 31, 2001 12,892,858 128,929 62,412,546 (63,377,118) (1,804,350) (2,639,993) $ (2,249,251)
=============
Net loss (34,035,466) (34,035,466) $(34,035,466)
Issuance of common shares 121,537 1,215 303,167 304,382
Minimum pension liability
adjustment (1,438,444) (1,438,444) (1,438,444)
Gain (loss) on cash flow
hedge (11,605) (11,605) (11,605)
Currency translation
adjustment (607,113) (607,113) (607,113)
------------ ----------- -------------- --------------- ---------------- --------------- -------------
Balance, December 31, 2002 13,014,395 $ 130,144 $ 62,715,713 $(97,412,584) $ (3,861,512) $(38,428,239) $(36,092,628)
============ =========== ============== =============== ================ =============== =============
See notes to consolidated financial statements.
F-5
SIMULA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
THREE YEARS ENDED DECEMBER 31, 2002
--------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
------------- ------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(34,035,466) $ (1,033,294) $ (4,920,396)
Adjustment to reconcile net loss to net cash from operating activities:
Depreciation and amortization 4,424,334 4,403,870 5,605,714
Deferred income taxes 37,581,000 2,000 (1,524,000)
Loss (gain) on disposal of discontinued operations 650,000 -- (1,630,000)
Currency translation adjustment (607,113) (546) (110,609)
Restructuring charge 851,465 367,000 375,000
Recovery of bad debts (132,934) -- --
Write-down of fixed assets and intangibles 417,449 -- 3,981,615
Loss (gain) on early extinguishment of debt -- 3,815,900 (1,523,933)
Non-cash equity compensation 149,886 79,400 129,727
Capitalized interest 1,535,096 365,246 463,952
Loss on disposal of assets 104,182 543,000 --
Changes in net assets and liabilities:
Contract and trade receivables - net of advances (1,916,594) (1,247,983) (1,257,718)
Inventories 1,616,618 (2,001,081) 1,613,431
Prepaid expenses and other (789,326) (183,159) (10,525)
Other assets (56,312) (1,122,396) (552,105)
Trade accounts payable (801,991) 1,174,121 (138,580)
Other accrued liabilities (587,322) (3,540,121) 408,467
Deferred revenue (1,519,164) (2,011,695) 2,632,271
Deferred lease costs 406,242 257,915 142,999
Restructuring reserve (1,024,952) (913,672) --
Liabilities of discontinued operations (629,328) -- --
Net assets held for sale -- -- (637,648)
------------- ------------- --------------
Net cash provided by (used in) operating activities 5,635,770 (1,045,495) 3,047,662
------------- ------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (3,714,952) (4,477,977) (1,231,275)
Costs incurred to obtain intangibles (1,028,134) (1,237,409) (1,009,338)
Proceeds from sale of property, equipment, and intangibles -- 861,848 12,326,521
------------- ------------- --------------
Net cash (used in) provided by investing activities (4,743,086) (4,853,538) 10,085,908
------------- ------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under line of credit (205,246) 6,159,210 (7,422,166)
New borrowings - net of expenses -- 22,515,546 --
Repayments under other debt arrangements (992,200) (23,350,376) (9,430,717)
Issuance of common shares - net of expenses 154,496 209,894 324,957
Preferred stock dividends -- -- (1,082,802)
Repurchased stock options -- (19,000) --
------------- ------------- --------------
Net cash (used in) provided by financing activities (1,042,950) 5,515,274 (17,610,728)
------------- ------------- --------------
NET DECREASE IN CASH (150,266) (383,759) (4,477,158)
CASH AT BEGINNING OF PERIOD 362,319 746,078 5,223,236
------------- ------------- --------------
CASH AT END OF PERIOD $ 212,053 $ 362,319 $ 746,078
============= ============= ==============
(Continued)
See notes to consolidated financial statements.
F-6
SIMULA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 2002
------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
------------- ------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid $6,823,953 $8,004,117 $7,541,143
============= ============ ============
Taxes paid $ 484,254 $ 140,827 $ 45,002
============= ============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Tax benefits from employee stock plans $ - $ - $ 4,000
============= ============ ============
In 2001, 608,734 shares of common stock were issued in exchange for an
outstanding stock warrant for 850,000 shares of common stock with an
exercise price of $1.625.
In 2000, a note payable in the amount of $800,000 was executed in Exchange for
the termination of our facility operating lease related to the airliner seat
operation which was disposed of in January 2000.
In 2000, a note payable was executed for the remaining balance of Purchased
intellectual property in the amount of $950,000.
In 2000, $1,301,756 of Series A Preferred Stock plus accrued Dividends of
$5,375 were exchanged for 905,600 shares of Common stock.
See notes to consolidated financial statements.
F-7
SIMULA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 2002
--------------------------------------------------------------------------------
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY -- Simula is a world-recognized safety technology company and
supplier of human safety and survival systems. We provide high-technology
products and services to all branches of the United States military, major
aerospace and defense prime contractors, international military forces, and
consumer markets. We have served the defense industry for almost 30 years. We
are a provider of military helicopter seating systems, aircraft and land vehicle
armor systems, protective equipment for military personnel, safety systems and
devices utilized in the automotive industry, and other technologies used in
commercial markets to protect humans in a variety of life-threatening or
catastrophic situations.
BASIS OF PRESENTATION -- The accompanying consolidated financial statements
have been prepared on a going concern basis, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business.
The consolidated financial statements do not include any adjustments relating to
recoverability and classification of recorded asset amounts and classification
of liabilities that might be necessary should the Company be unable to continue
as a going concern.
Current maturities of our debt as of December 31, 2002 are $41.3 million
and primarily consists of $11.3 million with our revolving line of credit
("RLC") due September 30, 2003, $3.2 million with our Senior Subordinated Notes
due September 30, 2003 and $26.6 million for our Senior Secured Note due
December 31, 2003. In order to meet future quarterly covenants and long-term
debt maturities we will need asset sales proceeds or recapitalization
transactions.
Throughout 2002, Simula was exploring its strategic options to address its
leverage issues including sale of assets or refinancing of the Company. In
December 2002, Company management added the sale or merger of the entire Company
as a potential strategy for dealing with the upcoming debt maturities in 2003.
We have retained investments bankers, structured a process, completed
preliminary steps, and have received considerable interest in pursuing a
transaction. In the event that the Company is successful in completing a sale,
merger or refinancing, the term of the new structure or financing would allow
the Company to refinance or repay the current debt. Because Simula's ability to
achieve the potential transactions cannot be assured the impact on liquidity
raises substantial doubt about the ability to continue as a going concern.
For the year ended December 31, 2002, Simula incurred a net loss of $34.0
million. This loss is due to the additional valuation allowance of $35.9 million
placed on our deferred tax assets in the fourth quarter of 2002. In the event
the Company cannot continue as a going concern, the deferred tax asset may not
be fully usable in the future and, therefore, the full valuation allowance was
recorded.
The consolidated financial statements include the accounts of Simula, Inc.
and its subsidiaries (collectively "we" and "our"). 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 us,
including those selected from acceptable alternatives.
a. Revenue - Revenues related to government contracts results principally
from 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 when management believes that costs
incurred materially differ from 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 determined that such losses will occur.
F-8
Revenue derived from the sale of commercial products is recognized when
persuasive evidence of an arrangement exists, delivery has occurred,
the fee is fixed and determinable and collectibility probable.
Generally, all of these conditions are met when the company ships
products to its customers. Revenue related to nonrefundable license
fees that are payable at the initiation of a licensing agreement are
recognized immediately in income when received or when collectibility
is reasonably assured, provided that there are no future obligations or
performance requirements.
Revenue related to nonrefundable license fees that are payable at the
initiation of a licensing agreement are recognized immediately in
income when received or when collectibility is reasonably assured,
provided that there are no future obligations or performance
requirements. Nonrefundable license fees that are in essence, a
prepayment of future royalties, are recognized as revenue on a
straight-line basis over the term of the initial license.
b. Concentration of Credit Risk - Financial instruments which potentially
subject the Company to concentrations of credit risk consist
principally of contract and trade accounts receivable. The U.S.
military comprise a significant portion of our Aerospace and Defense
segment customer base. Contracts and accounts receivable from the U.S.
Military at December 31, 2002 were approximately $10.6 million and at
December 31, 2001 were $10.0 million. We have performed work for the
U.S. military since 1975. The work performed is procured from virtually
all branches of the military on numerous individual contract awards.
Historically we have not experienced significant bad debts.
c. Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions. These estimates and
assumptions 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.
d. 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.
e. Asset impairment - We review the carrying value of our long-lived
assets and identifiable intangibles for possible impairment whenever
events or changes in circumstances indicate that the carrying amounts
may not be recoverable in accordance with the provisions of Statement
of Financial Accounting Standard ("SFAS") No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." Impairment losses, if
any, are recorded as a component of earnings from operations.
f. Derivative instruments - On January 1, 2001, we adopted SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", which
establishes accounting and reporting standards requiring us to
recognize derivatives as either assets or liabilities on the balance
sheet and to measure those instruments at fair value. The adoption of
SFAS No. 133 did not have a material impact on our financial position
or results of operations. We use derivatives to manage exposures to
foreign currency fluctuations. The only type of derivative we use is
foreign currency contracts. Our objective for holding these forward
contracts are to decrease the potential volatility of earnings and cash
flows associated with changes in foreign currency exchange rates (See
Note 13).
g. Stock based compensation - We have three stock-based employee
compensation plans, which are described more fully in Note 10. We
account for those plans under the recognition and measurement
principles of APB Opinion No. 25, "Accounting for Stock Issued to
Employees", and related Interpretations. Accordingly, compensation
expense in the amount of $79,400 for the year ended 2001 and $129,726
for the year ended 2000, has been recognized in relation to fully
vesting option grants, which were unvested at the time of resignation
of certain executive management. No other stock-based employee
compensation cost is reflected in net income, as all options granted
under those plans had an exercise price equal to the market value of
the underlying common stock on the date of grant. The following table
illustrates the effect on net
F-9
income and earnings per share if we had applied the fair value
recognition provisions of FASB Statement No. 123, "Accounting for
Stock-Based Compensation", to stock-based employee compensation for the
three years ended December 31, 2002:
2002 2001 2000
------------------ ---------------- -----------------
Net loss - as reported $ (34,035,466) $ (1,033,294) $ (6,003,198)
================== ================ =================
Deduct: Total stock based employee compensation
expense determined under fair value based
method for all awards (1,288,701) (379,176) (2,158,191)
------------------ ---------------- -----------------
Net loss - pro forma $ (35,324,167) $ (1,412,470) $ (8,161,389)
================== ================ =================
Loss per share - basic and diluted - as reported $ (2.63) $ (0.09) $ (0.52)
================== ================ =================
Loss per share - basic and diluted - pro forma $ (2.73) $ (0.11) $ (0.71)
================== ================ =================
The estimated fair value of options granted during 2002, 2001 and
2000 was $2.15, $1.26, and $2.30 respectively, per share. The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes options pricing model and the following table illustrates
the assumptions used for grants for the three years ended December
31,2002:
2002 2001 2000
------------------ ---------------- ---------------
Dividend yield None None None
Expected volatility 98% 68% 74%
Risk-free interest rate 3.6% 4.2% 5.5%
Expected lives 3.25 3.25 3.25
h. 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 relieved from inventory
using the first-in first-out method.
i. Property, equipment and leasehold improvements are stated at cost, net
of accumulated depreciation and impairment write-downs pursuant to SFAS
No. 144. 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 buildings and
equipment is calculated on a straight-line basis. Listed below are the
ranges of useful lives by property and equipment category:
Buildings 30 years
Equipment 3 to 7 years
j. Intangibles are recorded at cost, net of accumulated amortization and
impairment write-downs pursuant to SFAS No. 144. We acquire intangible
assets in the normal course of business. Intangibles are amortized on a
straight-line basis over 7 to 20 years.
k. Deferred financing costs are amortized over the life of the related
debt using the effective interest method.
l. Research and Development - We perform internal research and development
activities as well as research and development activities contracted by
our customers. Research and development costs are expensed as incurred.
Research and development costs of customer contracted research and
development activities are included in cost of goods sold.
m. Income taxes are accounted for under the provisions of SFAS No. 109,
"Accounting for Income Taxes." SFAS 109 requires recognition of
deferred tax assets and liabilities for the estimated future tax
consequences of events attributable to differences between the
financial statement carrying amounts of existing assets and liabilities
and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates in effect for the year in which the
F-10
differences are expected to be recovered or settled. Net deferred tax
assets are reduced through the establishment of a valuation allowance
at such time as, based upon available evidence, it is more likely than
not that the deferred tax assets will not be realized. At December 31,
2002, we established a full valuation allowance for all remaining
deferred tax assets.
n. (Loss) earnings per common share - SFAS No. 128, "Earnings Per Share,"
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. Basic earnings per share
amounts, for the year ended December 31, 2002, are calculated using the
weighted average outstanding shares of 12,926,967. Diluted earnings per
share amounts, for the year ended December 31, 2002, does not include
the effect of 227,142 weighted average outstanding shares related to
stock options to purchase common stock and does not include the effect
of 1,774,074 shares of common stock to be issued upon conversion of the
8% Notes because the result would be anti-dilutive. Earnings per share
amounts for the years ended December 31, 2001 and 2000 are calculated
using weighted average outstanding shares of 12,299,996 and 11,450,810,
respectively. Diluted earnings per share amounts, for the year ended
December 31, 2001, include the effect of 381,893 weighted average
outstanding shares related to stock options and warrants to purchase
common stock and does not include the effect of 1,774,074 shares of
common stock to be issued upon conversion of the 8% Notes because the
result would be anti-dilutive. Options and stock warrants to purchase
common stock and shares to be issued upon conversion of the 8% Notes
totaling 7,134,621 for the year ended December 31, 2000 were not used
for computing diluted earnings per share because the results would be
anti-dilutive.
o. New accounting pronouncements - In April 2002, the Financial Accounting
Standards Board ("FASB") issued SFAS 145, "Rescission of FASB
Statements No. 4, 44 and 64, amendment of FASB Statement No.13, and
Technical Corrections", which, among other things, no longer allows for
the classification of gains and losses from extinguishment of debt as
extraordinary. We will adopt SFAS No. 145 effective January 1, 2003 and
upon adoption, gains and losses on certain future debt extinguishment,
if any, will be recorded in pre-tax income. In addition, the $2.2
million extraordinary loss and the $1.1 million extraordinary gain from
early extinguishment of debt for the years ended December 31, 2001 and
2000, respectively, will be reclassified to income before extraordinary
loss to conform to the requirements under SFAS 145.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities", which addresses financial
accounting and reporting for costs associated with exit or disposal
activities. SFAS No. 146 also nullifies Emerging Issues Task Force
("EITF") No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)". SFAS No. 146 is effective
for exit or disposal activities initiated after December 31, 2002, with
early application encouraged. We will adopt SFAS No. 146 effective
January 1, 2003 and do not anticipate that the new standard will have a
material impact on our financial position or results of operations.
In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." This
Interpretation addresses the disclosures to be made by a guarantor in
its financial statements and its obligations under guarantees. The
Interpretation also clarifies the requirements related to the
recognition of a liability by the guarantor at the inception of a
guarantee. Per the interpretation, initial recognition of a liability
shall be applied only on a prospective basis to guarantees issued or
modified after December 31, 2002. We have adopted the disclosure
provisions of the interpretation as of December 31, 2002, as discussed
in Note 14, concerning our guarantees on certain leases.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation--Transition and Disclosure". This Statement
amends SFAS No. 123 to provide alternative methods of transition for a
voluntary change to the fair value method of accounting for stock-based
employee compensation. Specifically, SFAS No. 148 prohibits companies
from utilizing the prospective method of
F-11
transition, the only method offered under the original SFAS No. 123, in
fiscal years beginning after December 15, 2003. However, the statement
permits two additional transition methods for companies that adopt the
fair value method of accounting for stock-based compensation, which
include the modified prospective and retroactive restatement methods.
Under the prospective method, expense is recognized for all employee
awards granted, modified, or settled after the beginning of the fiscal
year in which the recognition provisions are first applied. The
modified prospective method recognizes stock-based employee
compensation cost from the beginning of the fiscal year in which the
provisions are first applied, as if the fair value method had been used
to account for all employee awards granted, modified, or settled in
fiscal years beginning after December 15, 1994. Under the retroactive
restatement method, all periods presented are restated to reflect
stock-based employee compensation cost under the fair value method for
all employee awards granted, modified, or settled in fiscal years
beginning after December 15, 1994. In addition, this Statement amends
the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the
effect of the method used on reported results using a prescribed
specific tabular format and requiring disclosure in the "Summary of
Significant Accounting Policies" or its equivalent. We have adopted the
new disclosure requirements for 2002, and are currently evaluating the
impact if we were to adopt the fair value method of accounting for
stock-based employee compensation under all three methods.
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 under the terms of the contract the 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. 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:
2002 2001
-------------- --------------
United States Government:
Billed receivables $ 3,956,426 $ 6,857,997
Cost and estimated earnings in excess of billings 11,188,928 6,454,932
-------------- --------------
Total United States Government 15,145,354 13,312,929
-------------- --------------
Other contracts:
Billed receivables 1,503,283 2,341,534
Costs and estimated earnings in excess of billings 3,027,327 4,165,178
-------------- --------------
Total other contracts 4,530,610 6,506,712
-------------- --------------
Other trade receivables 7,810,966 6,858,654
Less allowance for doubtful accounts (105,000) (237,000)
-------------- --------------
Contract and trade receivables - net $ 27,381,930 $ 26,441,295
============== ==============
Activity in the allowance for doubtful accounts for the year ended December 31:
2002 2001 2000
-------------- -------------- --------------
Allowance for doubtful accounts beginning balance $ (237,000) $ (423,000) $ (200,000)
Provision (477,000) (237,000) (250,000)
Usage 329,000 403,000 27,000
Recoveries 280,000 20,000 --
-------------- ------------------------------
Allowance for doubtful accounts ending balance $ (105,000) $ (237,000) $ (423,000)
============== ============== ==============
F-12
3. INVENTORIES
At December 31, inventories consisted of the following:
2002 2001
---------------- ----------------
Raw materials $ 4,420,174 $ 5,330,934
Work in progress 774,822 1,717,528
Finished goods 844,557 357,738
Inventory reserve (271,949) (21,978)
---------------------------------
Total Inventories $ 5,767,604 $ 7,384,222
================ ================
4. PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
At December 31, property, equipment and leasehold improvements consisted of the following:
2002 2001
---------------- -----------------
Land $ 816,888 $ 816,888
Buildings and leasehold improvements 4,593,765 4,585,152
Equipment 20,508,363 17,471,592
---------------- -----------------
Total 25,919,016 22,873,632
Less accumulated depreciation and amortization (14,145,769) (12,328,183)
---------------- -----------------
Property, equipment and leasehold improvements - net $ 11,773,247 $ 10,545,449
================ =================
5. INTANGIBLES
In January 2002, we adopted Statement of Financial Accounting Standards
(SFAS) No. 142 "Goodwill and Other Intangible Assets." SFAS No. 142 specifies
that goodwill and certain intangible assets with indefinite lives no longer be
amortized but instead be subject to periodic impairment testing. Intangible
assets with finite lives will continue to be amortized over their respective
useful lives and will be tested for impairment in accordance with SFAS No. 144
"Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144,
adopted January 1, 2002, supersedes SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the
accounting and reporting provisions of Accounting Principles Board (APB) Opinion
No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions."
All of our intangible assets with finite lives ranging from 15 to 20 years
were principally comprised of technology patents with a total cost at December
31 as follows:
2002 2001
--------------- -----------------
Patents and licenses $ 4,194,603 $ 3,695,462
Other 566,010 577,148
--------------- -----------------
Total 4,760,613 4,272,610
Less accumulated amortization (1,226,135) (938,714)
--------------- -----------------
Intangibles - net $ 3,534,478 $ 3,333,896
=============== =================
Intangible asset amortization expense for the year ended December 31, 2002 and
2001 was approximately $287,000 and $259,000, respectively. Estimated
amortization expense for the five succeeding fiscal years is as follows:
2003 $ 336,000
2004 336,000
2005 336,000
2006 336,000
2007 336,000
6. DEFERRED REVENUE
In connection with a Settlement Agreement reached with Autoliv in September
2000, we licensed certain technologies related to our automotive airbag
business. In exchange for these licenses, we received $7.0 million, of which
approximately $0.7 million was applied against royalties earned and unpaid under
our previous marketing and license agreement with Autoliv, $3.0 million was
recognized as technology revenue in September 2000 and $3.3 million was deferred
and will be recognized into revenue on a straight-line basis over three years.
In addition, we
F-13
received $3.0 million in prepayments to be applied to product delivered in the
future. Deferred license revenue was $827,008 at December 31, 2002 and was
$1,929,676 at December 31, 2001. Prepaid product was $0 at December 31, 2002 and
was $377,571 at December 31, 2001.
Other deferred revenue consists of amounts received or receivable in
connection with nonrefundable license fees which are required to be recognized
over the term of the underlying license agreement. Other deferred revenue as of
December 31, 2002 and 2001 was $540,000 and $600,000, respectively. Other
deferred revenue will be recognized in revenue on a straight-line basis over the
next nine years.
7. REVOLVING LINE OF CREDIT
On December 31, 1999, we executed a Financing Agreement with an asset-based
lender which provided for a $17,000,000 revolving line of credit ("RLC") and a
$5,000,000 Senior Secured term note payable. The $5,000,000 Senior Secured term
note was subsequently repaid with the proceeds received from the sale of our
airline seat manufacturing operation in February 2000. The RLC accrues interest
at the Chase Manhattan prime rate or LIBOR plus 2.4% based upon the rate we
select, matures September 30, 2003 and renews automatically unless terminated by
either party with proper notice.
Our availability under the RLC is dependent upon the relative balances of
trade accounts receivable, contract costs and estimated earnings in excess of
billings and inventories and each of their relative advance percentages and
advance limits. During the third quarter 2001, we amended our RLC to increase
the advance rate related to contract costs and estimated earnings in excess of
billings from 15% to 40% subject to a maximum advance limit of $3.5 million.
This maximum advance limit was subject to a subsequent reduction of $0.5 million
each quarter beginning with December 2001, until it was reduced to its original
advance limit of $1.5 million in September 2002. During the first quarter 2002,
we amended our RLC to increase the amount we are limited to incur in annual
operating lease commitments effective for our fiscal year ending December 31,
2001. Also during the third quarter of 2002 we again modified and amended
certain provisions of the RLC to increase the costs and revenues in excess of
billing loan cap back to $3.5 million with scheduled reductions of $0.5 million
quarterly commencing January 1, 2003. At December 31, 2002, the RLC had an
outstanding balance of $11.3 million with an average interest rate of 5.25% and
additional borrowing availability of $1.3 million. At December 31, 2001, the RLC
had an outstanding balance of $11.5 million with an average interest rate of
5.5% and additional borrowing availability of $3.7 million.
The Financing Agreement contains covenants that require the maintenance of
certain defined financial ratios and income and limits additional borrowings and
capital expenditures. On March 25, 2003, we completed an amendment for certain
provisions of the RLC to increase allowable capital expenditures for the fourth
quarter 2002. Additionally, due to the increase in the deferred tax asset
valuation allowance previously discussed, the Company was not in compliance with
the net income covenant for the fourth quarter 2002. On April 9, 2003 we
received a waiver for this technical, non-monetary default. During the first
quarter of 2003, Simula was in technical, non-monetary default of certain
monthly covenants with its RLC. We are currently negotiating for waivers for the
covenant non-compliance and anticipate successful resolution.
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 may be
assessed. The Financing Agreement, as amended, provides for an early termination
fee of 1.75% if terminated prior to September 30, 2002 and 1% if the early
termination occurs thereafter. The Financing Agreement is secured by a lien on
substantially all of our assets and is subject to a intercreditor agreement with
the holder of the Senior Secured Note.
8. LONG-TERM DEBT
Long-term debt at December 31 consisted of the following:
2002 2001
---------------- ----------------
Senior Secured $ 26,551,535 $ 25,016,439
8% Senior Subordinated Convertible Notes 31,135,000 31,135,000
9 1/2% Senior Subordinated Notes 3,238,000 3,238,000
F-14
Loans payable, secured by property and equipment - 778,178
Mortgage note payable, secured by land and buildings 939,771 970,266
Loan payable, unsecured 437,096 590,071
Obligations under capital leases (Note 13) 7,590 38,142
---------------- ----------------
Total 62,308,992 61,766,096
Less current portion (29,995,905) (993,682)
---------------- ----------------
Long-term debt $ 32,313,087 $ 60,772,414
================ ================
On September 26, 2001, we completed a financing with an accredited investor
of $25,000,000 in a Senior Secured Note due December 31, 2003. The financing
allowed us to repay the lender under our previous Term Notes for which we had
been in non-monetary default since December 31, 2000. In connection with the
repayment of this debt, an extraordinary loss on early extinguishment of debt of
$2,182,900, net of an income tax benefit of $1,633,000, has been recorded. The
pre-tax extraordinary loss of $3,815,900 included pre-payment penalties and
interest charges of $1,361,590 and unamortized deferred finance fees and loan
discounts totaling $2,454,310.
The $25,000,000 Senior Secured Note accrues interest payable quarterly at
12.5% and accrues principal in kind ("PIK") interest at 6%, which at our option
may be paid quarterly, provided we are in compliance with certain covenants, or
capitalized into the note balance. The PIK rate may also be reduced as our
leverage ratio is reduced. The PIK rate was 6% throughout 2002. At December 31,
2002, due to addition of PIK each quarter, the balance of the note was
$26,551,535. The Senior Secured Note contains covenants that require the
maintenance of certain defined financial ratios and limits additional borrowings
and capital expenditures. In addition to other remedies, the Senior Secured Note
provides for a fee of $1,000,000 if we are unable to meet our debt leverage
ratio requirement as of June 30, 2003. On March 25, 2003, we completed an
amendment for certain provisions of the Senior Secured Note to increase allowed
capital expenditures for the fourth quarter 2002. The Senior Secured Note is
secured by a lien on substantially all of our assets and is subject to a
intercreditor agreement with our asset based lender under the RLC.
In 1997, we completed a public offering of $34.5 million of 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 our common stock at a price of $17.55 per share of
common stock. The 8% Notes may be redeemed at our 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. In August,
September and October 2000, we repurchased in the open market 8% Notes totaling
$3,365,000 at an average discount of 45%, resulting in a pre-tax gain on early
extinguishment of debt net of transaction costs of $1,523,933.
In 1998, we completed a private placement to accredited investors of
$3,238,000 of our 9 1/2% Senior Subordinated Notes (the "9 1/2% Notes") and
received proceeds of $1,025,000 and exchanged $2,213,000 of our 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 our 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 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, we 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 9 1/2% Notes and the 8% Notes become
due upon successful acceleration of $10 million or more in senior debt. We were
in compliance with all of the covenants of this indenture at December 31, 2002.
The mortgage note payable of $939,771 relates to our 55,000 square foot office
and manufacturing facility in Asheville, North Carolina. In connection with the
move of operations to Phoenix, we completed a sales transaction of this facility
on April 8, 2003.
F-15
The loans payable, secured by property and equipment with a zero balance at
December 31, 2002, listed above related to the manufacturing facility in
Ashington, England and a note for purchased technology. Both balances were paid
off in 2002.
In August 2000, we executed an agreement to purchase certain intellectual
property in exchange for $350,000 paid in cash and the issuance of a $950,000
note payable. The note payable provided for principal payments on December 31,
2000, June 29, 2001 and June 28, 2002 of $500,000, $250,000 and $200,000,
respectively, each with accrued interest earned thereon. The interest earned
under this note accrued at the SunTrust Bank of St. Petersburg prime rate plus
3.5%. At December 31, 2002, no outstanding balance remains on this note.
In June 2000, we executed a note payable in the amount of $800,000 in
exchange for the termination of one of our facility operating leases related to
the airline new seat manufacturing operation, which was disposed of in January
2000. The note requires payments of monthly principal and interest at 8% of
approximately $16,000 and matures in June 2005 and is unsecured. At December 31,
2002, approximately $437,000 remains unpaid on this note.
The aggregate principal payments required for the five years subsequent to
December 31, 2002 are presented in the table below.
2003 $ 29,995,905
2004 31,350,123
2005 962,964
----------------
Total $ 62,308,992
================
Interest expense for the year ended December 31 is comprised of the
following:
2002 2001 2000
--------------- --------------- ---------------
Interest $ 8,353,701 $ 8,167,092 $ 7,234,201
Amortization of deferred financing costs 2,084,606 2,183,096 2,740,663
--------------- --------------- ---------------
Interest expense $ 10,438,307 $ 10,350,188 $ 9,974,864
=============== =============== ===============
Based on borrowing rates currently available to us and quoted market prices
for the 8% Notes, the fair value of long-term debt at December 31, 2002 is
approximately $55,567,461.
9. REDEEMABLE CONVERTIBLE PREFERRED STOCK
In 1999, we completed a private placement to an accredited investor of $7.5
million of Series A Convertible Preferred Stock (the "Series A"). The Series A
had a dividend rate of 6% per annum payable quarterly in cash, or in stock
valued at 90% of fair market value at the time of payment. The Series A also
provided for a mandatory redemption of the remaining outstanding shares on May
1, 2004.
During the year ended December 31, 2000, $2,250,000 of the Series A
Preferred Stock plus accrued dividends of $5,375 were tendered for conversion
into common stock. As a result of the common share conversion limit of 1,982,681
shares, we could satisfy the conversion of $1,307,151 and issued 905,600 shares
of common stock and we were not able to convert $952,772 of the tendered
preferred stock and accrued dividends into shares of our common stock. In
accordance with the provisions of the Preferred Stock Securities Purchase
Agreement, we were required to redeem the remaining balance of tendered
preferred stock and accrued dividends in accordance with the redemption formula
and paid the holder $1,934,831.
10. STOCK OPTIONS AND STOCK PLANS
In 1992, we 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, we adopted the 1994 Stock
Option Plan, as amended, which reserved up to 2,500,000 shares of common stock
for issuance under the Plan.
F-16
In June 1999, we adopted the 1999 Stock Option Plan which reserved up to
2,000,000 shares of common stock for issuance under the Plan and for which an
additional 450,000 shares of common stock were approved by the shareholders in
June 2001. Options granted under the 1994 and 1999 Plans as of December 31, 2002
were 4,820,410. Information with respect to the Plans is as follows:
WEIGHTED
AVERAGE
OPTION SHARES OPTION PRICE
----------------- -----------------
Outstanding at December 31, 1999 2,991,496 $ 10.06
Granted 1,532,150 $ 4.65
Canceled (14,899) $ 6.57
-----------------
Outstanding at December 31, 2000 4,508,747 $ 8.24
Granted 169,000 $ 2.57
Exercised (42,000) 1.46
Canceled (182,700) $ 12.14
-----------------
Outstanding at December 31, 2001 4,453,047 $ 7.87
Granted 353,000 $ 3.36
Exercised (5,500) $ 2.74
Canceled (113,333) $ 7.18
-----------------
Outstanding at December 31, 2002 4,687,214 $ 7.54
=================
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 on the date of
grant, or 85% of fair market value in the case of non-statutory options. As of
December 31, 2002, 2001 and 2000, exercisable options were 4,473,714, 4,127,047,
and 3,875,297, respectively.
The following information, aggregated by option price ranges, is applicable to
options outstanding at December 31, 2002:
Range of exercise prices .........................................$1.31 - $8.187 $11.25 - $18.563
Shares outstanding in range ...................................... 3,324,264 1,362,950
Weighted-average exercise price .................................. $5.03 $13.65
Weighted-average remaining contractual life in years ............. 6.79 3.84
Shares currently exercisable ..................................... 3,110,764 1,362,950
Weighted-average exercise price of shares currently exercisable .. $5.08 $13.65
RESTRICTED STOCK PLAN - In 1992, we adopted the 1992 Restricted Stock Plan
authorizing us to issue to key employees an aggregate of 19,500 shares of common
stock. We have reserved 19,500 shares of common stock for issuance pursuant to
the Restricted Stock Plan, of which 4,623 shares have been awarded. As of
February 25, 2002, no further awards can be granted under this plan.
EMPLOYEE STOCK PURCHASE PLAN - On June 20, 1996, we adopted the Employee
Stock Purchase Plan (the "ESPP") to allow eligible employees to acquire shares
of common stock at periodic intervals, paid for with accumulated payroll
deductions over a six month offering period. A total of 400,000 shares of common
stock were initially reserved and in June 2001 an additional 200,000 shares of
common stock were reserved for issuance under the ESPP. The first offering
period under the ESPP began October 1, 1996.
11. BENEFIT PLANS
We have 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). We make
contributions to the Plan based upon actuarially determined amounts. Effective
July 1, 1999, we froze the Plan for new participants.
F-17
The Plan's funded status and amounts recognized in our balance sheet at
December 31 are as follows:
2002 2001
---------------- -----------------
Actuarial present value of benefit obligation:
Accumulated benefit obligation $ 7,159,456 $ 5,639,712
Effect of projected future compensation increases 1,288,616 866,876
---------------- -----------------
Projected benefit obligation 8,448,072 6,506,588
Plan assets at fair value 4,495,455 4,007,062
Contributions after measurement date 254,220 -
---------------- -----------------
Unfunded status 3,698,397 2,499,526
Unrecognized prior service cost (131,758) (140,770)
Unrecognized loss (4,230,783) (2,376,556)
Unrecognized transition liability 56,530 62,182
---------------- -----------------
Accrued benefit cost (607,614) 44,382
Additional minimum liability 3,017,395 1,588,268
---------------- -----------------
Accrued benefit liability 2,409,781 1,632,650
Intangible asset 132,669 141,986
Accumulated other comprehensive income adjustments 2,884,726 1,446,282
---------------- -----------------
Net amount recognized $ (607,614) $ 44,382
================ =================
Reconciliation of the Plan's projected benefit obligation is as follows:
2002 2001
---------------- ---------------
Projected benefit obligation at beginning of year $ 6,506,588 $ 5,378,909
Service Cost 461,635 496,371
Interest Cost 469,834 418,699
Actuarial gain 1,294,801 412,320
Benefits paid (284,786) (199,711)
---------------- -----------------
Projected benefit obligation at end of year $ 8,448,072 $ 6,506,588
================ =================
Reconciliation of the fair value of plan assets is as follows:
2002 2001
---------------- ---------------
Fair value of plan assets at beginning of year $ 4,007,062 $ 3,448,775
Employer contributions 1,411,314 1,327,760
Actual loss (383,915) (569,762)
Benefits paid (284,786) (199,711)
---------------- -----------------
Fair value of plan assets at end of year $ 4,749,675 $ 4,007,062
================ =================
Net periodic pension cost includes the following:
2002 2001 2000
---------------- -------------- ----------------
Service Cost $ 461,635 $ 496,371 $ 490,036
Interest Cost 469,834 418,699 338,861
Expected loss on assets (355,069) (314,211) (230,469)
Transition asset recognition (5,652) (5,652) (5,652)
Prior service cost 9,012 9,010 (12,298)
Net loss recognition 179,560 65,851 79,615
------------------ ---------------- ------------------
Net periodic pension cost $ 759,320 $ 670,068 $ 660,093
================== ================ ==================
Assumptions at December 31 used in the accounting for the Plan were as
follows:
2002 2001 2000
---------------- -------------- -------------
Discount or settlement rate 6.75% 7.25% 7.75%
Rate of increase in compensation levels 3.25% 3.25% 3.75%
Expected long-term rate of return on Plan assets 8.00% 8.00% 8.00%
The Plan's assets consist of money market accounts and investments in
common stocks, bonds and mutual funds. We also have a 401(k) plan for
substantially all employees. Employer contributions to the 401(k) plan were
$141,141, $106,613, and $90,683 for the years ended December 31, 2002, 2001 and
2000, respectively.
F-18
12. INCOME TAXES
The income tax (benefit) provision including amounts related to
discontinued operations and extraordinary items, for the years ended December 31
are as follows:
2002 2001 2000
----------------- --------------- -----------------
$ 471,848 $ 298,000 $ 106,000
Current
Deferred 37,581,000 2,000 (1,524,000)
----------------- ---------------- -----------------
Provision (benefit) for income taxes $ 38,052,848 $ 300,000 $ 1,418,000
================= ================ =================
2002 2001 2000
---------------- -------------- ---------------
Federal statutory income tax rate 34.0% 34.0% 34.0%
State income tax rate 3.4 24.8 1.5
Foreign tax paid 8.9 - -
Unutilized state tax losses - (18.0) (5.8)
Valuation reserve 769.6 (103.2) (7.5)
Tax credits and other 5.9 21.5 5.0
---------------- -------------- ---------------
Effective rate 821.8% (40.9)% 27.2%
================ ============== ===============
The provision for deferred income taxes consists of the following:
2002 2001 2000
------------------ ---------------- ----------------
Accruals and reserves $ 2,549,000 $ 1,314,000 $ 7,700,000
Depreciation and amortization expense 118,000 1,058,000 (36,000)
Net operating loss carryforward (711,000) (2,854,000) (9,650,000)
Minimum tax credit carryforwards (273,000) (273,000) (268,000)
Change in valuation allowance 35,898,000 757,000 730,000
------------------ ---------------- ----------------
Total $ 37,581,000 $ 2,000 $ (1,524,000)
=====================================================
The significant tax effected temporary differences comprising deferred
taxes at December 31 are as follows:
2002 2001
---------------- ------------------
Current:
Extraordinary loss $ (171,000) $ 320,000
Accrued vacation and self-insurance 257,000 353,000
Inventory and warranty reserves 12,000 240,000
Other 544,000 1,683,000
---------------- ------------------
Total current deferred tax asset 642,000 2,596,000
---------------- ------------------
Long-term:
Excess of tax over book depreciation and amortization (1,121,000) (1,003,000)
Net operating loss carryforwards 35,480,000 34,328,000
Minimum tax credit carryforwards 1,777,000 1,604,000
Deferred start-up costs 120,000 120,000
Other 634,000 1,570,000
---------------- ------------------
Total long-term deferred tax asset 36,890,000 36,619,000
---------------- ------------------
Valuation allowance (37,532,000) (1,634,000)
================ ==================
Net deferred tax asset $ - $ 37,581,000
================ ==================
Statement of Financial Accounting Standards No. 109 requires the recording
of a deferred tax asset valuation allowance if the weight of available evidence
indicates that some or all of the deferred tax asset is more likely than not to
be realized. As previously discussed, the Company has very significant debt
obligations becoming due during 2003. In December 2002, the Company announced
its strategy to provide for these debt maturities through either a refinancing
of existing debt or a sale or merger of the Company. As a result of the
uncertainty concerning the Company's ability to either obtain refinancing or
complete a sale or merger of the Company, which may provide the Company the
opportunity to utilize its deferred tax assets, the Company has increased its
allowance against its deferred tax assets by $35.9 million representing the
total balance of its deferred tax assets at December 31, 2002.
F-19
We increased our deferred tax valuation allowance $35.9 million in 2002,
$0.8 million in 2001 and $0.7 million in 2000. Valuation allowance increases in
2001 and 2000 were due to certain tax credits and operating loss carryforwards,
primarily related to states in which we no longer have operations, that were
unlikely to be utilized. As discussed earlier, in the event the Company cannot
continue as a going concern, the deferred tax asset may not be usable in the
future and, therefore, the full valuation allowance was recorded. At December
31, 2002, we had approximately $100 million of federal net operating loss
carryforwards which expire through 2022 and approximately $43.8 million of state
net operating loss carryforward, which expire through 2022.
13. COMMITMENTS AND CONTINGENCIES
We lease certain equipment under capital lease agreements and certain
facilities under noncancellable operating leases with various renewal options.
Leased assets of $100,534 and $119,745 (net of accumulated depreciation of
$63,165 and $57,043) are included in property and equipment as of December 31,
2002 and 2001, 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:
Capital Leases Operating Leases
------------------- -------------------
2003 $ 7,832 $ 2,159,149
2004 1,955,563
2005 1,791,433
2006 1,725,566
2007 1,587,043
Thereafter 4,802,285
------------------- -------------------
Total minimum lease payments 7,832 $ 14,021,039
===================
Less amounts representing interest (242)
-------------------
Present value of net minimum lease payments $ 7,590
===================
Rent expense was $2,635,295, $2,765,869, and $2,378,617 for the years ended
December 31, 2002, 2001 and 2000, respectively.
Aggregate operating lease commitments guaranteed total approximately
$50,000 at December 31, 2002 related to the disposal of the Company's rail and
mass transit business, which were settled subsequent to December 31, 2002.
From time to time we are involved in litigation in the ordinary course of
business. We presently are not a party to any threatened or pending litigation,
the negative outcome of which would be material to us.
DERIVATIVE INSTRUMENTS - We have certain receivables and payables
denominated in Euros. To eliminate our exposure to changes in the U.S.
dollar/Euro exchange rate, we have entered into forward contracts to protect our
future cash flows. Our forward contracts generally range from one to three
months in original maturity.
In accordance with SFAS No. 133, we designate such forward contracts as
cash flow hedges. We account for changes in the fair value of our forward
contracts, based on changes in the forward exchange rate, with all such changes
in fair value reported in other comprehensive income. Amounts in other
comprehensive income are reclassified into earnings upon settlement of the
forward contract at an amount that will offset the related transaction gain or
loss arising from the re-measurement and adjust earnings for the cost of the
forward contracts. During 2002, there were no significant gains or losses
recognized in earnings for hedge ineffectiveness and we did not discontinue any
hedges because it was probable that the original forecasted transaction would
not occur. We have eight open contracts through March 31, 2003 totaling
$3,856,944 as of December 31, 2002.
RETENTION AGREEMENTS - In contemplation of a potential sale, merger or
other transfer of the Company, we have entered into retention agreements ("the
agreements") with certain key employees whereby the Company agreed to pay either
a bonus payment, or a retention payment and insurance benefit under the terms
provided within the agreements. The potential range for the bonus or retention
payment is between $2.6 million and $3.2 million
F-20
14. DISCONTINUED OPERATIONS
Our board of directors adopted a plan to dispose of our rail and mass
transit seating operations in 1998. Accordingly, the operating results of this
operation, including a provision for loss upon disposition, was segregated from
continuing operations and was reported as discontinued operations.
On April 25, 2002, the purchaser of our rail and mass transit seating
business filed for Chapter 7 Bankruptcy. Although the purchaser assumed all
obligations at the time of the sale in August 1999, we remained liable as
guarantor under the facility lease and certain equipment operating leases.
During the year ended December 31, 2002, we recorded a reserve of $650,000 for
potential settlements of the facility and equipment leases under guarantees and
recorded a loss of $347,000, net of related taxes in discontinued operations. We
have reached an agreement on the principal leases and subsequent to December 31,
2002 negotiated settlements for the remaining guarantees. Such settlement was
included in the amount reserved at December 31, 2002.
In August 2000, we agreed to amend and restate the Asset Purchase and Sale
Agreement for our disposed rail and mass transit seating operation. The amended
and restated agreement adjusted the total sales price to $4,062,500 to be paid
in $2,000,000 cash and a promissory note in the amount of $2,062,500. The
promissory note provided for interest at 8 1/2% payable quarterly with the
outstanding principal and accrued interest due on August 31, 2004. The
$2,000,000 cash receipt was recorded as a recovery in discontinued operations
and the remaining note balance continued to be accounted for under the cost
recovery method of accounting. The $2,000,000 cash recovery, offset by
additional settlement charges of $370,000 resulted in a gain on disposal of
discontinued operations of $879,000, net of tax expense of $751,000, during the
year ended December 31, 2000.
Under the Asset Purchase and Sale Agreement, as amended and restated, as
noted above, we retained the liability for claims incurred through August 31,
1999 under its self-funded health insurance plan and have agreed to indemnify
the acquiring company for any customary warranty and litigation claims. In
January 2001, we entered into a Settlement Agreement and Release of Claims with
a prior customer in order to dispose of outstanding litigation and reduce legal
fees. The settlement agreement for the customer claims required us to pay
$815,000 in four equal installments of $203,750 plus accrued interest at 7 1/2%
beginning January 20, 2001. This obligation was satisfied at December 31, 2001.
In exchange for the settlement, we received dismissal of lawsuits with
prejudice, mutual release of liabilities and extinguishment of any future
warranty claims. There are no outstanding obligations under the self-funded
health insurance plan.
15. RESTRUCTURING AND OTHER CHARGES
In December 1999, we adopted a plan of restructuring that included the
divestiture of our commercial airline seat manufacturing operation. In 2000 and
2001 we incurred additional severance restructuring expense. In July 2002, we
adopted a plan of restructuring focused on reducing our workforce to align with
a newly developed strategic focus, and in December of 2002 we incurred
additional severance as we completed additional reductions and re-alignments. At
December 31, 2002, there was $1,140,444 of remaining liability, which
principally relates to lease obligations associated with the closed airline
facility and other contracts associated with the 1999 restructuring and
severance obligations associated with the 2002 restructuring.
A summary of the change in accrued restructuring for each of years ended
December 31 is as follows:
Facility Other
Closure Contracts Severance Total
------------ -------------- ------------- -------------
January 1, 2000 $ 3,542,000 $ 1,900,000 $ 1,300,000 $ 6,742,000
2000 restructuring -- -- 2,597,619 2,597,619
Cash payments (2,370,603) (1,327,885) (3,730,016) (7,428,504)
------------ -------------- ------------- -------------
Balance at December 31, 2000 1,171,397 572,115 167,603 1,911,115
2001 restructuring -- -- 940,000 940,000
Reversal of charges -- -- (100,000) (100,000)
Cash payments (337,466) (92,115) (1,007,603) (1,437,184)
------------ -------------- ------------- -------------
F-21
Balance at December 31, 2001 833,931 480,000 -- 1,313,931
2002 restructuring -- -- 851,465 851,465
Cash payments (298,646) (148,059) (578,247) (1,024,952)
------------ -------------- ------------- -------------
Balance at December 31, 2002 $ 535,285 $ 331,941 $ 273,218 $ 1,140,444
============ ============== ============= =============
During 2002, in addition to the charges in accrued restructuring, we wrote
off assets in the amount of $359,363 comprised of $48,266 and $311,097,
classified in write-off of long lived assets related to moving manufacturing for
our Automotive business to Mexico and the closing and subsequent sale of our
Asheville facility, respectively.
In November 2001, we sold the net assets of our commercial airline
soft-goods manufacturer and received cash consideration of $984,391 and
assumption of approximately $170,000 in liabilities and recognized a net loss on
the sale of $543,000. The commercial airline seat manufacturing operation had
sales of $3.7 million and operating losses of $.6 million during the year ended
December 31, 2000.
During the year ended December 31, 2000, we recorded additional charges
related to the write-down of certain long-lived assets. The write-down of
long-lived assets totaled $4.2 million and primarily represented assembly
equipment for our automotive airbag, which was no longer needed due to
technological changes in the raw material utilized in airbag production.
16. RESEARCH AND DEVELOPMENT
Our 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:
2002 2001 2000
----------------- ------------------ ------------------
Research and development expenses $ 5,108,172 $ 4,775,966 $ 4,659,875
================= ================== ==================
Funded contracts:
Revenue funded by customers $ 3,463,296 $ 6,261,472 $ 7,164,227
Research and development expenses classified as cost
of such revenue (2,834,540) (6,414,143) (9,296,957)
----------------- ------------------ ------------------
Income (loss) on funded contracts $ 628,756 $ (152,671) $ (2,132,730)
================= ================== ==================
17. SEGMENT REPORTING
Simula is a holding company for wholly owned subsidiaries, which operate in
two primary business segments. The Aerospace and Defense segment includes
operations that design and manufacture crash resistant components, energy
absorbing devices and ballistic armor principally for branches of the United
States armed forces. The Commercial Products segment in 2002 includes operations
encompassing inflatable restraints and related technology for automobiles,
products derived from our proprietary technology and polymer material and in
2001 and 2000 also includes the airline soft goods manufacturing operation. All
other activity, included in Other, represents general corporate operations,
including unallocated interest and technology sales and royalties.
For the years ended December 31, 2002, 2001 and 2000, inter-segment sales
were insignificant and total inter-company sales of $171,721, $1,217,412 and
$2,141,185, respectively, have been eliminated.
2002
----------------------------------------------------------------------------
AEROSPACE AND COMMERCIAL
DEFENSE PRODUCTS OTHER TOTAL
------------------ ----------------- ------------------ --------------------
Revenue:
Contract revenue $ 73,367,529 $ $ $ 73,367,529
Product sales:
Automotive safety systems 35,126,765 35,126,765
Other 2,966,417 2,966,417
Technology sales and royalties 1,141,523 1,951,734 3,093,257
F-22
------------------ ----------------- ------------------ --------------------
Total revenue $ 73,367,529 $ 39,234,705 $ 1,951,734 $ 114,553,968
================== ================= ================== ====================
Operating income (loss) $ 11,984,813 $ 4,150,099 $ (1,029,223) $ 15,105,689
Identifiable assets 30,496,164 16,281,218 8,102,102 54,879,484
Depreciation and amortization 994,624 1,094,730 2,334,980 4,424,334
Capital expenditures 954,792 1,944,990 815,170 3,714,952
Revenue from two major customers accounted for approximately 49% of total
revenue for the year ended December 31, 2002. Contract and trade receivables
from these customers accounted for approximately 43% of the total contract and
trade receivables at December 31, 2002. The Commercial Products segment
recognized revenue from Autoliv that accounted for approximately 20% of total
revenue. The Aerospace and Defense segment recognized revenue from all branches
of the United States Armed Forces that accounted for approximately 29% of total
revenue for the year ended December 31, 2002.
Our external sales based upon the customers' country of origin and investment in
long-lived assets by geographic area are as follows:
2002
--------------------------------------
LONG-LIVED
REVENUES ASSETS
------------------- ----------------
United States $ 72,592,253 $ 17,602,846
Germany 29,100,542
United Kingdom 6,013,123 2,210,178
Other foreign countries 6,848,050
------------------- -----------------
Total $ 114,553,968 $ 19,813,024
=================== =================
2001
----------------------------------------------------------------------------
AEROSPACE AND COMMERCIAL
DEFENSE PRODUCTS OTHER TOTAL
------------------- ------------------ -------------------- -------------------
Revenue:
Contract revenue $ 63,921,947 $ $ $ 63,921,947
Product sales:
Automotive safety systems 35,644,420 35,644,420
Other 5,527,313 5,527,313
Technology sales and royalties 115,231 1,158,912 426,336 1,700,479
----------------- ---------------- ----------------- -------------------
Total revenue $ 64,037,178 $ 42,330,645 $ 426,336 $ 106,794,159
================= ================ ================= ===================
Operating income (loss) $ 10,965,541 $ 3,776,993 $ (1,309,740) $ 13,432,794
Identifiable assets 31,831,627 15,296,580 45,525,084 92,653,291
Depreciation and amortization 1,054,235 983,692 2,365,943 4,403,870
Capital expenditures 3,290,908 1,173,823 13,246 4,477,977
Revenue from three major customers accounted for approximately 61% of total
revenue for the year ended December 31, 2001. Contract and trade receivables
from these customers accounted for approximately 46% of the total contract and
trade receivables at December 31, 2001. The Commercial Products segment
recognized revenue from Autoliv that accounted for approximately 28% of total
revenue for the year ended December 31, 2001. The Aerospace and Defense segment
recognized revenue from all branches of the United States Armed Forces and the
Naval Air Warfare Center which accounted for approximately 23% and 10%,
respectively, of total revenue for the year ended December 31, 2001.
F-23
Our external sales based upon the customers' country of origin and
investment in long-lived assets by geographic area are as follows:
2001
----------------------------------
LONG-LIVED
REVENUES ASSETS
---------------- ---------------
United States $ 62,117,511 $ 53,442,533
Germany 31,910,496
United Kingdom 5,178,285 1,511,375
Other foreign countries 7,587,867
---------------- -----------------
Total $ 106,794,159 $ 54,953,908
================ =================
2000
----------------------------------------------------------------------------
AEROSPACE AND COMMERCIAL
DEFENSE PRODUCTS OTHER TOTAL
------------------ ------------------ ----------------- --------------------
Revenue:
Contract revenue $ 50,577,337 $ $ $ 50,577,337
Product sales:
Automotive safety systems 32,942,835 32,942,835
Other 9,001,115 9,001,115
Technology sales and royalties 213,309 4,170,875 390,000 4,774,184
---------------- ------------------ ----------------- ---------------------
Total revenue $ 50,790,646 $ 46,114,825 $ 390,000 $ 97,295,471
================= ================== ================= =====================
Operating income (loss) $ 1,502,780 $ 2,931,395 $ (3,951,640) $ 482,535
Identifiable assets 27,012,059 14,047,323 44,839,020 85,898,402
Depreciation and amortization 1,143,121 2,022,605 2,439,988 5,605,714
Capital expenditures 498,669 642,055 90,551 1,231,275
Revenue from three major customers accounted for approximately 56% of total
revenue for the year ended December 31, 2000. Contract and trade receivables
from these customers accounted for approximately 34% of the total contract and
trade receivables at December 31, 2000. The Commercial Products segment
recognized revenue from Autoliv and Boeing Aircraft that accounted for
approximately 35% and 11%, respectively, of total revenue for the year ended
December 31, 2000. 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, 2000.
Our external sales based upon the customers' country of origin and
investment in long-lived assets by geographic area are as follows:
2000
----------------------------------
LONG-LIVED
REVENUES ASSETS
---------------- -----------------
United States $ 49,034,065 $ 48,663,872
Germany 35,664,628
United Kingdom 6,839,429 1,586,570
Other foreign countries 5,757,349
---------------- -----------------
Total $ 97,295,471 $ 50,250,442
================ =================
18. UNAUDITED QUARTERLY FINANCIAL INFORMATION
2002
---------------- ---------------- ------------------------------------
First Second Third Fourth
---------------- ---------------- ------------------ ------------------
Revenue $ 29,102,288 $ 30,181,492 $ 27,582,979 $ 27,687,209
Cost of revenue 19,491,597 20,645,901 19,122,652 15,295,419
---------------- ---------------- ------------------ ------------------
Gross margin $ 9,610,691 $ 9,535,591 $ 8,460,327 $ 12,391,790
================ ================ ================== ==================
Income (loss) before discontinued
operations $ 373,360 $ 509,256 $ (393,802) $ (34,177,280)
Loss from discontinued operations, net of tax - - (347,000) -
---------------- ---------------- ------------------ ------------------
Net income (loss) 373,360 509,256 (740,802) (34,177,280)
---------------- ---------------- ------------------ ------------------
F-24
Earnings (loss) available for common
shareholders $ 373,360 $ 509,256 $ (740,802) $ (34,177,280)
================ ================ ================== ==================
Net earnings per common share - basic
and assuming dilution $ 0.03 $ 0.04 $ (0.06) $ (2.64)
================ ================ ================== ==================
The third and fourth quarters of 2002 include restructuring charges and
write-downs of assets $0.8 million and $0.5 million, respectively. Fourth
quarter revenues in 2002 include a settlement with a Tier 1 automotive supplier
in the amount of $3.0 million. During the fourth quarter of 2002, we placed an
additional valuation allowance on the deferred tax asset in the amount of $35.9
million.
CHUN
2001
-----------------------------------------------------------------------
First Second Third Fourth
---------------- ----------------- ----------------- ------------------
Revenue $ 25,535,767 $ 25,956,898 $ 27,078,541 $ 28,222,953
Cost of revenue 16,383,598 16,204,171 17,923,855 19,783,204
---------------- ----------------- ----------------- ------------------
Gross margin $ 9,152,169 $ 9,752,727 $ 9,154,686 $ 8,439,749
================ ================= ================= ==================
Net earnings (loss) before discontinued
operations and extraordinary item $ 322,461 $ 577,425 $ 148,940 $ 100,780
Extraordinary loss on early extinguishment
of debt, net of tax - - (2,182,900) -
---------------- ----------------- ----------------- ------------------
Net income (loss) 322,461 577,425 (2,033,960) 100,780
---------------- ----------------- ----------------- ------------------
Earnings (loss) available for common
shareholders $ 322,461 $ 577,425 $ (2,033,960) $ 100,780
================ ================= ================= ==================
Net earnings per common share - basic
and assuming dilution $ 0.03 $ 0.05 $ (0.17) $ 0.01
================ ================= ================= ==================
The fourth quarter of 2001 includes $0.1 million for the reversal of 2000
restructuring reserves and $0.8 million for the reversal of a 2000 medical
reserve related to the termination of our self-funded employee health plan.
F-25
ANNEX E
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
AMENDMENT NO. 1 TO
FORM 10-Q/A
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended MARCH 31, 2003 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from ____________ to
Commission file number 1-12410
SIMULA, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
ARIZONA 86-0320129
------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2625 S. PLAZA DRIVE, SUITE 100, TEMPE, ARIZONA
(Address of Principal Executive Offices) 85282
---------------------------------------- ----------
(Zip Code)
(602) 631-4005
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Indicate by check mark whether the registrant:
(1) has filed all reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports)
Yes [X] No [ ]
(2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class Outstanding at March 31, 2003
----- -----------------------------
Common Stock, $.01 par value 13,014,395
E-1
SIMULA, INC.
TABLE OF CONTENTS
PAGE
PART I - FINANCIAL INFORMATION
Item 1 - Interim Consolidated Financial Statements
Consolidated Balance Sheets as of March 31, 2003 (as restated) and
December 31, 2002...................................................... 2
Consolidated Statements of Operations for the Three Month Periods
Ended March 31, 2003 (as restated) and 2002............................ 3
Consolidated Statement of Shareholders' Deficit and Comprehensive
Loss for the Three Month Period Ended March 31, 2003 (as restated)..... 4
Consolidated Statements of Cash Flows for the Three Month Periods
Ended March 31, 2003 (as restated) and 2002............................ 5
Notes to Interim Consolidated Financial Statements..................... 6-10
Item 2 - Management's Discussion and Analysis of Results of
Operations and Financial Condition..................................... 11-14
Item 3 - Quantitative and Qualitative Disclosure about Market Risk..... 15
Item 4 -Controls and Procedures........................................ 15
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports.......................................... 16
SIGNATURES............................................................. 17
EXPLANATORY NOTE
This amendment No. 1 on form 10-Q/A is being filed to give effect to the
restatement of the Company's unaudited interim consolidated financial statements
as of and for the three month period ended March 31, 2003 as discussed in Note
13 to the unaudited interim consolidated financial statements.
E-2
SIMULA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2003 AND DECEMBER 31, 2002
2003 2002
--------------- -------------
(UNAUDITED)
(AS RESTATED
SEE NOTE 13)
ASSETS
CURRENT ASSETS
Cash and cash equivalents ......................................... $ 341,838 $ 212,053
Contract and trade receivables - Net (including costs and estimated
earnings in excess of billings of $14,393,111 and $14,216,255,
respectively) .................................................... 32,021,838 27,381,930
Inventories ....................................................... 5,125,320 5,767,604
Prepaid expenses and other (See Note 13) .......................... 1,528,276 1,704,873
------------ -------------
Total current assets .................................... 39,017,272 35,066,460
PROPERTY, EQUIPMENT, and LEASEHOLD IMPROVEMENTS -Net ...................... 11,508,136 11,773,247
DEFERRED FINANCING COSTS .................................................. 1,863,111 2,419,054
INTANGIBLES - Net ......................................................... 3,565,492 3,534,478
OTHER ASSETS .............................................................. 2,121,826 2,086,245
------------ -------------
TOTAL ..................................................................... $ 58,075,837 $ 54,879,484
============ =============
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
Revolving line of credit .......................................... $ 15,391,876 $ 11,283,393
Trade accounts payable ............................................ 7,721,777 6,170,585
Other accrued liabilities ......................................... 8,594,817 9,268,316
Deferred revenue .................................................. 622,535 898,503
Accrued restructuring costs ....................................... 1,145,473 1,140,444
Advances on contracts ............................................. 542,988 940,752
Current portion of long-term debt ................................. 30,387,391 29,995,905
------------ -------------
Total current liabilities .............................. 64,406,857 59,697,898
DEFERRED REVENUE .......................................................... 471,532 489,582
DEFERRED LEASE COST ....................................................... 905,154 807,156
LONG-TERM DEBT - Less current portion ..................................... 32,260,852 32,313,087
------------ -------------
Total liabilities ....................................... 98,044,395 93,307,723
------------ -------------
SHAREHOLDERS' DEFICIT
Preferred stock, $.05 par value- authorized 50,000,000 shares; none
outstanding
Common stock, $.01 par value- authorized 50,000,000 shares; issued
13,014,395 and 13,014,395, respectively .......................... 130,144 130,144
Additional paid-in-capital ........................................ 62,715,713 62,715,713
Accumulated deficit ............................................... (98,734,478) (97,412,584)
Accumulated other comprehensive loss .............................. (4,079,937) (3,861,512)
------------ -------------
Total shareholders' deficit ............................ (39,968,558) (38,428,239)
------------ -------------
TOTAL ..................................................................... $ 58,075,837 $ 54,879,484
============ =============
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
E-3
SIMULA, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTH PERIODS ENDED MARCH 31, 2003 AND 2002
2003 2002
------------ ------------
(AS RESTATED
SEE NOTE 13)
REVENUE............................................ $ 24,312,869 $ 29,102,288
COST OF REVENUE.................................... 17,003,106 19,491,597
------------ ------------
GROSS MARGIN....................................... 7,309,763 9,610,691
ADMINISTRATIVE EXPENSES (See Note 13).............. 4,435,435 4,938,305
RESEARCH AND DEVELOPMENT........................... 1,113,847 1,520,733
RESTRUCTURING CHARGES.............................. 300,831 --
------------ ------------
OPERATING INCOME................................... 1,459,650 3,151,653
INTEREST EXPENSE................................... (2,671,619) (2,558,293)
------------ ------------
(LOSS) INCOME BEFORE INCOME TAXES.................. (1,211,969) 593,360
INCOME TAX EXPENSE................................. 109,925 220,000
------------ ------------
NET (LOSS) INCOME.................................. $ (1,321,894) $ 373,360
============ ============
(LOSS) INCOME PER COMMON SHARE - Basic............. $ (0.10) $ 0.03
============ ============
(LOSS) INCOME PER COMMON SHARE - Diluted........... $ (0.10) $ 0.03
============ ============
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
E-4
SIMULA, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT AND COMPREHENSIVE
LOSS
THREE MONTHS ENDED MARCH 31, 2003
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
----------------------- PAID-IN ACCUMULATED COMPREHENSIVE SHAREHOLDERS' COMPREHENSIVE
SHARES AMOUNT CAPITAL DEFICIT LOSS DEFICIT LOSS
----------- ----------- ------------- ------------ ------------- -------------- --------------
Balance, January 1,
2003............... 13,014,395 $ 130,144 $ 62,715,713 $(97,412,584) $(3,861,512) $(38,428,239) $ --
Net loss (As
restated see Note
13)................ (1,321,894) (1,321,894) (1,321,894)
Issuance of common
shares............. -- -- -- -- --
Currency translation
adjustment......... (218,425) (218,425) (218,425)
---------- --------- ------------- ------------ ----------- ------------ -----------
Balance, March 31,
2003 (As restated
see Note 13)....... 13,014,395 $ 130,144 $ 62,715,713 $(98,734,478) $(4,079,937) $(39,968,558) $(1,540,319)
========== ========= ============= ============ =========== ============ ===========
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
E-5
SIMULA, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTH PERIODS ENDED MARCH 31, 2003 AND 2002
2003 2002
-------------- ------------
(AS RESTATED
SEE NOTE 13)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income....................................................................... $ (1,321,894) $ 373,360
Adjustment to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization....................................................... 1,198,741 1,056,159
Deferred income taxes............................................................... -- 220,000
Capitalized interest................................................................ 392,817 370,106
Loss on disposal of assets.......................................................... 50,705 --
Restructuring charge................................................................ 300,831 --
Currency translation adjustment..................................................... (218,425) (206,537)
Bad debt expense.................................................................... 1,952 140,062
Changes in net assets and liabilities:
Contract and trade receivables - net of advances................................... (5,039,624) (855,909)
Inventories......................................................................... 642,284 (280,401)
Prepaid expenses and other.......................................................... 176,597 191,386
Other assets........................................................................ (35,581) 232,462
Trade accounts payable.............................................................. 1,551,192 834,801
Deferred revenue.................................................................... (294,018) (632,669)
Deferred lease costs................................................................ 97,998 81,373
Accrued restructuring costs......................................................... (295,802) (95,795)
Other accrued liabilities........................................................... (673,499) (1,875,064)
------------ ------------
Net cash used by operating activities.......................................... (3,465,726) (446,666)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.................................................. (344,019) (432,660)
Costs incurred to obtain intangibles................................................ (115,387) (74,378)
------------ ------------
Net cash used in investing activities.......................................... (459,406) (507,038)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under line of credit................................................. 4,108,483 1,174,136
Principal payments under other debt arrangements................................... (53,566) (241,197)
------------ ------------
Net cash provided by financing activities...................................... 4,054,917 932,939
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...................................... 129,785 (20,765)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............................................ 212,053 362,319
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................................................. $ 341,838 $ 341,554
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest Paid......................................................................... $ 1,813,133 $ 2,376,960
============ ============
Taxes Paid............................................................................ $ 76,668 $ 192,454
============ ============
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
E-6
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Simula, Inc.
and its subsidiaries (collectively "we" and "our"). All of the subsidiaries are
wholly owned. All intercompany transactions are eliminated in consolidation.
The accompanying unaudited consolidated financial statements have been
prepared on a going concern basis, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business. As noted
in the accompanying financial statements, current maturities of debt are
approximately $45,800,000 million as of March 31, 2003 and there is uncertainty
relating to the Company's ability to refinance certain of its debt. These
factors, among others, indicate that the Company may be unable to continue as a
going concern. The accompanying financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts or amounts and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern. In order to meet
future quarterly covenants and current and long-term debt maturities, we will
need asset sales proceeds, refinancing or recapitalization transactions, or the
sale or merger of the Company.
We have prepared the accompanying interim consolidated financial statements
in accordance with Generally Accepted Accounting Principles in the United States
of America ("GAAP") for interim financial information and with the instructions
to Form 10-Q. Accordingly, they do not include all of the information and notes
required by GAAP for complete financial statements. In the opinion of
management, all adjustments and reclassifications considered necessary for a
fair and comparable presentation have been included and are of a normal
recurring nature. Operating results for the three months ended March 31, 2003
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2003. Such interim financial statements should be read in
conjunction with our consolidated financial statements and notes thereto
included in our 2002 Form 10-K.
NOTE 2 - RECENTLY ISSUED ACCOUNTING STANDARDS
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, amendment of FASB Statement No. 13, and Technical
Corrections", which, among other things, no longer allows for the classification
of gains and losses from extinguishment of debt as extraordinary. We adopted
SFAS No. 145 effective January 1, 2003 and upon adoption, gains and losses on
certain future debt extinguishment, if any, will be recorded in pre-tax income.
In addition any previously recorded extraordinary gains or losses from early
extinguishment of debt will be reclassified to income before extraordinary
income or loss to conform to the requirements under SFAS 145.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities", which addresses financial accounting and
reporting for costs associated with exit or disposal activities. SFAS No. 146
also nullifies Emerging Issues Task Force ("EITF") No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)". SFAS No. 146 is
effective for exit or disposal activities initiated after December 31, 2002. We
adopted SFAS No. 146 effective January 1, 2003 and do not anticipate that the
new standard will have a material impact on our financial position or results of
operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure". This Statement amends SFAS No. 123 to
provide alternative methods of transition for a voluntary change to the fair
value method of accounting for stock-based employee compensation. We adopted the
new disclosure requirements of SFAS No. 148 in 2002. We continue to account for
stock-based compensation under the recognition and measurement principles of
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees", and related Interpretations.
In November 2002, the FASB issued Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." The interpretation requires a
guarantor to recognize, at the inception of a guarantee, a liability for the
fair value of the obligation undertaken in issuing the guarantee and expands the
disclosures required. Initial recognition and measurement provisions of FIN No.
45 are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002, consequently, the adoption of FIN No. 45 had no effect on our
financial position, results of operations or cash flows. We believe our current
accounting policies are consistent with the interpretation.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities--an Interpretation of ARB No. 51," FIN No. 46 clarifies the
consolidation requirements of variable interest entities. We have adopted the
interpretation. We have no interests in unconsolidated variable interest
entities and, consequently, adoption of FIN No. 46 had no effect on our
financial position, results of operations or cash flows.
NOTE 3 - EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators of
basic and diluted per share computations. For the three month period ended March
31, 2003 the effect of 163,618 shares related to stock options were not used in
determining dilutive earnings per share because the result would have been
anti-dilutive. Additionally, for the three month periods ended March 31, 2003
and 2002, the effect of 1,774,074 shares to be issued upon conversion of the 8%
Senior Subordinated Convertible Notes was not used in determining dilutive
earnings per share because the result would have been anti-dilutive.
THREE MONTHS ENDED MARCH 31,
--------------------------------
2003 2002
-------------- --------------
(AS RESTATED
SEE NOTE 13)
Net (loss) earnings available to common shareholders.... $ (1,321,894) $ 373,360
============== ==============
Basic weighted average shares outstanding............... 13,014,395 12,892,858
Effect of dilutive securities........................... -- 287,727
-------------- --------------
Diluted weighted average shares outstanding............. 13,014,395 13,180,585
============== ==============
(Loss) earnings per common share -basic and diluted: $ (0.10) $ 0.03
============== ==============
E-7
NOTE 4 - STOCK BASED COMPENSATION
We have three stock-based employee compensation plans. We account for those
plans under the recognition and measurement principles of APB Opinion No. 25,
"Accounting for Stock Issued to Employees", and related Interpretations under
which no compensation cost has been recognized. However, we have computed
compensation cost, for pro forma disclosure purposes, based on the fair value of
all options awarded on the date of grant, utilizing the Black-Scholes option
pricing method. The following table illustrates the effect on net (loss) income
and (loss) income per share if we had applied the fair value recognition
provisions of FASB Statement No. 123, "Accounting for Stock-Based Compensation",
to stock-based employee compensation for the three month periods ended March 31:
2003 2002
---------------- ------------
(AS RESTATED
SEE NOTE 13)
Net (loss) income - as reported........................ $ (1,321,894) $ 373,360
============ ============
Deduct: Total stock based employee compensation
expense determined under fair value based method
for all awards....................................... (318,254) (1,529,075)
------------ ------------
Net loss - pro forma................................... $ (1,640,148) $ (1,155,715)
============ ============
(Loss) income per share: basic and diluted as
reported............................................. $ (0.10) $ 0.03
============ ============
Loss per share - basic and diluted - pro forma......... $ (0.13) $ (0.09)
============ ============
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes options pricing model and the following table illustrates the
assumptions used for grants for the three month periods ended March 31,:
2003 2002
---- ----
Dividend yield None None
Expected volatility................ 116% 93%
Risk-free interest rate............ 3.6% 3.6%
Expected lives..................... 3.25 3.25
NOTE 5 - INVENTORIES
At March 31, 2003 and December 31, 2002, inventories consisted of the
following:
2003 2002
-------------- -------------
Raw Materials........................ $ 3,608,836 $ 4,420,174
Work in Progress..................... 712,201 774,822
Finished Goods....................... 1,106,232 844,557
Inventory Reserve.................... (301,949) (271,949)
------------- -------------
Total Inventories..... $ 5,125,320 $ 5,767,604
============= =============
NOTE 6 - PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
At March 31, 2003 and December 31, 2002 property, equipment and leasehold
improvements consisted of the following:
2003 2002
------------- -------------
Land............................................ $ 816,888 $ 816,888
Buildings and leasehold improvements............ 4,543,048 4,593,765
Equipment....................................... 20,109,535 20,508,363
------------- -------------
Total........................................... 25,469,471 25,919,016
Less accumulated depreciation and amortization.. (13,961,335) (14,145,769)
------------- -------------
Property, equipment and leasehold
improvements - net................... $ 11,508,136 $ 11,773,247
============= =============
E-8
NOTE 7 - DEBT
On March 31, 2003, we were not in compliance with certain non-monetary
financial covenants under our Revolving Line of Credit (the "RLC"). On May 13,
2003, we received a waiver of this non-compliance at March 31, 2003. Our RLC had
outstanding borrowings of $15.4 million and remaining borrowing availability of
$1.6 million at March 31, 2003 as compared to outstanding borrowings of $11.3
million and a remaining borrowing availability of $1.3 million at December 31,
2002.
NOTE 8 - OTHER INTANGIBLE ASSETS
All of our intangible assets with finite lives ranging from 15 to 20 years
were principally comprised of technology patents with a total cost at March 31,
2003 and December 31, 2002 as follows:
2003 2002
-------------- --------------
Patents and licenses.................. $ 4,286,106 $ 4,194,603
Other................................. 132,669 566,010
------------- --------------
Total................................. 4,418,775 4,760,613
Less accumulated amortization......... (853,283) (1,226,135)
------------- ---------------
Intangibles - net.................. $ 3,565,492 $ 3,534,478
============= ==============
Intangible asset amortization expense for the three month periods ended March
31, 2003 and 2002 were approximately $60,500 and $74,000, respectively.
Estimated amortization expense for the five succeeding fiscal years is as
follows:
2003.................... $ 220,000
2004.................... 280,000
2005.................... 280,000
2006.................... 280,000
2007.................... 280,000
NOTE 9 - RESEARCH AND DEVELOPMENT
Our research and development efforts arise from funded development contracts
and proprietary research and development. Amounts arising from such efforts for
the three moths ended March 31, were as follows:
2003 2002
----------- -----------
Research and development expenses........... $ 1,113,847 $ 1,520,733
=========== ===========
Funded contracts:
Revenue funded by customers............... $ 290,651 $ 1,061,504
Research and development expenses
classified as cost of such Revenue...... (167,779) (777,789)
----------- -----------
Income on funded contracts................ $ 122,872 $ 283,715
=========== ===========
NOTE 10 - RESTRUCTURING
In December 1999, we adopted a plan of restructuring that included the
divestiture of our commercial airline seat manufacturing operation. In July
2002, we adopted a plan of restructuring focused on reducing workforce to align
with a newly developed strategic focus and in January 2003, we adopted a plan to
restructure our Aerospace and Defense business by reducing workforce and closing
our Asheville facility and consolidating those operations into our Phoenix
facility. At March 31, 2003, there was $1,145,473 of remaining liability, which
principally relates to lease obligations associated with the closed airline
facility, which run through May of 2008 and other contracts as a part of the
1999 restructuring and severance obligations as part of the 2002 and 2003
restructuring, which are expected to be fully paid by December of 2004. A
summary of the change in accrued restructuring is as follows:
E-9
FACILITY OTHER
CLOSURE CONTRACTS SEVERANCE TOTAL
----------- ------------ ------------ -----------
Balance at December 31, 2002.............. $ 535,285 $ 331,941 $ 273,218 $ 1,140,444
First quarter 2003 Aerospace and Defense
restructuring........................... -- -- 300,831 300,831
Reclassification of charges .............. 294,279 (294,279) -- --
Cash payments............................. (48,064) (2,040) (245,698) (295,802)
----------- ------------ ------------ -----------
Balance at March 31, 2003................. $ 781,500 $ 35,622 $ 328,351 $ 1,145,473
=========== ============ ============ ===========
NOTE 11 - DERIVATIVE INSTRUMENTS
We have certain receivables and payables denominated in Euros. To eliminate
our exposure to changes in the U.S. dollar/Euro exchange rate, we periodically
enter into forward contracts to protect our future cash flows. Our forward
contracts generally range from one to three months in original maturity.
In accordance with SFAS No. 133, we designate such forward contracts as cash
flow hedges. We account for changes in the fair value of our forward contracts,
based on changes in the forward exchange rate, with all such changes in fair
value reported in other comprehensive income. Amounts in other comprehensive
income are reclassified into earnings upon settlement of the forward contract at
an amount that will offset the related transaction gain or loss arising from the
re-measurement and adjust earnings for the cost of the forward contracts. As of
March 31, 2003, there were no significant gains or losses recognized in earnings
for hedge ineffectiveness and we did not discontinue any hedges because it was
probable that the original forecasted transaction would not occur. We have no
open hedging contracts as of March 31, 2003.
NOTE 12 - SEGMENT REPORTING
We are a holding company for wholly owned subsidiaries, which operate in two
primary business segments. Our Aerospace and Defense segment includes operations
that design and manufacture crash resistant components, energy absorbing
devices, and ballistic armor products which are sold principally to branches of
the United States armed forces. Our Commercial Products segment includes
operations encompassing inflatable restraints and related technology for
automobiles, products derived from our proprietary technology and polymer
materials. All other activity, included in Other, represents general corporate
operations, including unallocated interest and technology sales and royalties.
For the three-month periods ended March 31, 2003 and 2002, inter-segment
sales were insignificant and total intercompany sales of $139,615 and $34,535,
respectively, have been eliminated. For the three-month periods ended March 31,
2003 and 2002, sales to the branches of the United States Armed Forces were 88%
and 66%, respectively, of total sales.
2003
----------------------------------------------------------
AEROSPACE COMMERCIAL
AND DEFENSE PRODUCTS OTHER TOTAL
--------------- ----------- ----------- -------------
(AS RESTATED (AS RESTATED
SEE NOTE 13) SEE NOTE 13)
Revenue:
Contract revenue....................... $ 15,039,585 $ -- $ -- $ 15,039,585
Product sales:
Automotive safety systems............ -- 8,832,784 -- 8,832,784
Other................................ -- 3,909 -- 3,909
Technology sales and royalties......... -- 275,667 160,924 436,591
------------ ------------ ---------- ------------
Total revenue............................ $ 15,039,585 $ 9,112,360 $ 160,924 $ 24,312,869
============ ============ ========== ============
Operating income (loss).................. $ 1,944,290 $ 253,769 $ (738,409) $ 1,459,650
E-10
2002
------------------------------------------------------------
AEROSPACE COMMERCIAL
AND DEFENSE PRODUCTS OTHER TOTAL
-------------- ------------ ----------- ------------
Revenue:
Contract revenue...................... $ 19,293,239 $ -- $ -- $ 19,293,239
Product sales:
Automotive safety
systems............................ -- 9,028,163 -- 9,028,163
Other.............................. -- 102,765 -- 102,765
Technology sales and royalties........ -- 290,494 387,627 678,121
------------ ----------- ----------- ------------
Total revenue............................ $ 19,293,239 $ 9,421,422 $ 387,627 $ 29,102,288
============ =========== =========== ============
Operating income (loss).................. $ 3,514,075 $ (290,198) $ (72,224) $ 3,151,653
NOTE 13 -- RESTATEMENT:
Subsequent to the issuance of the Company's unaudited consolidated financial
statements for the quarter ended March 31, 2003, the Company determined that
certain costs of the sale of the automotive safety business and the potential
sale of the remainder Company were incorrectly capitalized as Prepaid Expenses
and Other on the balance sheet. These costs include legal and other fees related
to these proposed transactions, that had been incurred by the Company and should
have been recorded as expense as incurred. The Prepaid Expense and Other amount
in the balance sheet at March 31, 2003 has been restated to expense the
capitalized amount of $144,057. The statements of operations and cashflows for
the three months ended March 31, 2003 have also been restated to reflect the
expensing of the $144,057 previously capitalized. A summary of the significant
effects of the restatement are as follows:
AS OF MARCH 31, 2003
AS PREVIOUSLY REPORTED AS RESTATED
---------------------- -------------
Prepaid expenses and other................ $ 1,672,333 $ 1,528,276
Total current assets...................... 39,161,329 39,017,272
Total assets.............................. 58,219,894 58,075,837
Accumulated deficit....................... (98,590,421) (98,734,478)
Total shareholders' deficit............... (39,824,501) (39,968,558)
Total liabilities and shareholders' deficit 58,219,894 58,075,837
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2003
AS PREVIOUSLY REPORTED AS RESTATED
---------------------- -------------
Administrative Expenses..................... $ 4,291,378 $ 4,435,435
Operating Income............................ 1,603,707 1,459,650
Loss Before Taxes........................... (1,067,912) (1,211,969)
Net Loss.................................... (1,177,837) (1,321,894)
(Loss) per common share--basic.............. $ (.09) $ (.10)
(Loss) per common share--diluted............ $ (.09) $ (.10)
E-11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
The following management's discussion and analysis gives effect to the
restatement discussed in Note 13 of the unaudited consolidated financial
statements.
RESULTS OF OPERATIONS
THREE MONTH PERIOD ENDED MARCH 31, 2003 COMPARED TO
THREE MONTH PERIOD ENDED MARCH 31, 2002
CONSOLIDATED
THREE MONTHS ENDED
MARCH 31,
----------------------------- PERCENT
(IN THOUSANDS) 2003 2002 CHANGE INC (DEC)
-------------- ------------ -------------- ------------- -------------
(AS RESTATED (AS RESTATED (AS RESTATED
SEE NOTE 13) SEE NOTE 13) SEE NOTE 13)
Revenue......................... $ 24,313 $ 29,102 $ 4,789 (16%)
Gross margin.................... 7,310 9,611 2,301 (24%)
Administrative and research and
development expense........... 5,549 6,459 910 (14%)
Operating income................ 1,460 3,152 1,692 (54%)
Interest expense, net........... 2,672 2,558 114 4%
(Loss) income before income tax. (1,212) 593 1,805 (304%)
Income tax expense.............. 110 220 110 (50%)
Gross margin as a percentage of
revenue....................... 30% 33%
Administrative and research and
development expenses as a
percentage of revenue......... 23% 22%
AEROSPACE & DEFENSE
THREE MONTHS ENDED
MARCH 31,
------------------------- PERCENT
(IN THOUSANDS) 2003 2002 CHANGE INC (DEC)
------------ ------------ ------------ -----------
Revenue................................. $ 15,040 $ 19,293 $ 4,253 (22%)
Gross margin............................ 5,354 6,711 1,357 (20%)
Gross margin as a percentage of revenue. 36% 35%
COMMERCIAL PRODUCTS
THREE MONTHS ENDED
MARCH 31,
------------------------- PERCENT
(IN THOUSANDS) 2003 2002 CHANGE INC (DEC)
------------ ------------ ------------ -----------
Revenue................................. $ 9,112 $ 9,421 $ 309 (3%)
Gross margin............................ 1,795 2,512 717 (29%)
Gross margin as a percentage of revenue. 20% 27%
RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 2003
Revenue for the three-month period ended March 31, 2003 decreased 16% compared
to revenue in the same period for 2002. Revenue for the period declined 22% in
the Aerospace and Defense segment primarily due to timing of orders and delays
for funding of various programs. In the first quarter of 2003 Small Arms
Protective Inserts ("SAPI") body armor revenue grew compared to the same period
in 2002 however production revenues and profitability were negatively impacted
as we completed the SAPI body armor design validation for rework announced in
November of 2002. We resumed full production of SAPI for the U.S. Army in late
February 2003. Also in the first quarter we completed the consolidation of our
Asheville, North Carolina, operation into the larger Aerospace and Defense
facility
E-12
based in Phoenix. The plant closure and transition resulted in a temporary
revenue shortfall. Additionally, revenues were negatively impacted by decreases
in our military sealed parachute product and was partially offset by increased
production of military personnel vests. Revenue from the Commercial Products
segment declined 3%. Commercial products continue to face pricing pressures,
however this pricing pressure was partially offset by favorable foreign exchange
rates.
Gross margin as a percent of sales decreased to 30% for the three-month
period ended March 31, 2003 from 33% for the comparable period in 2002. Gross
margin as a percent of sales in our Aerospace and Defense segment increased to
36% for the three months ended March 31, 2003 from 35% for the same period in
2002 due to the effect of cost reduction efforts completed in 2002. Gross margin
as a percent of sales in our Commercial Products segment declined to 20% for the
three months ended March 31, 2003 from 27% for the same period in 2002.
Commercial segment gross margins experienced decreases attributed to continued
pricing pressure on existing platforms and a shift in product mix to next
generation products which generate lower margins.
Administrative and research and development expenses for the three-month
period ended March 31, 2003 decreased $0.9 million or 14% as compared to the
same 2002 period. This decrease was primarily attributable to cost savings
reductions related to restructuring activities in prior periods that we are now
seeing the result of as well a continued focus on reducing costs. The decrease
in Administrative costs is partially offset as we invested heavily in the design
and qualification testing of its new SAPI body armor product for future
procurements and by company wide premium increases in insurance that did not
have an impact in the first quarter of 2002. Additionally, we began to incur
costs related to selling our automotive safety business as well as the sale of
the entire company.
Operating income for the three-month period ended March 31, 2003 was $1.5
million compared to $3.2 million for the same period in 2002. The 2003 operating
income for the three-month period was negatively impacted primarily by lower
revenues discussed above as well as restructuring charges, costs associated with
the move of our Asheville facility, the investments in the design and
qualification testing for SAPI body armor for future procurements, costs related
to selling our business, discussed above and the completion of the voluntary
SAPI rework.
Interest expense for the three-month period ended March 31, 2003 was $2.7
million compared to $2.6 for the same period in 2002. Cash paid for interest for
each of the three-month periods ended March 31, 2003 and 2002 was $1.8 million
and $2.4 million, respectively.
Income Taxes - We recorded a tax expense of approximately $110,000 and
$220,000, respectively for the three-month periods ended March 31, 2003 and 2002
for our operations in the U.K. and North Carolina and believe that the year to
date tax rate is properly reflected in the financial statements.
LIQUIDITY AND CAPITAL RESOURCES
The accompanying unaudited consolidated financial statements have been
prepared on a going concern basis, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business. As noted
in the accompanying financial statements, current maturities of debt are
approximately $45,800,000 million as of March 31, 2003 and there is uncertainty
relating to the Company's ability to refinance certain of its debt. These
factors, among others, indicate that the Company may be unable to continue as a
going concern. The accompanying financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts or amounts and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern. In order to meet
future quarterly covenants and current and long-term debt maturities, we will
need asset sales proceeds, refinancing or recapitalization transactions, or the
sale or merger of the Company.
Current maturities of our debt as of March 31, 2003 are $45.8 million and
primarily consists of $15.4 million with our revolving line of credit ("RLC")
due September 30, 2003, $3.2 million with our 9.5% Senior Subordinated Notes due
September 30, 2003 and $26.9 million for our Senior Secured Note due December
31, 2003. In order to meet future quarterly covenants and current and long-term
debt maturities, we will need asset sales proceeds, refinancing or
recapitalization transactions, or the sale or merger of the Company.
With regard to a sale or merger of the Company or debt refinancing, we have
retained investment bankers, structured a process, completed most process steps,
and have received considerable interest in completing a transaction. In the
event that the Company is successful in completing a sale, merger or
refinancing, the terms of the new structure or financing may allow the Company
to repay or refinance its debt.
On March 31, 2003, we were not in compliance with certain non-monetary
financial covenants under our RLC. On May 13, 2003, we received waivers of the
non-compliance at March 31, 2003.
Because of our management and operational re-alignment and our operational
profitability, we expect to generate future positive operating cash flows and
our existing availability under our RLC will be adequate to fund our operations,
excluding the principal payments on the current debt previously discussed.
We continually review our revenue and cost forecasts so that we can react to
changes in our operations and liquidity position. The amount and timing of
Department of Defense procurement and future constraints on certain raw
materials and their costs could impact our ability to generate Aerospace
E-13
and Defense revenue and income. In our Commercial Products segment sales
contracts for our automotive products are based upon the estimated production of
the next year's requirements of the original equipment manufacture's ("OEMs").
Our ability to maintain Commercial Products revenue will be impacted by our
ability to successfully compete in an increasingly price competitive market and
to properly manage our foreign currency transaction risk. SEE "FORWARD-LOOKING
INFORMATION AND RISKS AND UNCERTAINTIES IN OUR BUSINESS" AND "QUANTITATIVE AND
QUALITATIVE DISCLOSURE ABOUT MARKET RISK"
Our ability to generate sufficient cash flow from operations is principally
dependent upon our ability to continue to increase revenue and contain or reduce
operating expenses. At March 31, 2003, we had cash and cash equivalents of
$341,838 compared to $212,053 at December 31, 2002. Our RLC had outstanding
borrowings of $15.4 million and remaining borrowing availability of $1.6 million
at March 31, 2003 as compared to outstanding borrowings of $11.3 million and a
remaining borrowing availability of $1.3 million at December 31, 2002. The RLC
at March 31, 2003 was impacted by timing of collection related to significant
U.S. government receivables. At May 5, 2003 our RLC had outstanding borrowings
of $14.6 million and remaining borrowing availability of $2.4 million. Because
of our federal and certain state net operating loss carryforwards, we are not a
significant cash taxpayer.
Operating activities used approximately $3.5 million of cash during the
three-months ended March 31, 2003 as compared to $0.4 million for the comparable
period in 2002. The increase in cash used by operations was attributable to
greater overall working capital required as compared to the prior 2002 period,
which required heavier investments primarily in accounts receivable and was
partially offset by an increase in accounts payable and decreases in inventory.
Investing activities used $0.5 million during the three-months ended March
31, 2003, principally attributable to the purchase of manufacturing equipment in
both of our business segments and additional investment in our patent portfolio.
Financing activities provided net cash of $4.1 million for the three-months
ended March 31, 2003, compared to $0.9 million provided by financing activities
for the same period in 2002. Cash provided in financing activities during the
three-months ended March 31, 2003 and 2002 primarily related to increased
borrowing under our RLC.
We believe we have sufficient manufacturing capacity, at March 31, 2003, to
meet our anticipated future delivery requirements. We may, however, seek
strategic partners for the joint development of capital intensive manufacturing
capacity for new high technology products. We may also seek to obtain additional
capital should demand for our products exceed current capacity. The raising of
capital in public or private markets will depend primarily upon prevailing
market conditions and the demand for our products and technologies.
RESEARCH AND DEVELOPMENT
Historically, we have made significant investments in research and
development. Our research and development expenditures have fluctuated based on
available government-funded contracts and available company funding. We
anticipate that future fluctuations will continue as a result of our efforts to
expand product lines and enhance our existing technologies.
FORWARD LOOKING INFORMATION AND RISKS AND UNCERTAINTIES IN OUR BUSINESS
A wide variety of factors affect our projected operating and financial
results and can adversely impact our revenues, profitability and cash flows. Our
liquidity and available working capital depend upon our cash flow from
operations and, potentially, upon proceeds from asset sales or licensing,
refinancing of our debt, or potential sale or merger of the Company. Improved
cash flow from operations will depend on our ability to continue to implement
our cost cutting initiatives. Continued compliance with our debt covenants is
necessary to avoid loan defaults and is a requirement for maintaining access to
funds available under our RLC.
With respect to our product offerings many of our products are subassemblies
in final products. We act as subcontractor to defense industry prime contractors
and as a component supplier to automotive ("OEM") and first tier systems
suppliers. Accordingly, we are reliant on others to gain and retain market
acceptance for our products, and we must continue to demonstrate that our
products will provide
E-14
advantages to the manufacturers of final products, including increasing product
safety and providing such manufacturers with competitive cost advantages
Although we have long established relationships with a number of our
Aerospace and Defense customers, we do not have significant long-term supply
contracts with any of these customers. Our customers typically do not commit to
long-term production schedules and, as a result, customer orders generally are
subject to cancellation or delay. Reliance upon defense contracts involves
certain risks, including dependence on congressional appropriations and changes
in governmental policies that reflect military and political developments.
In our Commercial Products segment, we operate in the highly competitive
automotive safety industry. As most of our competitors have greater resources
than we do and since products become commoditized over time, our success in this
industry is largely dependent on our ability to innovate. Our ability to compete
effectively in this industry also depends on our ability to remain competitive
in pricing, service, and performance. In addition, automotive OEMs continually
exert downward pressure on prices, forcing us to cut costs and to innovate in
order to maintain margins and projected volumes from year to year.
Factors pertinent to our ability to meet our current and future financial
projections include:
o our ability to refinance our debt or achieve acceptable valuations in a
process to sell or merge the Company;
o our relationship with our senior lenders and on-going compliance with loan
terms and covenants;
o our relationship with significant customers and maintenance of preferred
supplier relationships with them that are renegotiated frequently;
o our leveraged status and the level and cost of our debt;
o the continued reduction of our fixed expenses;
o ability to monetize assets including through sales of certain assets or
technologies at a favorable price;
o our ability to continue to provide design and manufacturing services,
products and new product applications that compare favorably on the basis of
time to introduction, cost, and performance with those of our competitors;
o the cyclical nature of the automobile industry and other markets addressed
by our products;
o the level and makeup of military expenditures;
o contract mix and shifting production and delivery schedules among our market
segments;
o the amount of resources available for independent research and development;
o proof of concept and production validation of certain of our new
technologies and proposed products, as well as our financial ability to
establish manufacturing capacity for such products; and
o technological changes introduced by competitors and customers.
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. We undertake no obligation to update any of these forward-looking
statements to reflect events or circumstances after the date on which such
statements were made or to reflect the occurrence of unanticipated events.
Actual results and trends may differ materially. Risks include those described
herein and in our registration statements and periodic reports filed with the
U.S. Securities and Exchange Commission.
E-15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
CURRENCY EXCHANGE RATE RISK
We have currency exposures related to buying and selling in currencies other
than the local currency in which we operate. These exposures may impact future
earnings and/or operating cash flows. Currently, our most significant exposure
relates to the Euro and the British Pound. We have supply contracts for our
ITS(R) and AHPS that are Euro denominated. We also maintain a manufacturing
facility in the United Kingdom for which we fund its operating expenses in
British Pounds. We enter into foreign currency hedge transactions to mitigate
our associated risks. The magnitude of the exposure varies over time and we
enter into agreements from time to time by which we seek to manage certain
portions of our foreign exchange exposure in accordance with established policy
guidelines. These arrangements primarily hedge cash flows for forecasted
transactions involving receivables and payables. We currently have no hedging
contracts open as of March 31, 2003.
ITEM 4. CONTROLS AND PROCEDURES
We evaluated, under the supervision and with the participation of
management, including the Chief Executive Officer (CEO) and the Chief Financial
Officer (CFO), the effectiveness of the design and operation of our disclosure
controls and procedures as of March 31, 2003, pursuant to Rule 15d-14 under the
Securities Exchange Act of 1934 (Exchange Act). Based upon that evaluation, the
CEO and CFO concluded that Simula's disclosure controls and procedures are
effective to ensure that information required to be disclosed in Simula's
reports filed or submitted under the Exchange Act are recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms.
During the quarterly period covered by this amended report, there were no
significant changes in our internal controls or in other factors that could
significantly affect the disclosure controls.
E-16
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS
(a) Exhibits: The following Exhibits are included pursuant to Item 601 of
Regulation S-K.
NO. DESCRIPTION REFERENCE
3.1 Articles of Incorporation of Simula, Inc., as amended and restated (2)
3.2 Bylaws of Simula, Inc., as amended and restated (1)
4.7 Indenture dated April 1, 1997, in connection with the Company's issuance of
the 8% Senior Subordinated Convertible Notes due May 1, 2004 (6)
10.11 1992 Stock Option Plan, as amended effective September 15, 1998 (13)
10.12 1992 Restricted Stock Plan (1)
10.21 1994 Stock Option Plan, as amended effective September 15, 1998 (3)
10.26 Simula, Inc. Employee Stock Purchase Plan (2)
10.27 Outside Directors Equity Plan (9)
10.37 Simula, Inc. 1999 Incentive Stock Option Plan (4)
10.41 Financing Agreement with The CIT Group/Business Credit, Inc. dated December
30,1999 (5)
10.41A Amendment Number Three to Financing Agreement between the Company and The CIT
Group/Business Credit, Inc. dated September 26, 2001 (7)
10.41B Amendment Number Five to Financing Agreement between the Company and The CIT
Group/Business Credit, Inc. dated June 30, 2002 (10)
10.41C Amendment Number Seven to Financing Agreement between the Company and The CIT
Group/Business Credit, Inc. dated October 22, 2002 (10)
10.41D Amendment Number Nine to Financing Agreement between the Company and The CIT
Group/Business Credit, Inc. dated March 25, 2003 (11)
10.41E Waiver to Certain Financial Covenants to Financing Agreement between the
Company and The CIT Group/Business Credit, Inc. dated April 9, 2003 (11)
10.45 Loan Agreement between the Company and Allied Capital Corporation dated
September 26, 2001 (7)
10.45A Waiver and Amendment No. 1 to Loan Agreement between the Company and Allied
Capital Corporation dated August 19, 2002 (10)
10.45B Consent and Amendment No. 2 to Loan Agreement between the Company and Allied
Capital Corporation dated March 25, 2003 (11)
10.46 Employment Agreement between the Company and Bradley P. Forst dated November
12, 2001, effective October 1, 2000 (7)
10.48 Employment Agreement between the Company and Joseph
Coltman dated December 13, 2001, effective October 13,
2000 (8)
10.49 Employment Agreement between the Company and John S. Hodgson dated February
1, 2002, effective February 11, 2002 (8)
10.50 Retention Agreement between the Company and John A. Jenson dated December 20,
2002 (11)
99.1 Certification by Chief Executive Officer pursuant to section 906 of
Sarbanes-Oxley Act *
99.2 Certification by Chief Financial Officer pursuant to section 906 of
Sarbanes-Oxley Act *
* Filed herewith
(1) Filed with Registration Statement on Form S-18, No. 33-46152-LA, under the
Securities Act of 1933, effective April 13, 1992.
(2) Filed with 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 for the quarter ended September 30, 1998.
(4) Filed with Definitive Proxy on May 14, 1999, for the Company's Annual
Meeting of Shareholders held on June 17, 1999.
(5) Filed with report on Form 10-K for the year ended December 31, 1999.
(6) Filed with report on Form 10-Q for the quarter ended March 31, 2000.
(7) Filed with report on Form 10-Q for the quarter ended September 30, 2001.
(8) Filed with report on Form 10-K for the year ended December 31, 2001.
(9) Filed with Registration Statement on Form S-8, effective March 28, 2002
(10) Filed with report on Form 10-Q for the quarter ended September 30, 2002.
(11) Filed with report on Form 10-K for the year ended December 31, 2002.
(b) Reports on Form 8-K:
(1) Report on Form 8-K dated March 31, 2003, furnishing notification of late
filing on Form 12b-25.
E-17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this amended report (Amendment No. 1) on Form 10Q/A
for the quarter ended March 31, 2003 to be signed on its behalf by the
undersigned thereunto duly authorized.
SIMULA, INC.
DATE: November 5, 2003 /s/John A. Jenson
----------------------------
John A. Jenson
Chief Financial Officer
E-18
CERTIFICATION
I, Bradley P. Forst, certify that:
1. I have reviewed this Amendment No. 1 Report on Form 10-Q/A of Simula, Inc.;
2. Based on my knowledge, this amended report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this amended report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this amended report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
(c) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this amended report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation and
(d) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
/s/ Bradley P. Forst
---------------------------------
Bradley P. Forst
Chief Executive Officer
November 5, 2003
E-19
CERTIFICATION
I, John A. Jenson, certify that:
1. I have reviewed this Amendment No. 1 Report on Form 10-Q/A of Simula, Inc.;
2. Based on my knowledge, this amended report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this amended report;
3. Based on my knowledge, the financial statements, and other financial
information included in this amended report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this amended report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
(c) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this amended report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation and
(d) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
/s/ John A. Jenson
-------------------------------
John A. Jenson
Chief Financial Officer
November 5, 2003
E-20
EXHIBIT INDEX
99.1 Certification by Chief Executive Officer pursuant to section 906 of
Sarbanes-Oxley Act
99.2 Certification by Chief Financial Officer pursuant to section 906 of
Sarbanes-Oxley Act
E-21
EXHIBIT 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Amendment No. 1 to the Quarterly Report of Simula, Inc.
(the "Company") on Form 10-Q/A for the period ended March 31, 2003 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Bradley P. Forst, Chief Executive Officer of the Company, certify, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the Company.
/s/ Bradley P. Forst
-------------------------------
Bradley P. Forst
Chief Executive Officer
November 5, 2003
E-22
EXHIBIT 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Amendment No. 1 to the Quarterly Report of Simula, Inc.
(the "Company") on Form 10-Q/A for the period ended March 31, 2003 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
John A. Jenson, Chief Financial Officer of the Company, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the Company.
/s/ John A. Jenson
--------------------------------
John A. Jenson
Chief Financial Officer
November 5, 2003
E-23
ANNEX F
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
AMENDMENT NO. 1 TO
FORM 10-Q/A
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended JUNE 30, 2003 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
--------------- ---------------
Commission file number 1-12410
SIMULA, INC.
--------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
ARIZONA 86-0320129
----------------------------------- ---------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
7822 SOUTH 46TH STREET, PHOENIX, ARIZONA 85044
----------------------------------------- ---------------------
(Address of Principal Executive Offices) (Zip Code)
(602) 643-7233
--------------------------------------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
2625 S. PLAZA DRIVE, SUITE 100, TEMPE, AZ 85282
--------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant:
(1) has filed all reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports) and
(2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
CLASS OUTSTANDING AT JUNE 30, 2003
--------------------------------- --------------------------------
Common Stock, $.01 par value 13,017,688
F-1
TABLE OF CONTENTS
SIMULA, INC.
TABLE OF CONTENTS
PAGE
PART I - FINANCIAL INFORMATION
Item 1 - Interim Consolidated Financial Statements
Consolidated Balance Sheets as of June 30, 2003 (as restated) and December 31, 2002.................................. 2
Consolidated Statements of Operations for the Three Month and Six Month Periods Ended June 30, 2003
(as restated) and 2002............................................................................................. 3
Consolidated Statement of Shareholders' Deficit and
Comprehensive Loss for the Six Month Period Ended June 30, 2003 (as restated)........................................ 4
Consolidated Statements of Cash Flows for the Six Month Periods Ended June 30, 2003 (as restated) and
2002............................................................................................................... 5
Notes to Interim Consolidated Financial Statements................................................................... 6-11
Item 2 - Management's Discussion and Analysis of Results of Operations and Financial Condition....................... 12-16
Item 3 - Quantitative and Qualitative Disclosure about Market Risk................................................... 17
Item 4 - Controls and Procedures..................................................................................... 17
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports........................................................................................ 18-19
SIGNATURES........................................................................................................... 20
EXPLANATORY NOTE
This amendment No. 1 on form 10-Q/A is being filed to give effect to the
restatement of the Company's unaudited interim consolidated financial statements
as of and for the three month and six month periods ended June 30, 2003 as
discussed in Note 14 to the unaudited interim consolidated financial statements.
F-2
SIMULA, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2003 AND DECEMBER 31, 2002
2003 2002
------------ -----------
(AS RESTATED
SEE NOTE 14)
ASSETS
CURRENT ASSETS
Cash and cash equivalents .................................................... $ 193,199 $ 147,842
Contract and trade receivables - Net (including costs and estimated earnings . 17,545,914 20,446,665
in excess of billings of $8,207,578 and $14,216,255, respectively)
Inventories .................................................................. 2,823,143 3,953,837
Prepaid expenses and other ................................................... 673,005 1,402,252
Current assets of discontinued operations .................................... 10,492,818 9,115,864
------------ -----------
Total current assets ....................................................... 31,728,079 35,066,460
PROPERTY, EQUIPMENT, and LEASEHOLD IMPROVEMENTS-Net ............................ 6,253,145 7,737,356
DEFERRED FINANCING COSTS ....................................................... 1,290,344 2,419,054
INTANGIBLES - Net .............................................................. 1,389,482 1,311,857
OTHER ASSETS ................................................................... 473,295 436,102
LONG-TERM ASSETS OF DISCONTINUED OPERATIONS .................................... 7,731,094 7,908,655
------------ -----------
TOTAL .......................................................................... $48,865,439 $ 54,879,484
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
Revolving line of credit ..................................................... $ 9,555,525 $ 11,283,393
Trade accounts payable ....................................................... 4,089,792 3,555,552
Other accrued liabilities .................................................... 6,230,352 6,355,349
Deferred revenue ............................................................. 60,000 60,000
Accrued restructuring costs .................................................. 1,133,984 1,140,444
Advances on contracts ........................................................ 532,180 940,752
Current portion of long-term debt ............................................ 61,892,822 29,988,315
Current liabilities of discontinued operations ............................... 6,115,989 6,374,093
------------ -----------
Total current liabilities .................................................. 89,610,644 59,697,898
DEFERRED REVENUE ............................................................... 450,000 480,000
DEFERRED LEASE COST ............................................................ 1,003,152 807,156
LONG-TERM DEBT - Less current portion .......................................... 259,709 32,313,087
LONG-TERM LIABILITIES OF DISCONTINUED OPERATIONS ............................... 3,928 9,582
------------ -----------
Total liabilities .......................................................... 91,327,433 93,307,723
------------ -----------
SHAREHOLDERS' DEFICIT
Preferred stock, $.05 par value - authorized 50,000,000 shares; none
outstanding
Common stock, $.01 par value - authorized 50,000,000 shares; issued .......... 130,433 130,144
13,017,688 and 13,014,395, respectively
Additional paid-in-capital ................................................... 62,772,245 62,715,713
Accumulated deficit .......................................................... (100,935,281) (97,412,354)
Accumulated other comprehensive loss ......................................... (4,429,391) (3,861,742)
------------ -----------
Total shareholders' deficit ............................................... (42,461,994) (38,428,239)
------------ -----------
TOTAL .......................................................................... $ 48,865,439 $54,879,484
============ ============
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
F-3
SIMULA, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATION
THREE MONTH PERIOD ENDED SIX MONTH PERIOD ENDED
JUNE 30, JUNE 30,
------------------------------- -------------------------------
2003 2002 2003 2002
-------------- -------------- -------------- --------------
(AS RESTATED (AS RESTATED
SEE NOTE 14) SEE NOTE 14)
REVENUE..................................................... $ 17,217,418 $ 21,604,622 $ 32,421,836 $ 41,409,757
COST OF REVENUE............................................. 10,592,174 13,912,320 20,392,147 26,693,028
-------------- -------------- -------------- --------------
GROSS MARGIN................................................ 6,625,244 7,692,302 12,029,689 14,716,729
ADMINISTRATIVE EXPENSES (Note 14)........................... 3,831,138 3,539,983 7,269,757 6,850,569
RESEARCH AND DEVELOPMENT.................................... 544,343 308,900 1,129,289 713,559
RESTRUCTURING CHARGES....................................... 298,090 -- 598,921 --
-------------- -------------- -------------- --------------
OPERATING INCOME............................................ 1,951,673 3,843,419 3,031,722 7,152,601
INTEREST EXPENSE............................................ 3,084,321 2,572,693 5,756,971 5,114,616
OTHER EXPENSE (Note 7)...................................... 1,000,000 -- 1,000,000 --
-------------- -------------- -------------- --------------
(LOSS) INCOME BEFORE INCOME TAXES........................... (2,132,648) 1,270,726 (3,725,249) 2,037,985
INCOME TAX EXPENSE.......................................... -- 559,047 17,011 839,501
-------------- -------------- -------------- --------------
(LOSS) INCOME BEFORE DISCONTINUED OPERATIONS................ (2,132,648) 711,679 (3,742,260) 1,198,484
(LOSS) INCOME FROM DISCONTINUED OPERATIONS.................. (68,387) (202,424) 219,333 (315,869)
-------------- -------------- -------------- --------------
NET (LOSS) INCOME........................................... $ (2,201,035) $ 509,255 $ (3,522,927) $ 882,615
============== ============== ============== ==============
(LOSS) INCOME PER COMMON SHARE - Basic......................
(LOSS) INCOME BEFORE DISCONTINUED OPERATIONS................ (.16) 0.06 (.29) 0.09
(LOSS) INCOME FROM DISCONTINUED OPERATIONS.................. (.01) (0.02) .02 (0.02)
------------- ------------- ------------- -------------
(LOSS) INCOME PER COMMON SHARE -Basic....................... $ (.17) $ 0.04 $ (.27) $ 0.07
============= ============= ============= =============
(LOSS) INCOME PER COMMON SHARE -Diluted.....................
(LOSS) INCOME BEFORE DISCONTINUED OPERATIONS................ (.16) 0.06 (.29) 0.09
(LOSS) INCOME FROM DISCONTINUED OPERATIONS.................. (.01) (0.02) .02 (0.02)
------------- ------------- ------------- -------------
(LOSS) INCOME PER COMMON SHARE -Diluted..................... $ (.17) $ 0.04 $ (.27) $ 0.07
============= ============= ============= =============
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
F-4
SIMULA, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIT AND COMPREHENSIVE LOSS
SIX MONTHS ENDED JUNE 30, 2003 (AS RESTATED, SEE NOTE 14)
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
----------------------- PAID-IN ACCUMULATED COMPREHENSIVE SHAREHOLDERS' COMPREHENSIVE
SHARES AMOUNT CAPITAL DEFICIT LOSS DEFICIT LOSS
---------- --------- ----------- ------------- ----------- ------------- --------------
Balance, January 1,
2003............ 13,014,395 $ 130,144 $62,715,713 $ (97,412,354) $(3,861,742) $ (38,428,239) $ --
Net loss (Note 14)... (3,522,927) (3,522,927) (3,522,927)
Issuance of
common shares...... 3,293 289 56,532 56,821 --
Currency
translation
adjustment......... (567,649) (567,649) (567,649)
---------- --------- ----------- ------------- ----------- ------------- -----------
Balance, June 30,
2003 (Note 14) 13,017,688 $ 130,433 $62,772,245 $(100,935,281) $(4,429,391) $ (42,461,994) $(4,090,576)
========== ========= =========== ============= =========== ============= ===========
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
F-5
SIMULA, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTH PERIODS ENDED JUNE 30, 2003 AND 2002
2003 2002
-------------- --------------
(AS RESTATED
SEE NOTE 14)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income.................................................................... $ (3,522,927) $ 882,615
Adjustment to reconcile net (loss) income to net cash provided by operating
activities:
Depreciation and amortization.................................................... 1,781,135 1,620,366
Deferred income taxes............................................................ -- 574,481
Capitalized interest............................................................. 795,875 749,860
Loss (gain) on disposal of assets................................................ 175,959 (971)
Restructuring charge............................................................. 598,921 --
Currency translation adjustment.................................................. (567,649) (143,057)
Bad debt expense................................................................. -- 310,874
Non-cash equity compensation..................................................... -- 74,779
Write down of intangibles........................................................ 99,754 --
Changes in net assets and liabilities:
Contract and trade receivables - net of advances................................ 2,492,179 (624,287)
Inventories...................................................................... 1,130,694 638,125
Prepaid expenses and other....................................................... 729,247 220,360
Other assets..................................................................... (37,193) 16,045
Trade accounts payable........................................................... 534,240 (408,365)
Deferred revenue................................................................. (30,000) (693)
Deferred lease costs............................................................. 195,996 210,246
Accrued restructuring costs...................................................... (605,381) (334,875)
Other accrued liabilities........................................................ (124,999) (941,144)
Net assets of discontinued operations........................................... (1,463,151) (1,891,326)
-------------- --------------
Net cash provided by operating activities................................... 2,182,700 953,033
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment............................................... (742,401) (766,077)
Costs incurred to obtain intangibles............................................. (330,311) (67,321)
Proceeds from sale of property, equipment and intangibles....................... 1,551,162 --
-------------- --------------
Net cash provided by (used in) investing activities....................... 478,450 (833,398)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under line of credit.............................................. (1,727,868) 143,095
Principal payments under other debt arrangements................................ (944,746) (89,895)
Issuance of Common Stock...................................................... 56,821 101,205
-------------- --------------
Net cash (used in) provided by financing activities....................... (2,615,793) 154,405
-------------- --------------
NET INCREASE IN CASH AND CASH EQUIVALENTS.............................................. 45,357 274,040
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD......................................... 147,842 461,502
-------------- --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD............................................... $ 193,199 $ 735,542
============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest Paid...................................................................... $ 3,784,118 $ 3,749,175
============== ==============
Income Taxes Paid.................................................................. $ 76,668 $ 394,418
============== ==============
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
F-6
NOTE 1 -- BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Simula, Inc.
and its subsidiaries (collectively "we" and "our"). All of the subsidiaries are
wholly owned. All intercompany transactions are eliminated in consolidation.
The accompanying unaudited consolidated financial statements have been
prepared on a going concern basis, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business. As noted
in the accompanying financial statements, current maturities of debt are
approximately $71,450,000 million as of June 30, 2003 and there is uncertainty
relating to the Company's ability to refinance certain of its debt. These
factors, among others, indicate that the Company may be unable to continue as a
going concern. The accompanying financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts or amounts and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern. As part of the plan
to meet future quarterly covenants and current and long-term debt maturities, we
sold our automotive safety business during July 2003 and subsequently entered
into a letter of intent providing for the sale and merger of Simula, Inc. as
discussed in Note 12 -- Subsequent Events.
As permitted by rules of the Securities and Exchange Commission for interim
reporting, we have prepared the accompanying interim unaudited consolidated
financial statements in accordance with accounting principles generally accepted
in the United States of America ("GAAP") for interim financial information and
with the instructions to Form 10-Q. As permitted by these rules, certain
information and notes required by GAAP for complete financial statements are
condensed or omitted. In the opinion of management, all adjustments and
reclassifications considered necessary for a fair and comparable presentation
have been included and are of a normal recurring nature. Operating results for
the three and six-month periods ended June 30, 2003 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2003. Such interim financial statements should be read in conjunction with our
consolidated financial statements and notes thereto included in our 2002 Form
10-K.
NOTE 2 -- RECENTLY ISSUED ACCOUNTING STANDARDS
In April 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 149, "Amendment of
Statement No. 133 on Derivative Instruments and Hedging Activities", which
amended and refined certain characteristics of derivative instruments and
hedges. The application of SFAS No. 149 did not have a material effect on the
Company's financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity", which requires
the classification of certain financial instruments, previously classified
within the equity section of the balance sheet, to be included in liabilities.
SFAS No. 150 is effective for financial instruments entered into or modified
after May 31, 2003 and June 15, 2003 for all other instruments. The application
of SFAS No. 150 did not have a material effect on the Company's financial
statements
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, amendment of FASB Statement No.13, and Technical Corrections",
which, among other things, no longer allows for the classification of gains and
losses from extinguishment of debt as extraordinary. We adopted SFAS No. 145
effective January 1, 2003 and upon adoption, gains and losses on certain future
debt extinguishment, if any, will be recorded in pre-tax income. In addition any
previously recorded extraordinary gains or losses from early extinguishment of
debt will be reclassified to income before extraordinary income or loss to
conform to the requirements under SFAS 145.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities", which addresses financial accounting and
reporting for costs associated with exit or disposal activities. SFAS No. 146
also nullifies Emerging Issues Task Force ("EITF") No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)". SFAS No. 146 is
effective for exit or disposal activities initiated after December 31, 2002. We
adopted SFAS No. 146 effective January 1, 2003. Current transactions which may
effect the Company are discussed in Note 12, to the unaudited consolidated
financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure". This Statement amends SFAS No. 123
to provide alternative methods of transition for a voluntary change to the fair
value method of accounting for stock-based employee compensation. We adopted the
new disclosure requirements of SFAS No. 148 in 2002. We continue to account for
stock-based compensation under the recognition and measurement principles of
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees", and related Interpretations.
In November 2002, the FASB issued Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." The interpretation requires a
guarantor to recognize, at the inception of a guarantee, a liability for the
fair value of the obligation undertaken in issuing the guarantee and expands the
disclosures required. Initial recognition and measurement provisions of FIN No.
45 are applicable on a prospective basis to guarantees
F-7
issued or modified after December 31, 2002. The adoption of FIN No. 45 had no
effect on our financial position, results of operations or cash flows.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities - an Interpretation of ARB No. 51." FIN No. 46 clarifies the
consolidation requirements of variable interest entities. We have adopted the
interpretation. We have no interests in any variable interest entities and,
consequently, adoption of FIN No. 46 had no effect on our financial position,
results of operations or cash flows.
NOTE 3 - EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators of
basic and diluted per share computations. For the three and six month periods
ended June 30, 2003 the effect of 142,212 and 190,936, respectively, shares
related to stock options were not used in determining dilutive earnings per
share because the result would have been anti-dilutive. Additionally, for the
three and six month periods ended June 30, 2003 and 2002, the effect of
1,774,074 shares to be issued upon conversion of the 8% Senior Subordinated
Convertible Notes was not used in determining dilutive earnings per share
because the result would have been anti-dilutive.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- -----------------------------
2003 2002 2003 2002
-------------- ------------ -------------- ------------
(AS RESTATED (AS RESTATED
SEE NOTE 14) SEE NOTE 14)
Net (loss) earnings available to common shareholders.......... $ (2,201,035) $ 509,255 $ (3,522,927) $ 882,615
============== ============= ============== =============
Basic weighted average shares outstanding..................... 13,020,980 12,910,428 13,017,688 12,901,694
Effect of dilutive securities................................. -- 360,011 -- 321,852
-------------- ------------- -------------- -------------
Diluted weighted average shares outstanding................... 13,020,980 13,270,439 13,017,688 13,223,546
============== ============= ============== =============
Basic per share amounts....................................... $ (0.17) $ 0.04 $ (0.27) $ 0.07
============== ============= ============== =============
Diluted per share amounts..................................... $ (0.17) $ 0.04 $ (0.27) $ 0.07
============== ============= ============== =============
NOTE 4 - STOCK BASED COMPENSATION
We have three stock-based employee compensation plans. We account for those
plans under the recognition and measurement principles of APB Opinion No. 25,
"Accounting for Stock Issued to Employees",and related Interpretations under
which no compensation cost has been recognized. However, we have computed
compensation cost, for pro forma disclosure purposes, based on the fair value of
all options awarded on the date of grant, utilizing the Black-Scholes option
pricing method. The following table illustrates the effect on net (loss) income
and (loss) income per share if we had applied the fair value recognition
provisions of FASB Statement No. 123, "Accounting for Stock-Based
Compensation",to stock-based employee compensation for the three month and six
month periods ended June 30:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- -----------------------------
2003 2002 2003 2002
-------------- ------------ -------------- ------------
(AS RESTATED (AS RESTATED
SEE NOTE 14) SEE NOTE 14)
Net (loss) income - as reported............................... $ (2,201,035) $ 509,255 $ (3,522,927) $ 882,615
============== ========== ============== ============
Deduct: Total stock based employee compensation expense
determined under fair value based method.................... (211,481) (115,334) (476,141) (1,413,659)
-------------- ---------- -------------- ------------
Net (loss) income - pro forma................................. $ (2,412,516) $ 393,921 $ (3,999,068) $ (531,044)
============== ========== ============== ============
(Loss) income per share: basic and diluted as reported........ $ (0.17) $ 0.04 $ (0.27) $ 0.07
============== ========== ============== ============
(Loss) income per share: basic and diluted - pro forma........ $ (0.19) $ 0.03 $ (0.31) $ (0.04)
============== ========== ============== ============
F-8
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes options pricing model and the following table illustrates the
assumptions used for grants for the three month and six-month periods ended
June 30:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------------------------------------------
2003 2002 2003 2002
---------------- ---------------- ---------------- ----------------
Dividend yield None None None None
Expected volatility........ 116% 96% 116% 98%
Risk-free interest rate.... 3.6% 3.6% 3.6% 3.6%
Expected lives............. 3.25 3.25 3.25 3.25
NOTE 5 - INVENTORIES
At June 30, 2003 and December 31, 2002, inventories consisted of the
following:
2003 2002
------------- -------------
Raw Materials.............. $ 2,802,905 $ 3,298,676
Work in Progress........... 370,238 636,980
Finished Goods............. -- 258,181
Inventory Reserve.......... (350,000) (240,000)
------------- -------------
Total Inventories........ $ 2,823,143 $ 3,953,837
============= =============
NOTE 6 - PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
At June 30, 2003 and December 31, 2002 property, equipment and leasehold
improvements consisted of the following:
2003 2002
-------------- ---------------
Land................................................................... $ 481,888 $ 816,888
Buildings and leasehold improvements................................... 2,640,798 3,885,263
Equipment.............................................................. 12,939,670 13,229,244
-------------- ---------------
Total.................................................................. 16,062,356 17,931,395
Less accumulated depreciation and amortization......................... (9,809,211) (10,194,039)
-------------- ---------------
Property, equipment and leasehold improvements - net................. $ 6,253,145 $ 7,737,356
============== ===============
NOTE 7 - DEBT
On June 30, 2003, we were not in compliance with certain non-monetary
financial covenants under our Revolving Line of Credit (the "RLC"). On August
12, 2003, we received a waiver of the non-compliance at June 30, 2003. Our RLC
had outstanding borrowings of $9.6 million and remaining borrowing availability
of $5.8 million at June 30, 2003 as compared to outstanding borrowings of $11.3
million and a remaining borrowing availability of $1.3 million at December 31,
2002. In addition, as of June 30, 2003, we were not in compliance with a certain
non-monetary financial covenant under our Senior Secured Note which, provided
for a performance fee of $1.0 million. The fee has been recorded as of June 30,
2003, is separately classified in other expense, and was paid on July 31, 2003.
On August 12, 2003, we received a waiver of the non-compliance at June 30, 2003.
NOTE 8 - OTHER INTANGIBLE ASSETS
All of our intangible assets with finite lives ranging from 15 to 20 years
were principally comprised of technology patents with a total cost at June 30,
2003 and December 31, 2002 as follows:
2003 2002
------------- -------------
Patents and licenses........................... $ 1,626,068 $ 1,686,456
Other.......................................... 132,669 566,010
------------- -------------
Total.......................................... 1,758,737 2,252,466
Less accumulated amortization.................. (369,255) (940,609)
------------- -------------
Intangibles - net............................ $ 1,389,482 $ 1,311,857
============= =============
F-9
Intangible asset amortization expense for the three month periods ended
June 30, 2003 and 2002 were approximately $ 58,000 and $ 60,000, respectively.
Estimated amortization expense for the five succeeding fiscal years is as
follows:
2003 ................................... $ 116,000
2004 ................................... 100,000
2005 ................................... 100,000
2006 ................................... 100,000
2007 ................................... 100,000
NOTE 9 - RESEARCH AND DEVELOPMENT
Our research and development efforts arise from funded development contracts
and proprietary research and development. Amounts arising from such efforts are
as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2003 2002 2003 2002
----------- ------------ ------------- --------------
Research and development expenses............... $ 544,343 $ 308,900 $ 1,129,289 $ 713,559
=========== ============ ============= ==============
Funded contracts:
Revenue funded by customers................... $ 180,928 $ 771,092 $ 471,578 $ 1,829,104
Research and development expenses classified
as cost of such revenue..................... (99,531) (462,105) (267,310) (1,236,402)
----------- ------------ ------------- --------------
Income of funded contracts...................... $ 81,397 $ 308,987 $ 204,268 $ 592,702
=========== ============ ============= ==============
NOTE 10 -- RESTRUCTURING
In December 1999, we adopted a plan of restructuring that included the
divestiture of our commercial airline seat manufacturing operation. In July
2002, we adopted a plan of restructuring focused on reducing workforce to align
with a newly developed strategic focus and in January 2003, we adopted a plan to
restructure our Aerospace and Defense business by reducing workforce and closing
our Asheville facility and consolidating those operations into our Phoenix
facility. The Asheville facility was closed and all operations were moved to the
Phoenix location as of March 31, 2003. We completed the sale of the Asheville
facility on April 8, 2003 and retired the mortgage note payable related to that
facility. At June 30, 2003, there was $1,133,984 of remaining restructuring
liability, which principally relates to lease obligations associated with the
closed airline facility, which run through May of 2008 and other contracts as a
part of the 1999 restructuring and severance obligations as part of the 2002 and
2003 restructuring, which are expected to be fully paid by December of 2004. A
summary of the change in accrued restructuring is as follows:
FACILITY OTHER
CLOSURE CONTRACTS SEVERANCE TOTAL
------------ ------------ ------------ -------------
Balance at December 31, 2002................ $ 535,285 $ 331,941 $ 273,218 $ 1,140,444
First quarter 2003 restructuring............ -- -- 300,831 300,831
Second quarter 2003 restructuring........... 39,647 258,443 298,090
Reclassification of charges................. 294,279 (294,279) -- --
Cash payments............................... (117,721) (2,040) (485,620) (605,381)
------------ ------------ ------------ -------------
Balance at June 30, 2003.................... $ 711,843 $ 75,269 $ 346,872 $ 1,133,984
============ ============ ============ =============
F-10
NOTE 11 - DERIVATIVE INSTRUMENTS
As of June 30, 2003, we have certain receivables and payables denominated in
Euros, however those receivables and payables denominated in Euros we sold as
part of the transaction completed on July 22, 2003 related to our commercial
automotive business (see Note 12). To eliminate our exposure to changes in the
U.S. dollar/Euro exchange rate, we periodically enter into forward contracts to
protect our future cash flows. Our forward contracts generally range from one to
three months in original maturity. As of June 30, 2003, we have no outstanding
contracts.
In accordance with SFAS No. 133, we designate such forward contracts as cash
flow hedges. We account for changes in the fair value of our forward contracts,
based on changes in the forward exchange rate, with all such changes in fair
value reported in other comprehensive income. Amounts in other comprehensive
income are reclassified into earnings upon settlement of the forward contract at
an amount that will offset the related transaction gain or loss arising from the
re-measurement and adjust earnings for the cost of the forward contracts. As of
June 30, 2003, there were no significant gains or losses recognized in earnings
for hedge ineffectiveness and we did not discontinue any hedges because it was
probable that the original forecasted transaction would not occur.
NOTE 12 - SUBSEQUENT EVENTS
On July 22, 2003, we completed the sale of all the assets of our Automotive
Safety division to Zodiac, S.A. at a selling price of $14.3 million in cash.
Customary closing and purchase price adjustments are expected to be completed
within 45 days of the sale closing. After deducting closing costs and purchase
price adjustments, we received net proceeds of approximately $11.0 million.
Currently included in the closing costs is approximately $1.0 million related to
two separate escrow accounts, from which we can potentially recover a maximum
$0.5 million within three months and a maximum of $0.5 million in 18 months. The
transaction resulted in a gain on sale of discontinued operations of
approximately $0.1 million before any recovery of amounts deposited in escrows
previously discussed. We applied the net proceeds to repay a portion of our
outstanding debt.
Our automotive safety business, which represents the Company's commercial
segment, has been reported as a discontinued operation within these financial
statements. The major classes of assets and liabilities included as part of the
sale of our automotive safety business consisted of the following:
DECEMBER 31,
JUNE 30, 2003 2002
-------------- --------------
Receivables and other......................................... $ 6,893,021 $ 6,999,476
Inventory and other........................................... 3,599,797 2,116,388
-------------- --------------
Current Assets of Discontinued Operations................. 10,492,818 9,115,864
-------------- --------------
Property, Equipment and Leaseholds, net....................... 3,708,729 4,035,891
Intangibles, net.............................................. 2,279,009 2,222,621
Other assets.................................................. 1,743,356 1,650,143
-------------- --------------
Long Term Assets of Discontinued Operations............... 7,731,094 7,908,655
-------------- --------------
Total Assets of Discontinued Operations....................... $ 18,223,912 $ 17,024,519
============== ==============
Trade accounts payable........................................ $ 2,916,718 $ 2,615,033
Other accrued liabilities and other........................... 3,199,271 3,759,060
-------------- --------------
Current Liabilities of Discontinued Operations............ 6,115,989 6,374,093
-------------- --------------
Deferred Income............................................... 3,928 9,582
-------------- --------------
Long Term Liabilities of Discountined Operations............ 3,928 9,582
Total Liabilities of Discontinued Operations.................. $ 6,119,917 $ 6,383,675
============== ==============
Revenue and (loss) income before income taxes for our automotive safety
business for the periods ended June 30:
THREE MONTH PERIOD ENDED SIX MONTH PERIOD ENDED
2003 2002 2003 2002
--------- --------- ---------- ----------
Revenues......................... 9,456,837 8,576,869 18,565,287 17,874,023
(Loss) income before income
taxes ...................... 104,613 (376,100) 485,322 (564,628)
On July 23, 2003 we announced that we signed a Letter of Intent ("LOI") to
be acquired by Armor Holdings, Inc. (NYSE:AH) of Jacksonville, Florida. The LOI
states that Armor Holdings shall acquire all outstanding common stock of Simula,
retire outstanding indebtedness, and assume all liabilities of Simula for total
consideration of $110.5 million. Consideration to Simula's shareholders will, at
Armor Holdings' discretion, consist of cash or a combination of cash and
registered shares of Armor Holdings' common stock, with at least 20% of the
value of the payment to shareholders to be in cash. The transaction is
structured as a merger and is expected to be taxable to Simula's shareholders.
The LOI calls for an exclusive negotiation period through August 29, 2003,
during which the companies will endeavor to complete all necessary activities
leading to the execution of a definitive merger agreement. The LOI provides for
a good faith deposit by Armor Holdings, expedited due diligence and payment of a
break-up fee if Simula accepts a competing offer. The transaction is subject to,
among other things, satisfactory due diligence, the execution of a definitive
agreement, regulatory approvals including satisfaction of the requirements and
waiting period related to the Hart-Scott-Rodino Antitrust Improvements Act,
requisite approvals by each company's Board of Directors, and the approval of
our shareholders. Upon completion of the definitive agreement, we anticipate
submission of a proxy and registration statement to shareholders for approval of
the transaction and a closing on or about November 15, 2003. The Board of
Directors of both Simula and Armor Holdings have approved the proposed
transaction as defined in the LOI.
NOTE 13 - SEGMENT REPORTING
We are a holding company for wholly owned subsidiaries, which now operates
in one primary business segment. Our Commercial segment consisted of our
Automotive Safety division which was sold as discussed in Note 12, above. Our
Aerospace and Defense segment includes operations that design and manufacture
crash resistant components, energy absorbing devices, and ballistic armor
products, which are sold principally to branches of the United States armed
forces. All other activity, included in Other, represents general corporate
operations, including unallocated interest and technology sales and royalties
and operations from our business derived from proprietary technology and polymer
materials.
F-11
For the three-month period ended June 30, 2003 and 2002, inter-segment sales
were insignificant and total intercompany sales of $ 71,437 and $ 20,685,
respectively, have been eliminated. For the three-month periods ended June 30,
2003 and 2002, sales to branches of the United States Armed Forces were 88% and
96%, respectively, of total sales.
2003
--------------------------------------------
AEROSPACE
DEFENSE OTHER TOTAL
-------------- ------------ --------------
(AS RESTATED (AS RESTATED
SEE NOTE 14) SEE NOTE 14)
Revenue:
Contract revenue............................. $ 16,899,461 $ -- $ 16,899,461
Product sales:............................... -- 32,378 32,378
Other
Technology sales and royalties............... -- 285,579 285,579
-------------- ------------ --------------
Total revenue.................................. $ 16,899,461 $ 317,957 $ 17,217,418
============== ============ ==============
Operating income (loss)........................ $ 2,828,710 $ (877,037) $ 1,951,673
2002
--------------------------------------------
AEROSPACE
AND
DEFENSE OTHER TOTAL
-------------- ------------ --------------
Revenue:
Contract revenue.............................. $ 21,083,449 $ -- $ 21,083,449
Product sales:
Other....................................... -- 84,249 84,249
Technology sales and royalties................ -- 436,924 436,924
-------------- ----------- --------------
Total revenue................................... $ 21,083,449 $ 521,173 $ 21,604,622
============== =========== ==============
Operating income (loss)......................... $ 3,871,454 $ (28,035) $ 3,843,419
For the six-month periods ended June 30, 2003 and 2002, inter-segment sales were
insignificant and total intercompany sales of $ 211,052 and $ 47,478,
respectively, have been eliminated. For the six-month period ended June 30, 2003
and 2002, sales to branches of the United States Armed Forces were 88% and 82%,
respectively, of total sales.
2003
----------------------------------------------
AEROSPACE
DEFENSE OTHER TOTAL
-------------- -------------- --------------
(AS RESTATED (AS RESTATED
SEE NOTE 14) SEE NOTE 14)
Revenue:
Contract revenue.................... $ 31,939,045 $ -- $ 31,939,045
Product sales:
Other............................. -- 36,287 36,287
Technology sales and royalties...... -- 446,504 446,504
-------------- -------------- --------------
Total revenue......................... $ 31,939,045 $ 482,791 $ 32,421,836
============== ============== ==============
Operating income (loss)............... $ 4,773,583 $ (1,741,861) $ 3,031,722
2002
---------------------------------------------
AEROSPACE AND
DEFENSE OTHER TOTAL
-------------- ------------- --------------
Revenue:
Contract revenue.................... $ 40,373,195 $ -- $ 40,373,195
Product sales:
Other............................. -- 187,014 187,014
Technology sales and royalties...... -- 849,548 849,548
-------------- ------------- --------------
Total revenue......................... $ 40,373,195 $ 1,036,562 $ 41,409,757
============== ============= ==============
Operating income (loss)............... $ 7,386,334 $ (233,733) $ 7,152,601
NOTE 14 -- RESTATEMENT:
Subsequent to the issuance of the Company's unaudited consolidated financial
statements for the quarter ended June 30, 2003, the Company determined that
certain costs of the sale of the automotive safety business and the potential
merger with Armor Holdings were incorrectly capitalized as Prepaid Expenses and
Other on the balance sheet. These costs include legal and other fees, related to
these proposed transactions that had been incurred by the Company and should
have been recorded as expense as incurred. The Prepaid Expense and Other amount
in the balance sheet at June 30, 2003 has been restated to expense the
capitalized amount of $593,890. Of this amount, $144,057 was expensed in the
restated three month period ended March 31, 2003 and $449,833 has been expensed
in the three month period ended June 30, 2003. In addition, (loss)/income per
share from discontinued operations for the three month and six month periods
ended June 30, 2003 have been restated to ($0.01) and $.02 per share,
respectively, instead of the previously reported amounts of $0.00 and $0.01,
respectively. A summary of the significant effects of the restatement is as
follows:
JUNE 30, 2003
--------------------------------
AS PREVIOUSLY
REPORTED AS RESTATED
------------- -------------
Prepaid expense and other......................... $ 1,266,895 $ 673,005
Total current assets.............................. 32,321,969 31,728,079
Total assets...................................... 49,459,329 48,865,439
Accumulated deficit............................... (100,341,391) (100,935,281)
Total shareholders' deficit....................... (41,868,104) (42,461,994)
Total liabilities and shareholders' deficit....... 49,459,329 48,865,439
FOR THE THREE MONTHS ENDED
JUNE 30, 2003
--------------------------------
AS PREVIOUSLY
REPORTED AS RESTATED
------------- -------------
Administrative Expenses............................ $ 3,381,305 $ 3,831,138
Operating Income................................... 2,401,506 1,951,673
Loss Before Income Taxes........................... (1,682,815) (2,132,648)
Loss Before Discontinued Operations................ (1,682,815) (2,132,648)
Net loss........................................... (1,751,202) (2,201,035)
Net loss per share-- basic......................... $ (.13) $ (.17)
Net loss per share-- diluted....................... $ (.13) $ (.17)
FOR THE SIX MONTHS ENDED
JUNE 30, 2003
--------------------------------
AS PREVIOUSLY
REPORTED AS RESTATED
------------- -------------
Administrative Expenses............................ $ 6,675,867 $ 7,269,757
Operating Income................................... 3,625,612 3,031,722
Loss Before Taxes.................................. (3,131,359) (3,725,249)
Loss Before Discontinued Operations................ (3,148,370) (3,742,260)
Net loss........................................... (2,929,037) (3,522,927)
Net loss per share-- basic......................... $ (.23) $ (.27)
Net loss per share-- diluted....................... $ (.23) $ (.27)
F-12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
The following management's discussion and analysis gives effect to the
restatement discussed in Note 14 to the unaudited consolidated financial
statements.
RESULTS OF OPERATIONS
THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2003 COMPARED TO
THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2002
CONSOLIDATED
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------------------------------- ------------------------------------------------------
PERCENT PERCENT
(IN THOUSANDS) 2003 2002 CHANGE INC (DEC) 2003 2002 CHANGE INC (DEC)
------------ ----------- ------------- ------------ ------------ ------------ ------------ ------------
(AS RESTATED (AS RESTATED (AS RESTATED (AS RESTATED (AS RESTATED (AS RESTATED
SEE NOTE 14) SEE NOTE 14) SEE NOTE 14) SEE NOTE 14) SEE NOTE 14) SEE NOTE 14)
Revenue............... $ 17,217 $21,605 ($4,388) (20%) $32,422 $41,410 $(8,988) (21%)
Gross margin.......... 6,625 7,692 (1,067) (13%) 12,030 14,717 (2,687) (18%)
Administrative and
research and
development
expense.............. 4,375 3,849 526 14% 8,399 7,564 835 11%
Operating income...... 1,952 3,843 (1,891) (49%) 3,032 7,153 (4,121) (57%)
Interest expense,
net.................. 3,084 2,573 511 19% 5,757 5,115 642 12%
Other expense......... 1,000 -- 1,000 100% 1,000 -- 1,000 100%
(Loss) income
before income tax.... (2,132) 1,271 (3,403) (268%) (3,725) 2,038 (5,763) (283%)
Income tax expense. .. -- 559 (559) (100%) 17 840 (823) (97%)
Gross margin as a
percentage of
revenue.............. 38% 35% 37% 35%
Administrative and
research and
development
expenses as a
percentage of
revenue.............. 25% 17% 26% 18%
AEROSPACE & DEFENSE
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------------------------- ----------------------------------------------
PERCENT
PERCENT INC
(IN THOUSANDS) 2003 2002 CHANGE INC (DEC) 2003 2002 CHANGE (DEC)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Revenue.................... $ 16,899 $ 21,083 $(4,184) (19%) $ 31,939 $ 40,373 $(8,434) (20%)
Gross margin............... 6,464 7,312 (848) (11%) 11,817 14,022 (2,205) (15%)
Gross margin as a
percentage of revenue..... 38% 34% 36% 34%
RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIOD ENDED JUNE 30, 2003
Revenue for the three-month period ended June 30, 2003 decreased 20%
compared to revenue in the same period for 2002. Revenue for the period declined
19% in the Aerospace and Defense segment primarily due to timing of orders and
delays in Department of Defense funding of various programs. We completed the
move of our Asheville facility to our Phoenix facility as of March 31, 2003;
however, temporary revenue shortfalls affected this area of our business as the
former Asheville operations were integrated into the Phoenix facility. Small
Arms Protective Inserts ("SAPI") business continues to be robust. However, SAPI
revenues were negatively impacted during the second quarter of 2003 compared to
the same period in 2002 due to the timing of orders and the validation and
rework completed in the first quarter of 2003. The aforementioned decreases were
partially offset by increased revenues related to our Inflatable Systems and
Product Spares. The remaining revenue decrease is attributable to our technology
licensing efforts, which decreased during the second quarter of 2003, primarily
due to a strategic decision to retain all technology rights as an asset during
our focused efforts on selling the entire Company. Results were consistent with
internal expectations and forecasts.
F-13
Gross margin as a percent of sales increased to 38% for the three-month
period ended June 30, 2003 from 35% for the comparable period in 2002. Gross
margin as a percent of sales in our Aerospace and Defense segment increased to
38% for the three months ended June 30, 2003 from 34% for the same period in
2002. The increase was primarily due to cost savings related to the move and
integration of the Asheville facility to our Phoenix location as well as the
effect of cost reduction efforts completed in 2002 and early 2003.
Administrative and research and development expenses for the three-month
period ended June 30, 2003 increased $0.5 million or 14% as compared to the same
2002 period. The increase is related to increased research and development
activities and transaction costs related to selling our automotive safety
business as well as the sale of the entire Company. We and others in the
aerospace and defense industry have experienced a shift from externally funded
development to more internally funded development, which has caused research and
development expenditures to increase for the three months ended June 30, 2003
compared to the same period in 2002. Transaction costs for the three-month
period ended June 30, 2003 were approximately $0.4 million, additionally,
approximately $0.3 million of relocation charges related to the Asheville
facility shutdown and move is included in general administrative expense for the
three months ended June 30, 2003. The aforementioned increases were partially
offset by cost saving reductions in general administrative expenses related to
restructuring activities discussed above.
Operating income for the three-month period ended June 30, 2003 was $2.0
million compared to $3.8 million for the same period in 2002. This decrease was
attributable to lower revenues and transaction costs discussed above as well as
restructuring charges and other costs associated with the move and integration
of our Asheville facility.
Interest expense increased to $3.1 million for the three-month period ended
June 30, 2003 compared to $2.6 for the same period in 2002. The increase is
primarily attributable to approximately $0.4 million of expense related to a
yield maintenance interest feature in the mortgage note for the Asheville
facility that was retired in April 2003. Cash paid for interest for each of the
three-month periods ended June 30, 2003 and 2002 was $1.4 million and $1.4
million, respectively.
Other expense for the three-month period ended June 30, 2003 was $1.0
million and was entirely attributable to a one-time performance fee payment
related to covenant non-compliance under our Senior Secured Note.
We recorded a tax expense of approximately $173,000 and a tax benefit of
$173,676, respectively in discontinued operations for the three-month period
ended June 30, 2003 and 2002 for our operations in the U.K. and believe that the
year to date tax rate is properly reflected in the financial statements.
RESULTS OF OPERATIONS FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2003
Revenue for the six-month period ended June 30, 2003 decreased 21% compared
to revenue in the same period for 2002. Revenue for the period declined 20% in
the Aerospace and Defense segment. In the first quarter of 2003, SAPI body armor
revenue grew compared to the same period in 2002. However, production revenues
and profitability were negatively impacted as we completed the SAPI body armor
design validation for rework announced in November of 2002. We resumed full
production of SAPI for the U.S. Army in late February 2003, but the design
validation process did cause delay in the timing of revenues anticipated in the
second quarter of 2003 related to new SAPI orders. Also in the first quarter, we
completed the consolidation of our Asheville, North Carolina, operation into the
larger Aerospace and Defense facility based in Phoenix. The plant closure and
transition resulted in a temporary revenue shortfall. Additionally, revenues
were negatively impacted by decreases in orders for our military sealed
parachute product and were partially offset by increased production of military
personnel vests. The aforementioned decreases were also partially offset by
increases in our Inflatable Systems and Product Spares. Technology and licensing
revenues for the six-months ended June 30, 2003 decreased approximately 48%
compared to the same period in 2002 and is primarily attributed to a strategic
decision to retain all technology rights as an asset during our focused efforts
on selling the entire Company.
Gross margin as a percentage of sales increased to 37% for the six-month
period ended June 30, 2003 from 35% for the comparable period in 2002. Gross
margin as a percent of sales in our Aerospace and Defense segment increased to
36% for the six months ended June 30, 2003 from 34% for the same period in 2002.
The integration of the Asheville facility to the Phoenix location enabled us to
achieve cost savings not experienced in 2002 and cost reduction efforts began in
2002 and early 2003 have been the key drivers for the increased margins.
F-14
Administrative and research and development expenses for the six-month
period ended June 30, 2003 increased $0.8 million or 11% as compared to the same
2002 period. The increase is due primarily to increases in research and
development costs due to investments in the design and qualification testing of
new SAPI body armor product for future procurements as well as by company wide
premium increases in insurance that did not have an impact in the six month
period ended June 30, 2002. Also included in general administrative expense as
of June 30, 2003 is approximately $0.6 million of transaction costs related to
the selling of our automotive safety business as well as the sale of the entire
Company and $0.4 million of relocation costs related to the Asheville facility
shutdown and move. These increases in costs were partially offset by cost
reductions activities initiated in 2002 and early 2003.
Operating income for the six-month period ended June 30, 2003 was $3.0
million as compared to $7.2 million for the same period in 2002. The 2003
operating income for the six-month period was negatively impacted by lower
revenues discussed above as well as restructuring charges, transaction costs,
costs associated with the move of our Asheville facility, the investments in the
design and qualification testing for SAPI body armor for future procurements and
the completion of the voluntary SAPI rework.
Interest expense for the six-month period ended June 30, 2003 was $5.8
million compared to $5.1 million for the same period in 2002. The increase in
interest expense between the two periods is primarily attributable to
approximately $0.4 million of expense related to a yield maintenance interest
feature in the mortgage note for the Asheville facility that the was retired in
April 2003. Cash paid for interest for each of the six-month periods ended June
30, 2003 and 2002 was $3.8 million.
Other expense for the six-month period ended June 30, 2003 was $1.0 million
and was entirely attributable to a one-time performance fee payment related to
covenant non-compliance for failure to met a leverage ratio as of June 30, 2003
under our Senior Secured Note.
We recorded a tax expense of approximately $283,000, of which approximately
$265,989 is recorded in discontinued operations, for the six-month period ended
June 30, 2003 for our operations in the U.K. and North Carolina and a tax
expense of approximately $591,000, of which approximately $248,759 of benefit
was recorded in discontinued operations, for the six month period ended June 30,
2002. We believe that the year to date tax rate is properly reflected in the
financial statements.
LIQUIDITY AND CAPITAL RESOURCES
The accompanying unaudited consolidated financial statements have been
prepared on a going concern basis, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business. As noted
in the accompanying financial statements, current maturities of debt are
approximately $71,450,000 million as of June 30, 2003 and there is uncertainty
relating to the Company's ability to refinance certain of its debt. These
factors, among others, indicate that the Company may be unable to continue as a
going concern. The accompanying financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts or amounts and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern. As part of the plan
to meet future quarterly covenants and current and long-term debt maturities, we
sold our automotive safety business during July 2003 and subsequently entered
into a letter of intent providing for the sale and merger of Simula, Inc. as
discussed in Note 12. Subsequent Events of the unaudited consolidated financial
statements.
Current maturities of our debt as of June 30, 2003 are $71.5 million and
primarily consist of $ 9.6 million under our revolving line of credit ("RLC")
due September 30, 2003, $3.2 million of our 9.5% Senior Subordinated Notes due
September 30, 2003, $27.3 million of our Senior Secured Note due December 31,
2003, and $31.4 million of our 8% Senior Subordinated Notes due May 1, 2004. As
part of the plan to meet future quarterly covenants and current and long-term
debt maturities, we sold our Automotive Safety division during July 2003 and
subsequently entered into a letter of intent providing for the sale and merger
of Simula, Inc., as discussed below.
On July 22, 2003, we completed the sale of all the assets of our Automotive
Safety division to Zodiac, S.A. at a selling price of $14.3 million in cash.
Customary closing and purchase price adjustments are expected to be completed
within 45 days of the sale closing. After deducting closing costs and purchase
price adjustments, we received net proceeds of approximately $11.0 million.
Currently included in the closing costs is approximately $1.0 million related to
two separate escrow accounts, from which we can potentially recover a maximum
$0.5 million within three months and a maximum of $0.5 million in 18 months. The
transaction resulted in a gain on sale of discontinued operations of
approximately $0.1 million before recovery of any amounts deposited in the
escrows previously discussed. We applied the net proceeds to repay a portion of
our outstanding debt.
On July 23, 2003, we announced that we signed a Letter of Intent ("LOI") to
be acquired by Armor Holdings, Inc. (NYSE:AH) of Jacksonville, Florida. The LOI
states that Armor Holdings shall acquire all outstanding common stock of the
Company, retire outstanding indebtedness, and assume all liabilities of Simula
for total consideration of $110.5 million. Consideration to Simula's
shareholders will, at Armor Holdings' discretion, consist of cash or a
combination of cash and registered shares of Armor Holdings' common stock, with
at least 20% of the value of the payment to shareholders to be in cash. The
transaction is structured as a merger and is expected to be taxable to Simula's
shareholders.
The LOI calls for an exclusive negotiation period through August 29, 2003,
during which the companies will endeavor to complete all necessary activities
leading to the execution of a definitive merger agreement. The LOI provides for
a good faith deposit by Armor Holdings, expedited due diligence and payment of a
break-up fee if Simula accepts a competing offer. The transaction is subject to,
among other things, satisfactory due diligence, the execution of a definitive
agreement, regulatory approvals including
F-15
satisfaction of the requirements and waiting period related to the
Hart-Scott-Rodino Antitrust Improvements Act, requisite approvals by each
company's Board of Directors, and the approval of Simula's shareholders. Upon
completion of the definitive agreement, we anticipate submission of a
proxy/registration statement to its shareholders for approval of the transaction
and a closing on or about November 15, 2003. The Board of Directors of both
Simula and Armor Holdings have approved the proposed transaction as defined in
the LOI.
On June 30, 2003, we were not in compliance with certain non-monetary
financial covenants under our RLC. On August 12, 2003, we received waivers of
the non-compliance at June 30, 2003. In addition, as of June 30, 2003, we were
not in compliance with certain non-monetary financial covenants under our Senior
Secured Note, which provided for a fee of $1.0 million. The fee has been
recorded as of June 30, 2003, is separately classified in other income and
expense and was paid on July 31, 2003. On August 12, 2003, we received a waiver
of the non-compliance at June 30, 2003.
Because of our management and operational re-alignment and our operational
profitability, we expect to generate future positive operating cash flows that,
together with our existing availability under our RLC, will be adequate to fund
our planned operations, excluding the principal payments on the current debt
previously discussed.
We continually review our revenue and cost forecasts so that we can react to
changes in our operations and liquidity position. The amount and timing of
Department of Defense procurement and future constraints on certain raw
materials and their costs could impact our ability to generate Aerospace and
Defense revenue and income. SEE "FORWARD-LOOKING INFORMATION AND RISKS AND
UNCERTAINTIES IN OUR BUSINESS" below AND "QUANTITATIVE AND QUALITATIVE
DISCLOSURE ABOUT MARKET RISK" included Item 3 of this Part I
Our ability to generate sufficient cash flow from operations is principally
dependent upon our ability to continue to increase revenue and contain or reduce
operating expenses. At June 30, 2003, we had cash and cash equivalents of
$193,199 compared to $147,842 at December 31, 2002. Our RLC had outstanding
borrowings of $9.6 million and remaining borrowing availability of $5.8 million
at June 30, 2003 as compared to outstanding borrowings of $11.3 million and a
remaining borrowing availability of $1.3 million at December 31, 2002. At August
11, 2003 our outstanding borrowings under the RLC was $0.7 million and remaining
borrowing availability was $4.1 million. Because of our federal and certain
state net operating loss carryforwards, we are not a significant cash taxpayer.
Operating activities provided approximately $2.2 million of cash during the
six months ended June 30, 2003 as compared to approximately $1.0 million for the
comparable period in 2002. The increase in cash provided by operations was
attributable to less overall working capital required as compared to the prior
2002 period, which required heavier investments primarily in accounts receivable
and inventory and was partially offset by an increase in accounts payable and
decreases in advances on contracts.
Investing activities provided $0.5 million during the six-months ended June
30, 2003 compared to a use of approximately $0.8 million for the same period in
2002. The increase in cash provided by investing activities is related to the
completion of the sale of the Asheville facility. After closing costs, we
received proceeds of approximately $1.5 million and applied those proceeds to
retire the mortgage on the facility of approximately $0.9 million and pay a
yield maintenance interest fee of approximately $0.4 million, which is recorded
in interest expense. The cash provided by investing activities was partially
offset by the purchase of manufacturing equipment and additional investment in
our patent portfolio.
Financing activities used net cash of $2.6 million for the six-months ended
June 30, 2003, compared to $0.2 million provided by financing activities for the
same period in 2002. Cash used in financing activities during the six-months
ended June 30, 2003 was attributable to retirement of the Asheville facility
mortgage note payable and decreased borrowings under our RLC.
We believe we have sufficient manufacturing capacity, at June 30, 2003, to
meet our anticipated future delivery requirements. We may, however, seek
strategic partners for the joint development of capital intensive manufacturing
capacity for new high technology products.
F-16
RESEARCH AND DEVELOPMENT
Historically, we have made significant investments in research and
development. Our research and development expenditures have fluctuated based on
available government-funded contracts and available company funding. We
anticipate that future fluctuations will continue as a result of our efforts to
expand product lines and enhance our existing technologies.
FORWARD LOOKING INFORMATION AND RISKS AND UNCERTAINTIES IN OUR BUSINESS
A wide variety of factors affect our projected operating and financial
results and can adversely impact our revenues, profitability and cash flows. Our
liquidity and available working capital depend upon our cash flow from
operations and, will require proceeds from asset sales or licensing, refinancing
of our debt, or potential sale or merger of Simula. Improved cash flow from
operations will depend on our ability to continue to implement our cost cutting
initiatives. Continued compliance with our debt covenants is necessary to avoid
loan defaults and is a requirement for maintaining access to funds available
under our RLC.
With respect to our product offerings many of our products are subassemblies
in final products. We act as subcontractor to defense industry prime
contractors. Accordingly, we are reliant on others to gain and retain market
acceptance for our products, and we must continue to demonstrate that our
products will provide advantages to the manufacturers of final products,
including increasing product safety and providing such manufacturers with
competitive cost advantages
Although we have long established relationships with a number of our
Aerospace and Defense customers, we do not have significant long-term supply
contracts with any of these customers. Our customers typically do not commit to
long-term production schedules and, as a result, customer orders generally are
subject to cancellation or delay. Reliance upon defense contracts involves
certain risks, including dependence on congressional appropriations and changes
in governmental policies that reflect military and political developments.
Factors pertinent to our ability to meet our current and future financial
requirements and projections include:
o our ability to complete the pending acquisition by Armor Holdings, Inc.;
o our relationship with our senior lenders and on-going compliance with
loan terms and covenants;
o our relationship with significant customers and maintenance of preferred
supplier relationships with them that are renegotiated frequently;
o our leveraged status and the level and cost of our debt;
o the continued reduction of our fixed expenses;
o ability to monetize assets including through sales of certain assets or
technologies at a favorable price;
o our ability to continue to provide design and manufacturing services,
products and new product applications that compare favorably on the basis
of time to introduction, cost, and performance with those of our
competitors;
o the level and makeup of military expenditures;
o contract mix and shifting production and delivery schedules among our
market segments;
o the amount of resources available for independent research and
development;
o proof of concept and production validation of certain of our new
technologies and proposed products, as well as our financial ability to
establish manufacturing capacity for such products; and
o technological changes introduced by competitors and customers.
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. We undertake no obligation to update any of these forward-looking
statements to reflect events or circumstances after the date on which such
statements were made or to reflect the occurrence of unanticipated events.
Actual results and trends may differ materially. Risks include those described
herein and in our registration statements and periodic reports filed with the
U.S. Securities and Exchange Commission.
F-17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
CURRENCY EXCHANGE RATE RISK
We have currency exposures related to buying and selling in currencies other
than the local currency in which we operate. These exposures may impact future
earnings and/or operating cash flows. Currently, our most significant exposure
relates to the Euro and the British Pound. We have supply contracts that are
Euro denominated for our ITS(R) and AHPS products. We maintained a manufacturing
facility in the United Kingdom for which we fund operating expenses in British
Pounds. We enter into foreign currency hedge transactions to mitigate our
associated risks. The magnitude of the exposure varies over time and we enter
into agreements from time to time by which we seek to manage certain portions of
our foreign exchange exposure in accordance with established policy guidelines.
These arrangements primarily hedge cash flows for forecasted transactions
involving receivables and payables. We currently have no hedging contracts open
as of June 30, 2003, and we disposed of our U.K. manufacturing facility when we
sold our Automotive Safety division on July 22, 2003.
ITEM 4. CONTROLS AND PROCEDURES
We evaluated, under the supervision and with the participation of
management, including the Chief Executive Officer (CEO) and the Chief Financial
Officer (CFO), the effectiveness of the design and operation of our disclosure
controls and procedures as of June 30, 2003, pursuant to Rule 15d-14 under the
Securities Exchange Act of 1934 (Exchange Act). Based upon that evaluation, the
CEO and CFO concluded that Simula's disclosure controls and procedures are
effective to ensure that information required to be disclosed in Simula's
reports filed or submitted under the Exchange Act are recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms.
During the quarterly period covered by this amended report, there were no
significant changes in our internal controls or in other factors that could
significantly affect the disclosure controls.
F-18
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS
(a) Exhibits: The following Exhibits are included pursuant to Item 601 of
Regulation S-K.
NO. DESCRIPTION REFERENCE
3.1 Articles of Incorporation of Simula, Inc., as amended and restated (2)
3.2 Bylaws of Simula, Inc., as amended and restated (1)
Indenture dated April 1, 1997, in connection with the Company's issuance of the 8%
4.7 Senior Subordinated Convertible Notes due May 1, 2004. (6)
10.11 1992 Stock Option Plan, as amended effective September 15, 1998. (3)
10.12 1992 Restricted Stock Plan (1)
10.21 1994 Stock Option Plan, as amended effective September 15, 1998. (3)
10.26 Simula, Inc. Employee Stock Purchase Plan (2)
10.27 Outside Directors Equity Plan (9)
10.37 Simula, Inc. 1999 Incentive Stock Option Plan (4)
10.41 Financing Agreement with The CIT Group/Business Credit, Inc. dated December 30,1999. (5)
Amendment Number Three to Financing Agreement between the Company and The CIT
10.41A Group/Business Credit, Inc. dated September 26, 2001. (7)
Amendment Number Five to Financing Agreement between the Company and The CIT
10.41B Group/Business Credit, Inc. dated June 30, 2002. (10)
Amendment Number Seven to Financing Agreement between the Company and The CIT
10.41C Group/Business Credit, Inc. dated October 22, 2002. (10)
Amendment Number Nine to Financing Agreement between the Company and The CIT
10.41D Group/Business Credit, Inc. dated March 25, 2003. (11)
Waiver to Certain Financial Covenants to Financing Agreement between the Company and
10.41E The CIT Group/Business Credit, Inc. dated April 9, 2003. (11)
Loan Agreement between the Company and Allied Capital Corporation dated September 26,
10.45 2001. (7)
Waiver and Amendment No. 1 to Loan Agreement between the Company and Allied Capital
10.45A Corporation dated August 19, 2002. (10)
Consent and Amendment No. 2 to Loan Agreement between the Company and Allied Capital
10.45B Corporation dated March 25, 2003. (11)
Employment Agreement between the Company and Bradley P. Forst dated November 12, 2001,
10.46 effective October 1, 2000. (7)
Employment Agreement between the Company and Joseph Coltman dated December 13, 2001,
10.48 effective October 13, 2000. (8)
10.50 Retention Agreement between the Company and John A. Jenson dated December 20, 2002. (11)
31.1 Certification of Chief Executive Officer pursuant to Item 601(b)(31) of Regulation S-K *
31.2 Certification of Chief Financial Officer pursuant to Item 601(b)(31) of Regulation S-K *
32.1 Certification of Chief Executive Officer pursuant to item 601(b)(32) of Regulation S-K *
32.2 Certification of Chief Financial Officer pursuant to item 601(b)(32) of Regulation S-K *
* Filed herewith
(1) Filed with Registration Statement on Form S-18, No. 33-46152-LA, under the
Securities Act of 1933, effective April 13, 1992.
(2) Filed with 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 for the quarter ended September 30, 1998.
(4) Filed with Definitive Proxy on May 14, 1999, for the Company's Annual
Meeting of Shareholders held on June 17, 1999.
(5) Filed with report on Form 10-K for the year ended December 31, 1999.
(6) Filed with report on Form 10-Q for the quarter ended March 31, 2000.
(7) Filed with report on Form 10-Q for the quarter ended September 30, 2001.
(8) Filed with report on Form 10-K for the year ended December 31, 2001.
(9) Filed with Registration Statement on Form S-8, effective March 28, 2002.
(10) Filed with report on Form 10-Q for the quarter ended September 30, 2002.
F-19
(11) Filed with report on Form 10-K for the year ended December 31, 2002.
(b) Reports on Form 8-K:
(1) Report on Form 8-K dated May 15, 2003 furnishing notification of issuance of
a press release pertaining to earnings for the fiscal quarter ended March
31, 2003.
(2) Report on Form 8-K dated June 17, 2003 disclosing an agreement for the sale
of assets of the Company's Automotive Safety subsidiary.
F-20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this amended report on Form 10-Q/A (Amendment No. 1)
for the quarter ended June 30, 2003 to be signed on its behalf by the
undersigned thereunto duly authorized.
SIMULA, INC.
DATE: November 5, 2003 /s/ John A. Jenson
-----------------------
John A. Jenson
Chief Financial Officer
F-21
EXHIBIT INDEX
NO. DESCRIPTION REFERENCE
3.1 Articles of Incorporation of Simula, Inc., as amended and restated (2)
3.2 Bylaws of Simula, Inc., as amended and restated (1)
Indenture dated April 1, 1997, in connection with the Company's issuance of the 8%
4.7 Senior Subordinated Convertible Notes due May 1, 2004. (6)
10.11 1992 Stock Option Plan, as amended effective September 15, 1998. (3)
10.12 1992 Restricted Stock Plan (1)
10.21 1994 Stock Option Plan, as amended effective September 15, 1998. (3)
10.26 Simula, Inc. Employee Stock Purchase Plan (2)
10.27 Outside Directors Equity Plan (9)
10.37 Simula, Inc. 1999 Incentive Stock Option Plan (4)
10.41 Financing Agreement with The CIT Group/Business Credit, Inc. dated December 30,1999. (5)
Amendment Number Three to Financing Agreement between the Company and The CIT
10.41A Group/Business Credit, Inc. dated September 26, 2001. (7)
Amendment Number Five to Financing Agreement between the Company and The CIT
10.41B Group/Business Credit, Inc. dated June 30, 2002. (10)
Amendment Number Seven to Financing Agreement between the Company and The CIT
10.41C Group/Business Credit, Inc. dated October 22, 2002. (10)
Amendment Number Nine to Financing Agreement between the Company and The CIT
10.41D Group/Business Credit, Inc. dated March 25, 2003. (11)
Waiver to Certain Financial Covenants to Financing Agreement between the Company and
10.41E The CIT Group/Business Credit, Inc. dated April 9, 2003. (11)
Loan Agreement between the Company and Allied Capital Corporation dated September 26,
10.45 2001. (7)
Waiver and Amendment No. 1 to Loan Agreement between the Company and Allied Capital
10.45A Corporation dated August 19, 2002. (10)
Consent and Amendment No. 2 to Loan Agreement between the Company and Allied Capital
10.45B Corporation dated March 25, 2003. (11)
Employment Agreement between the Company and Bradley P. Forst dated November 12, 2001,
10.46 effective October 1, 2000. (7)
Employment Agreement between the Company and Joseph Coltman dated December 13, 2001,
10.48 effective October 13, 2000. (8)
10.50 Retention Agreement between the Company and John A. Jenson dated December 20, 2002. (11)
31.1 Certification of Chief Executive Officer pursuant to Item 601(b)(31) of Regulation S-K *
31.2 Certification of Chief Financial Officer pursuant to Item 601(b)(31) of Regulation S-K *
32.1 Certification of Chief Executive Officer pursuant to item 601(b)(32) of Regulation S-K *
32.2 Certification of Chief Financial Officer pursuant to item 601(b)(32) of Regulation S-K *
* Filed herewith
(1) Filed with Registration Statement on Form S-18, No. 33-46152-LA, under the
Securities Act of 1933, effective April 13, 1992.
(2) Filed with 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 for the quarter ended September 30, 1998.
(4) Filed with Definitive Proxy on May 14, 1999, for the Company's Annual
Meeting of Shareholders held on June 17, 1999.
(5) Filed with report on Form 10-K for the year ended December 31, 1999.
(6) Filed with report on Form 10-Q for the quarter ended March 31, 2000.
F-22
(7) Filed with report on Form 10-Q for the quarter ended September 30, 2001.
(8) Filed with report on Form 10-K for the year ended December 31, 2001.
(9) Filed with Registration Statement on Form S-8, effective March 28, 2002.
(10) Filed with report on Form 10-Q for the quarter ended September 30, 2002.
(11) Filed with report on Form 10-K for the year ended December 31, 2002.
F-23
EXHIBIT 31.1
CERTIFICATION
I, Bradley P. Forst, certify that:
1. I have reviewed this Amendment No. 1 Report on Form 10-Q/A of Simula,
Inc.;
2. Based on my knowledge, this amended report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this amended report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this amended report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
(c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this amended report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely o materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over inancial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons erforming the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
/s/ Bradley P. Forst
------------------------
Bradley P. Forst
Chief Executive Officer
November 5, 2003
F-24
EXHIBIT 31.2
CERTIFICATION
I, John A. Jenson, certify that:
1. I have reviewed this Amendment No. 1 Report on Form 10-Q/A of Simula, Inc.;
2. Based on my knowledge, this amended report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this amended report;
3. Based on my knowledge, the financial statements, and other financial
information included in this amended report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this amended report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
(c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this amended report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
/s/ John A. Jenson
-----------------------
John A. Jenson
Chief Financial Officer
November 5, 2003
F-25
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Amendment No. 1 to the Quarterly Report of Simula, Inc.
(the "Company") on Form 10-Q/A for the period ended June 30, 2003 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Bradley P. Forst, Chief Executive Officer of the Company, certify, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the Company
for the periods presented.
/s/ Bradley P. Forst
-----------------------
Bradley P. Forst
Chief Executive Officer
November 5, 2003
F-26
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Amendment No. 1 to the Quarterly Report of Simula, Inc.
(the "Company") on Form 10-Q/A for the period ended June 30, 2003 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
John A. Jenson, Chief Financial Officer of the Company, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the Company
for the periods presented.
/s/ John A. Jenson
-----------------------
John A. Jenson
Chief Financial Officer
November 5, 2003
F-27
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of the State of Delaware (the
"DGCL") makes provision for the indemnification of officers and directors of
corporations in terms sufficiently broad to indemnify its officers and directors
under certain circumstances from liabilities (including reimbursement of
expenses incurred) arising under the Securities Act.
As permitted by the DGCL, Armor's Charter provides that, to the fullest
extent permitted by the DGCL, no director shall be liable to Armor or to its
stockholders for monetary damages for breach of his fiduciary duty as a
director. Delaware law does not permit the elimination of liability (i) for any
breach of the director's duty of loyalty to Armor or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) in respect of certain unlawful dividend payments
or stock redemptions or repurchases or (iv) for any transaction from which the
director derives an improper personal benefit. The effect of this provision in
the Charter is to eliminate the rights of Armor and its stockholders (through
stockholders' derivative suits on behalf of Armor) to recover monetary damages
against a director for breach of fiduciary duty as a director thereof (including
breaches resulting from negligent or grossly negligent behavior) except in the
situations described in clauses (i)-(iv), inclusive, above. These provisions
will not alter the liability of directors under federal securities laws.
Armor's Charter provides that it may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of Armor) by reason of
the fact that he is or was a director, officer, employee or agent of Armor or is
or was serving at the request of Armor as a director, officer, employee or agent
of another corporation or enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding if
such person acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of Armor, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe such person's conduct
was unlawful.
Armor's Charter also provides that it may indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of Armor to procure a judgment in
its favor by reason of the fact that such person acted in any of the capacities
set forth above, against expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection with the defense or settlement
of such action or suit if such person acted under similar standards, except that
no indemnification may be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to Armor unless and only
to the extent that the Court of Chancery of the State of Delaware or the court
in which such action or suit was brought shall determine upon application that
despite the adjudication of liability but in view of all the circumstances of
the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Court of Chancery or such other court shall deem proper.
Armor's Charter also provides that to the extent a director or officer of
Armor has been successful in the defense of any action, suit or proceeding
referred to in the previous paragraphs or in the defense of any claim, issue, or
matter therein, he shall be indemnified against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection therewith; that
indemnification provided for in the Charter shall not be deemed exclusive of any
other rights to which the indemnified party may be entitled; and that Armor may
purchase and maintain insurance on behalf of a director or officer of Armor
against any liability asserted against him or incurred by him in any such
capacity or arising out of his status as such whether or not Armor would have
the power to indemnify him against such liabilities under the provisions of
Section 145 of the DGCL.
II-1
ITEM 21. EXHIBITS
(a) Exhibits
The following exhibits are filed as part of this registration statement:
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
-------------- ----------------------
2.1* Agreement and Plan of Merger dated as of August 29, 2003
by and among Registrant, AHI Bulletproof Acquisition,
Corp., and Simula, Inc. (included as Annex A to the proxy
statement/prospectus included in Part I of this
registration statement).
3.1 Certificate of Incorporation of Registrant (incorporated
by reference to Exhibit 3.1 to Form 8-K, Current Report
of Armor, dated September 3, 1996).
3.2 Certificate of Merger of American Body Armor & Equipment,
Inc., a Florida corporation, and Registrant (incorporated
by reference to Exhibit 3.2 to Form 8-K, Current Report
of Registrant, dated September 3, 1996).
3.3 Bylaws of Registrant (incorporated by reference to
Exhibit 3.3 to Form 8-K, Current Report of Registrant,
dated September 3, 1996).
3.4 Amendment to Bylaws of Registrant (incorporated by
reference to Exhibit 3.4 to Registrant's Form 10-K
Annual Report for the fiscal year ended December 31,
1998).
5.1* Opinion of Kane Kessler, P.C.
21.1 Subsidiaries of Registrant (incorporated by reference to
Exhibit 21.1 to Registrant's Form 10-K Annual Report for
the fiscal year ended December 31, 2002).
23.1 Consent of Kane Kessler, P.C. (included in Exhibit 5.1).
23.2 Consent of PricewaterhouseCoopers LLP.
23.3 Consent of Deloitte & Touche LLP.
24.1* Power of Attorney (included on page II-5 of this
registration statement).
99.1* Form of Simula, Inc. Proxy Card.
99.2 Consent of Relational Advisors LLC (included in Annex C
to the proxy statement/prospectus included in Part I of
this registration statement).
* Previously filed.
(b) Schedules
There are no financial schedules required to be filed herewith.
(c) Reports, Opinions or Appraisals
The opinion of Relational Advisors LLC is attached as Annex C to the proxy
statement/prospectus included in Part I of this registration statement.
II-2
ITEM 22. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Securities and Exchange Commission pursuant
to Rule 424(b) if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the
effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) above do not apply
if the information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed with or furnished to the
Securities and Exchange Commission by the registrant pursuant to Section 13 or
Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by
reference in this registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination
of the offering.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other Items of the applicable form.
The registrant undertakes that every prospectus (i) that is filed pursuant
to the paragraph immediately preceding, or (ii) that purports to meet the
requirements of Section 10(a)(3) of the Securities Act of 1933 and is used in
connection with an offering of securities subject to Rule 415, will be filed as
a part of an amendment to the registration statement and will not be used until
such amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be
II-3
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 or this Form, within one business day of receipt of
such request and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of this registration statement through the date
of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement on Form S-4 to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York,
State of New York on November 6, 2003.
ARMOR HOLDINGS, INC.
By: /s/ Warren B. Kanders
---------------------
Warren B. Kanders,
Chief Executive Officer and Chairman
of the Board of Directors
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been duly signed below by the following persons in
the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Warren B. Kanders Chairman of the Board of November 6, 2003
--------------------- Directors and Director
Warren B. Kanders (principal executive officer)
/s/ Robert R. Schiller Chief Financial Officer and November 6, 2003
---------------------- Chief Operating Officer
Robert R. Schiller (principal financial officer)
* Chief Accounting Officer November 6, 2003
------------------ (principal accounting officer)
Glenn J. Heiar
* Director November 6, 2003
--------------------
Nicholas Sokolow
* Director November 6, 2003
--------------------
Burtt R. Ehrlich
* Director November 6, 2003
---------------------
Thomas W. Strauss
II-5
/s/ Alair A. Townsend Director November 6, 2003
---------------------
Alair A. Townsend
/s/ Deborah A. Zoullas Director November 6, 2003
----------------------
Deborah A. Zoullas
* By: /s/ Robert R. Schiller
-----------------------------------
Robert R. Schiller
as Attorney-In-Fact
II-6
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
-------------- ----------------------
23.2 Consent of PricewaterhouseCoopers LLP.
23.3 Consent of Deloitte & Touche LLP.