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SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

Simula, Inc.

(602) 643-7233

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 o

Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act).

Yes o   No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

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SIMULA, INC.

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SIMULA, INC. AND SUBSIDIARIES

Unaudited Consolidated Balance Sheets
September 30, 2003 and December 31, 2002

See notes to unaudited consolidated financial statements.

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SIMULA, INC. AND SUBSIDIARIES

Unaudited Consolidated Statements of Operation

See notes to unaudited consolidated financial statements.

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SIMULA, INC. AND SUBSIDIARIES

Unaudited Consolidated Statements of Shareholders’ Deficit and Comprehensive Loss
Nine Months Ended September 30, 2003

See notes to unaudited consolidated financial statements.

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SIMULA, INC. AND SUBSIDIARIES

Unaudited Consolidated Statements of Cash Flows
Nine Month Periods Ended September 30, 2003 and 2002

See notes to unaudited consolidated financial statements.

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Notes to Interim Unaudited Consolidated Financial Statements

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 $59.6 million as of September 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 an Agreement and Plan of Merger to be acquired by Armor Holdings, Inc., a Delaware corporation (“Armor Holdings”) as discussed in Note 11 — Transactions and Subsequent Events.

     As permitted by rules of the Securities and Exchange Commission for interim reporting, we have prepared the accompanying interim 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 nine-month periods ended September 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.

     Certain reclassifications have been made to the financial statements for the prior periods to conform with current year's presentation.

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 a 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 and do not

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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. 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 month period and nine month periods ended September 30, 2003 the effect of 176,741 and 138,833 shares related to stock options were not used because the result would have been anti-dilutive. Additionally, for the three and nine month periods ended September 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.

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 income and earnings per share if we had applied the fair value recognition

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provisions of FASB Statement No. 123, “Accounting for Stock-Based Compensation”, to stock-based employee compensation for the three month and nine month periods ended September 30:

     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 nine-month periods ended September 30:

Note 5 – Inventories

     At September 30, 2003 and December 31, 2002, inventories consisted of the following:

Note 6 – Property, Equipment and Leasehold Improvements

     At September 30, 2003 and December 31, 2002 property, equipment and leasehold improvements consisted of the following:

Note 7 – Debt

     On September 30, 2003, we were not in compliance with certain non-monetary financial covenants under our Revolving Line of Credit (the “RLC”) and our Senior Secured Note. On November 12, 2003, we received waivers of the non-compliance at September 30, 2003. 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. Our RLC had outstanding borrowings of $ 3.5 million and remaining borrowing availability of $ 3.5 million at September 30, 2003 as compared to outstanding borrowings of $11.3 million and a remaining borrowing availability of $1.3 million at December 31, 2002.

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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 September 30, 2003 and December 31, 2002 as follows:

     Intangible asset amortization expense for the three month periods ended September 30, 2003 and 2002 were approximately $24,000 and $51,000, respectively and $106,000 and $134,000 for the nine month periods ended September 30, 2003 and 2002, respectively. Additionally, during the nine month period ended September 30, 2003 we wrote off approximately $100,000 of intangibles. Estimated amortization expense for the five succeeding fiscal years is as follows:

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:

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 September 30, 2003, there was $759,077 of remaining restructuring liability, which principally relates to lease obligations associated with the closed airline facility, which run through May of 2008. Severance obligations as part of the 2002 and 2003 restructuring, which are expected to be fully paid by December 2004. A summary of the change in accrued restructuring is as follows:

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Note 11 – Transactions and 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 approximately $14.5 million in cash. Customary closing and purchase price adjustments increased the previously announced selling price by approximately $0.2 million. After deducting closing costs and related fees, we received net proceeds of approximately $12.9 million. The transaction resulted in a gain on sale of approximately $0.6 million, which includes approximately $0.3 million related to an escrow account, from which we can potentially recover a maximum of $0.5 million in 18 months from the closing of the transaction, before the impact of the one-time charge to write off accumulated foreign currency translation losses of approximately $1.9 million. We applied the net proceeds to repay a portion of our outstanding debt.

     On September 2, 2003, we announced that we signed an Agreement and Plan of Merger (the “Merger Agreement”) to be acquired by Armor Holdings, Inc., a Delaware corporation (“Armor Holdings”). The Merger Agreement 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.

Note 12 – Segment Reporting

     We are a holding company for wholly-owned subsidiaries, which now operate in one primary business segment. Our Commercial segment consisted of our Automotive Safety division, which was sold as discussed in Note 11, 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.

     For the three-month periods ended September 30, 2003 and 2002, inter-segment sales were insignificant and total intercompany sales of $20,696 and $4,081, respectively, have been eliminated. For the three-month periods ended September 30, 2003 and 2002 sales to the branches of the United States Armed Forces were 86% and 85%, respectively of total sales.

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