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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
X Annual Report Pursuant to Section 13 or 15(d) of the Securities
- --------- Exchange Act of 1934 (Fee Required)
For the fiscal year ended September 30, 1998
Transition Report Pursuant to Section 13 or 15(d) of the
- --------- Securities Exchange Act of 1934 (No Fee Required)
For the transition period from to
---------- ----------
Commission File number 0-15318
BALLISTIC RECOVERY SYSTEMS, INC.
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(Name of Small Business Issuer in its Charter)
Minnesota 41-1372079
- ------------------------------- -----------------------
(State or other jurisdiction of (IRS Employer ID Number)
incorporation or organization)
300 Airport Road, South St. Paul, Minnesota 55075-3541
- ------------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Issuer's telephone number including area code: (651) 457-7491
--------------
Securities registered pursuant to Section 12(b) of the Act: None
----
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01
par value
------------------
(Title of Class)
Check whether the Issuer (1) has filed all reports required to be filed by
section 13 or 15(d) of the Exchange Act during the past 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: X Yes No
--- ---
Check if there is no disclosure of delinquent filers in response to Item 405 of
Registration S-B contained in this form, and no disclosure will be contained, to
the best of the Issuer's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. X .
---
State Issuer's revenues for the most recent fiscal year: $1,622,544.
Based upon the average bid and asked prices of the Issuer's Common Stock, the
aggregate market value of the Common Stock held by Non-affiliates of the Issuer
as of December 10, 1998 was approximately $2,675,000.
Number of shares outstanding as of December 10, 1998: 5,696,927.
Index for exhibits is located on page 30. This document contains 32 pages.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Definitive Proxy Statement to be used in connection
with the election of directors at the 1999 annual shareholders meeting (the
"Proxy Statement") are incorporated by reference into Part III, Items 9-12 as
follows:
Part of From 10-K Portion of Proxy Statement
1. Part III, Item 9. 1. Proposal 1: Election
Directors and Executive of Directors.
Officers of the Registrant.
2. Part III, Item 10. 2. Proposal 1: Executive
Executive Compensation. Compensation.
3. Part III, Item 11. 3. Common Stock Ownership of
Security Ownership of Principal Shareholders and
Certain Beneficial Management.
Owners and Management.
4. Part III, Item 12. 4. Certain Relationships and
Certain Relationships and Related Transactions.
Related Transactions.
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PART I
Item 1. Description of Business
Ballistic Recovery Systems, Inc. (the "Company") was incorporated in 1980 under
the laws of the State of Minnesota.
(a) Business Development
The Company designs, manufactures and markets emergency parachute
recovery systems for use with light aircraft. The Company has products
in both the recreational and general aviation markets. The Company
believes it was one of the first and is the only remaining US
manufacturer of whole aircraft recovery systems. In addition, the
Company has designed systems for use in the highly competitive military
and civilian unmanned aircraft markets.
The Company began with products for ultralight aircraft in the early
1980's and expanded its efforts in the general aviation market in the
late 1980's with the design and testing of a recovery system for the
Cessna 150/152 model aircraft. The development of the Cessna
150/152-model system was the primary purpose for the Company going
public in 1986, with a secondary offering in 1988. In early 1993, the
Company received Federal Aviation Administration ("FAA") approval for
the GARD-150 product for installation on FAA-certified Cessna 150/152
aircraft.
Beginning in 1994, the Company sought and established relationships
with outside sources for research and development funding in order to
continue its efforts towards long-term product development and
expansion. During 1994, the Company began receiving outside funding for
certain research and development projects. Since that time, the Company
has established various funding sources for its research and
development. Outside funding for research and development activities is
an ongoing objective for the Company, however, no assurances can be
made that the Company will be successful into the future under this
objective.
The Company has recently completed work under a research and
development funding agreement with a privately held company that has
developed a four-place composite, certified aircraft. The aircraft,
known as the Cirrus Design SR-20, was successfully certified on October
23, 1998 by the FAA. This is the first FAA certified aircraft to offer
one of the Company's recovery systems as standard equipment. The
Company has been informed that production of the first group of
customer aircraft is underway and first deliveries of aircraft, which
will include the Company's parachute systems, are expected to begin
during the month of January 1999. Although certified, there can be no
assurances that deliveries will begin during the Company's fiscal year
1999 or at any future time, nor that its volumes will have a material
affect on the Company.
A project that is nearing completion is the Company's Small Business
Innovation Research grant (SBIR) through NASA. The purpose of the grant
is to perform research of low-cost, lightweight aircraft emergency
recovery systems. The Company received a Phase I grant during 1994. All
work under this Phase I grant was completed during fiscal year 1995.
With the completion of Phase I, the Company applied for and received a
Phase II grant to continue on with the research that it began in the
first phase. The Phase II grant, which began in March 1996, is for a
maximum of $582,000 over a period of 36 months and will be completed
during the Company's fiscal year 1999.
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Item 1. Description of Business (Continued)
(a) Business Development (Continued)
In June 1996, the Company received a development contract for a
recovery system for a prototype-unmanned aircraft being developed by a
government contractor. The Company anticipated that the contract, as
extended, will be completed during the Company's fiscal year 1999. The
maximum amount of the contract is $150,000 and calls for the
development and delivery of a series of recovery devices both for use
in testing, and possibly in future production models. This project is a
development project for the government contractor and may or may not be
successful.
(b) Narrative Description of Business
PRINCIPAL PRODUCTS:
The Company's principal product line is whole aircraft emergency
parachute recovery systems. The systems, in an in-air emergency
situation, may be activated by the pilot releasing a parachute that is
designed to open quickly, slow the decent of the aircraft, and lower it
safely to the ground to prevent or reduce human injury and damage to
the aircraft. The Company's contract engineering services also deal
with long-term product development and expansion of the ballistically
deployed parachute recovery systems product line.
Recreational Aviation Products:
Recreational aviation products include products designed and
manufactured for use on unregistered aircraft such as ultralights, hang
gliders, paragliders and aircraft registered with the FAA as
experimental. The Company manufactures these products and sells them
directly to individuals and through dealers and distributors who also
market and sell the aircraft and related products.
General Aviation Products:
The Company's attempt to enter the general aviation market began in the
mid 1980's when it began development of an emergency parachute recovery
system for the Cessna 150/152 series of aircraft. In 1993, this system,
known as the GARD-150, received a Supplemental Type Certificate (STC)
from the FAA that allows owners of Cessna 150/152 model aircraft to
install the system.
Media attention for this new product resulted in domestic and
international television and radio broadcasts as well as coverage in
domestic and international aviation and non-aviation magazines. The
Company believes that the successful completion of the product for the
Cessna 150/152, which generated media attention for both the product
and the Company, created interest in the Company's product by outside
companies.
Another product developed for the general aviation market is for a
privately held company that has developed and certified a four-place
all composite general aviation aircraft. The aircraft, known as the
Cirrus Design SR-20, was successfully certified on October 23, 1998.
This is the first FAA certified aircraft to offer one of the Company's
recovery systems as standard equipment. The Company has been informed
that production of the first group of customer aircraft is underway and
first deliveries of aircraft, which will include the Company's
parachute systems, are expected to begin during the month of January
1999. See Note 2 of Notes to Financial Statements for further
information.
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Item 1. Description of Business (Continued)
(b) Narrative Description of Business (Continued)
Contract Research and Development:
Contract research and development has allowed the Company to expand its
product line and expertise in whole aircraft recovery systems. In
addition, the Company's expertise has allowed us to receive new and
follow on contracts for both government contractors and civilian
companies. It has been and will continue to be a goal of the Company to
receive outside funding for its research and development activities.
The Company is currently involved in two contract research and
development projects. One of the projects is through the Small Business
Innovation Research grant (SBIR) program administered by NASA. The
purpose of the grant is to perform research of low-cost, lightweight
aircraft emergency recovery systems. The Company received initial
funding during its fiscal year 1995 through a Phase I grant, and
received subsequent funding through a Phase II grant beginning in
fiscal year 1996. The Phase II grant, which began in March 1996, is for
a maximum of $582,000 and will be completed during the Company's fiscal
year 1999. The purpose of the grant is not only to provide research in
areas of interest to NASA, but also to develop products that can be
commercialized by the small business entity. The Company hopes that the
research will lead to products that have both military and civilian
applications complimenting or enhancing the Company's current product
line. See Note 3 of Notes to Financial Statements for further
information.
In June 1996, the Company received a development contract for a
recovery system for a prototype-unmanned aircraft being developed by a
government contractor. The contract is for a maximum amount of
$150,000, and calls for the development and delivery of a series of
recovery devices both for use in testing, and possibly in future
production models. The Company anticipates that this project will be
completed during the Company's fiscal year 1999. See Note 4 of Notes to
Financial Statements for further information.
The successful completion of any of these projects cannot be assured.
Also, there can be no assurance that if these projects are completed
that they will produce revenues for the Company or that they will
produce technology that can be applied to other similar aircraft or
products, or that if produced, will be successfully marketed and sold.
MANUFACTURING OPERATIONS AND SUPPLIERS:
The Company's personnel in a South St. Paul, Minnesota facility, using
components manufactured to its specifications perform assembly of the
Company's product line. The parachutes utilized by the Company are
purchased from a certain key supplier. Up until the current fiscal
year, ballistic devices were also purchased from an outside supplier.
During fiscal year 1998, the Company designed, tested and began
manufacturing its own ballistic devices. Other components are purchased
from a variety of suppliers or internally produced. The Company
routinely searches for new vendors and feels alternate sources can be
found should any of these vendors be unable to meet the Company's
needs. In addition, the Company possesses or can acquire the expertise
necessary for internal production of all key components.
PATENTS:
On August 26, 1986, United States Patent No. 4,607,814 was issued to
the founder of the Company, for an explosively deployed parachute
system for ultralight aircraft. The patent, which with the payment of
continuing maintenance fees, is effective until 2003 and has been
assigned to the Company. This patent does not cover the solid fuel
extraction device aspect of the systems currently being sold by the
Company.
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Item 1. Description of Business (Continued)
(b) Narrative Description of Business (Continued)
PATENTS (CONTINUED):
On September 5, 1989, United States Patent No. 4,863,119 was issued to
the Company on behalf of two of the Company's employees for a
"Parachute Reefing Device" as part of a parachute recovery system. The
two employees assigned the patent to the Company, which with the
payment of continuing maintenance fees is effective until 2006. This
patented feature is utilized in the Company's sport aviation line as
well as in its general aviation product. Current development projects
also utilize the reefing device as a integral design component.
When the Company completes development of additional ballistic
parachute recovery systems, it intends to apply for patents for such
systems if possible. There can be no assurance, however, that any
patents will be granted or, if granted that they will be of material
benefit to the Company.
SEASONALITY:
Typically, the Company experiences seasonality in its sports aviation
line. The second and third quarters have the highest sales as this
product line is marketed to recreational pilots who tend to fly their
aircraft during the warmer months and equip their aircraft with a
recovery system near the beginning of the flying season. The Company's
sale efforts have been expanded to increase its presence in new and
existing markets as a means of reducing this seasonality. Nonetheless,
seasonality will remain an issue for the Company until its product line
expands to include aircraft that do not experience such seasonal
fluctuations in their use and production.
DEPENDENCE ON A SINGLE CUSTOMER:
During the fiscal years ended September 30, 1998 and 1997, the Company
was not dependent on any single customer that accounted for more that
10% of its sales. The Company primarily distributes its products
through dealers and distributors who in turn sell to the end consumer.
The Company believes that in the event that any individual dealers or
distributors cease to represent the Company's products, that
alternative dealers or distributors can be established.
BACKLOG OF ORDERS:
As of September 30, 1998 and 1997, the Company had a backlog of orders
totaling approximately $172,000 and $223,000, respectively. The 1998
backlog is expected to be filled during fiscal year 1999.
RESEARCH AND DEVELOPMENT:
A summary of research and development is as follows:
<TABLE>
<CAPTION>
1998 1997
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<S> <C> <C>
Total research and development
expenditures $636,958 $365,836
Revenues recognized under contract
research and development
relationships (646,019) (416,503)
--------- ---------
Research and development, net ($9,061) ($50,667)
========= =========
</TABLE>
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Item 1. Description of Business (Continued)
(b) Narrative Description of Business (Continued)
RESEARCH AND DEVELOPMENT (CONTINUED):
The sources of the outside funding included: current development of a
recovery system for the recently certified Cirrus Design SR-20
aircraft; the SBIR grant; and the unmanned aircraft recovery system as
discussed in Notes 2, 3 and 4 of the Notes to Financial Statements.
COMPETITION:
The Company sells its ballistically deployed parachute recovery systems
in the United States and internationally. The Company entered into a
covenant not to compete agreement on October 26, 1995 with Second
Chantz ("SCI"), whom the Company believes was the only domestic
competitor for ballistically deployed parachute systems for the
domestic sport aviation market. Several foreign companies have or are
attempting to introduce new competitive products into the international
sport aviation market. Competition is strong in the German market based
on price, but the Company believes that it continues to make relatively
strong sales in that market. At present, none of the foreign companies
have successfully entered the domestic market. The Company believes its
current systems were the first in the market and that its products and
service are superior to its competitors.
The Company has expanded its contract research and development
activities to include an expansion in the certified general aviation
market. At present, there are no other manufacturers with the FAA
Supplemental Type Certificate necessary for the Cessna 150/152 general
aviation market. The Company is unaware of any other manufacturer
performing contract or self-funded research and development activities
in an effort to obtain Supplemental Type Certificates for any other FAA
certified aircraft.
Many companies with resources and capabilities greater than those of
the Company could develop, manufacture and market a parachute recovery
system competitive with that of the Company, although the Company
believes that such development and approval could take several years to
complete.
ENVIRONMENTAL COMPLIANCE:
The Company believes that it is in compliance with all current federal
and state environmental laws.
EMPLOYEES:
As of September 30, 1998, the Company had 14 full-time and 2 part-time
employees at its South St. Paul facility.
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Item 1. Description of Business (Continued)
(b) Narrative Description of Business (Continued)
YEAR 2000 COMPLIANCE ISSUE:
During fiscal year 1998, the Company completed a review of: 1) its
products; 2) the Company's manufacturing process for its products; and
3) its internal computer systems and software packages to identify
those that could be affected by the Year 2000 issue. First, none of the
Company's products contain software or embedded microprocessors that
are time sensitive. Second, the Company's manufacturing process is not
automated to the extent that any part of the process is computerized or
relies upon time-sensitive software. The process of manufacturing the
Company's products is largely a mechanical process. Finally, none of
the Company's computer systems or software packages will be affected by
the Year 2000 issue based on our review. During fiscal year 1999, the
Company will contact its suppliers, customers and banks to assess the
possible impact, if any, of the Year 2000 compliance issue. It is not
expected that there will be any material impact on the Company as a
result of the Year 2000 issue, but no assurances can be made at this
time. The Company believes that its actions to date and actions by its
suppliers, customers and banks will minimize any risks to the Company.
The Company has not yet seen the need to develop any widespread
contingency plan for the Year 2000 issue, but this will continuously be
monitored as the Company gains more information about the compliance
programs of its vendors and customers. Given that some risks are beyond
the control of the Company, the Company does not believe that it can
develop a contingency plan that will totally shield the Company from an
economic ripple effect throughout the entire economy should others fail
to resolve their own Year 2000 issues.
Based upon the Company's current assessment, the costs of addressing
potential Year 2000 problems are not expected to be material or have a
material adverse impact on the Company's financial position. While the
Company fully anticipates achieving Year 2000 compliance well in
advance of January 1, 2000, there are certain risks that do exist.
Those risks run from slight delays in processing data to the most
reasonably likely worst case scenario of the inability to communicate
with customers and suppliers.
Item 2. Description of Property
The Company leases a stand-alone 13,000 square foot office and
production facility located at Fleming Field Airport in South St. Paul,
Minnesota. The building is a World War II training hangar, which the
Company renovated. (See Note 11 of Notes to Financial Statements).
Item 3. Legal Proceedings
The Company was named in a lawsuit based on a crash of an ultralight
aircraft.. The Company has filed a motion for summary judgement, which
is set for hearing on December 10, 1998. Plaintiff's counsel informed
the Company on November 25, 1998 that the plaintiff would not oppose
the Company's motion. The Company believes that based upon the
representations of the Plaintiff's counsel that there is no potential
for liability.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders through a
solicitation of proxies or otherwise during the fourth quarter.
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PART II
Item 5. Market for Common Equity and Related Stockholder Matters
(a) Market Information
The Company was formerly listed on the NASDAQ stock exchange after
going public in 1986. However, NASDAQ delisted the Company in 1992
following a change in the listing requirements. The stock is listed on
the pink sheets and the electronic bulletin board on the over the
counter market under the trading symbol of BRSI. Several Internet stock
tracking services show the Company's trading volumes with bid and ask
prices as far back as August 1995. Based on information provided by
these Internet stock-tracking services, the Company believes that the
asking price would be $0.81 and the bid price would be $0.75 as of
September 30, 1998.
The following table sets forth the estimated high and low bid prices
for the periods indicated. The estimated bid prices shown are based on
information from several Internet stock-tracking services. These
figures are estimates or averages and do not necessarily represent
actual transactions.
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Common Stock:
-------------
<S> <C> <C> <C> <C> <C> <C>
1998 High $0.56 $1.06 $1.06 $1.50
Low $0.31 $0.25 $0.75 $0.56
1997 High $0.81 $0.69 $0.56 $0.56
Low $0.44 $0.44 $0.31 $0.31
</TABLE>
(b) Holders
As of December 10, 1998, the Company estimates there were approximately
1,100 beneficial owners of the Company's common stock.
(c) Dividends
No dividends have been paid on the Company's securities and it is not
anticipated that any dividends will be paid in the near future.
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Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS:
Business Overview:
The current fiscal year has been one of the most challenging and exciting fiscal
years in recent history. The Company has been working diligently over the past
several years in an effort to expand its revenue opportunities beyond the
existing sport and recreational aircraft markets. The sport and recreational
markets have been the main stay of the Company's revenues since the early 1980s,
but a review of the financial statements will show these markets have limited
revenue possibilities. With relatively low volumes, any downturn in the
marketplace has a significant impact on revenues, efficiency and profitability.
October 23, 1998 was a very significant date in the history of the Company. That
was the date that the Cirrus Design SR-20 aircraft received its certification
from the Federal Aviation Administration (FAA). Cirrus Design has agreed to
utilize the Company's product as standard equipment on its aircraft. The receipt
of certification finalized one of the Company's long-standing outside research
and development projects. This project was for a recovery system that is
standard equipment on this new general aviation aircraft. Since the recovery
system will be standard equipment, the Company believes that the introduction of
this aircraft on the market will begin to have a positive impact on the
Company's revenues and profitability during fiscal year 1999. As orders and
production of this aircraft expand, the Company will directly benefit from that
growth. In addition, the Company anticipated being able to expand its product
line to include other general aviation aircraft as the recovery system gains
further market acceptance. No assurance can be given, however, that the Cirrus
Design aircraft will be successful in its initial market acceptance.
Another long-standing outside research and development project is for a research
grant under the SBIR program administered by NASA. Initial development and
testing has been performed with further testing scheduled early in fiscal year
1999. If further development and testing show promise, the Company will consider
further development and testing beyond the grant period.
Sales
Sales for the current fiscal year were down by 12.5%. The decrease is a result
of softer sales of the Company's systems in the international market while
domestic sales remained flat. International markets were affected by a number of
factors including the economic unrest in Asia, a strong US currency that raises
the cost of the Company's exports, and increased competition in Europe. In
addition, certain markets may be reaching a saturation point for the Company's
product. The Company has expanded its efforts to improve international business,
but there can be no assurances that these efforts will produce increased sales
for the Company.
Sales in the recreational aircraft market for fiscal year 1999 are expected to
be even or slightly higher than the prior fiscal year as a result of the
Company's efforts to improve international business and an anticipated
improvement in domestic aircraft sales. In addition to recreational market
sales, it is expected that the Company will begin delivery of systems for the
newly certified Cirrus Design SR-20 aircraft. This aircraft utilizes the
Company's parachute system as standard equipment, and production of that
aircraft has begun with first deliveries, which will include the Company's
parachute system, expected in January 1999. The Company has received a purchase
order for the first 100 units. These first 100 units are expected to be
delivered within 16 months from the date of certification, which was October
1998. Volume projections and timing of those volumes is uncertain at this time.
Although certified, there can be no assurances that this aircraft will actually
be produced in volumes that will have a material effect on the Company.
Gross Margin
The gross margin for the current fiscal year was slightly better than that of
the previous fiscal year. The Company has made a concerted effort to hold and
improve the gross margin despite material cost increases. No assurances can be
made that this effort will result in steady or improving gross margins into the
future.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED):
Operating Expenses:
Selling, general and administrative costs were higher in the current fiscal year
as compared to the prior fiscal year as a result of expanded trade show and
international travel expenditures. These expenditures are part of the Company's
plans to expand the sport and recreational market sales while looking for new
markets and revenue sources. In addition, further expenditures have been made in
support of the current research and development contracts as the Company's
management became actively involved in managing and overseeing the final stages
of development and testing.
Outside funding has offset research and development costs for both fiscal years.
Net research and development costs were higher in the current fiscal year as the
Company made contributions towards the expenses necessary to complete
development and testing of certain projects. All of the outside research and
development projects underway at the end of fiscal year 1998 are expected to be
completed during the Company's fiscal year 1999. The Company will continue to
look for sources for further outside funding of research and development, but
there can be no assurances that the Company will be successful in those efforts.
INCOME BEFORE INCOME TAXES
Income before income taxes was lower in the current year by almost 75% as a
result of two key items. First, revenues were down in the ultralight market and
second, expenditures were made to support the completion of outside research and
development projects. Income in future fiscal years is expected to increase as a
result of increased sales and a reduction in the Company's research and
development expenditures. As the Company expands into different aircraft markets
and expands its product applications, market conditions will determine ultimate
sales levels and profitability.
Income Taxes Expense (Benefit)
The benefit recorded in the current and prior fiscal years was a result of the
valuation of the Company's net operating loss carryforwards. The benefits are
recorded based on the Company's ability to demonstrate that there is a
reasonable likelihood of being able to utilize the carryforwards to offset State
and Federal taxes on future taxable income. If the Company continues to
demonstrate its ability to utilize even more of the carryforwards, consideration
will be given to the recording of additional benefits.
LIQUIDITY AND CAPITAL RESOURCES:
Management intends to fund all of its continuing operation out of its current
revenues with the exception of its contract research and development projects.
The Company has also established a line-of-credit for use in operations as
required. Management believes that the current business operation is adequate to
support the ongoing operations of the Company during the next twelve-month
period and will maintain and adjust expenses as necessary to improve
profitability. Current contract research and development projects are expected
to be completed during the Company's fiscal year 1999. The Company will continue
to look for sources for contract research and development projects, but there
can be no assurances that the Company will be successful in its efforts.
The Company anticipates a need to make capital improvements to its current
production facility as well as expenditures to increase inventory levels as a
result of the production of general aviation units for the recovery system that
was recently certified. However, it is currently the intention of the Company to
fund the expenditures through current operations as well as revenues generated
by those units.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED):
The Company recently completed development and testing for a newly certified
general aviation aircraft. With the receipt of certification on October 23,
1998, the Cirrus Design SR-20 aircraft became the first FAA certified aircraft
to offer one of the Company's parachute systems as standard equipment.
Production of the aircraft is currently underway and first deliveries, which
will include the Company's parachute system, are expected to begin in January
1999. Although certified, there can be no assurances that this aircraft will
actually be produced in volumes that will have a material effect on the Company.
One of the Company's ongoing projects is the Small Business Innovation Research
grant (SBIR) through NASA. The purpose of the grant is to perform research of
low-cost, lightweight aircraft emergency recovery systems. The Company received
a Phase I grant during 1994. All work under this Phase I grant was completed
during fiscal year 1995. With the completion of Phase I, the Company applied for
and received a Phase II grant to continue on with the research that it began in
the first phase. The Phase II grant, which began in March 1996, is for a maximum
of $582,000 and is expected to be completed during fiscal year 1999.
Another project began in June 1996, when the Company received a development
contract for a recovery system for a prototype unmanned aircraft being developed
by a government contractor. The contract, with revisions, is for a total of
$150,000 and will be completed during fiscal year 1999. The purchase order calls
for the development and delivery of a series of recovery devices both for use in
testing, and possibly in future production models.
The Private Securities Litigation Reform Act of 1995 provides "safe harbor" for
forward-looking statements. Certain information included in this Form 10-KSB and
other materials filed or to be filed by the Company with the Securities and
Exchange Commission (as well as information included in oral statements or other
written statements made or to be made by the Company) contain statements that
are forward-looking, such as statements relating to plans for research projects,
anticipated Cirrus delivery schedules, other business development activities as
well as other capital spending, financial sources, the effects of competition
and resolution of any Year 2000 issues. Such forward-looking information
involves important risks and uncertainties that could significantly affect
anticipated results in the future and, accordingly, such results may differ from
those expressed in any forward-looking statements made by or on behalf of the
Company. These risks and uncertainties include, but are not limited to, the
elimination of funding for new research and development projects, the decline in
unregistered aircraft sales, potential product liability claims, dependence on
discretionary consumer spending, dependence on existing management, general
economic conditions, changes in federal or state laws or regulations.
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Item 7. Financial Statements and Supplementary Data
<TABLE>
<CAPTION>
Pg.
<S> <C>
(1) Financial Statements for the years ended September 30, 1998 and 1997:
Independent Auditors' Report 14
Balance Sheets as of September 30, 1998 and 1997 15
Statements of Operations for the years ended September 30, 1998
and 1997 16
Statements of Shareholders' Equity for the years ended
September 30, 1998 and 1997 17
Statements of Cash Flows for the years ended September 30,
1998 and 1997 18
Notes to Financial Statements 19
</TABLE>
(2) Financial Statement Schedules of Supplemental Information are no longer
required under Regulation S-B.
13
<PAGE> 14
CALLAHAN, JOHNSTON & ASSOCIATES, LLC
CERTIFIED PUBLIC ACCOUNTANTS AND CONSULTANTS
7850 Metro Parkway, Suite 207
Minneapolis, MN 55425
(612) 858-7207 Fax (612) 858-7202
INDEPENDENT AUDITORS' REPORT
Stockholders and Board of Directors
Ballistic Recovery Systems, Inc.
South St. Paul, Minnesota
We have audited the accompanying balance sheets of Ballistic Recovery Systems,
Inc. as of September 30, 1998 and 1997 and the related statements of operations,
shareholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
an assessment of the accounting principles used and significant estimates made
by management, as well as an evaluation of the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Ballistic Recovery Systems,
Inc. as of September 30, 1998 and 1997, and the results of operations, cash
flows and changes in shareholders' equity for the years then ended, in
conformity with generally accepted accounting principles.
/s/ Callahan, Johnston & Associates, LLC
Callahan, Johnston & Associates, LLC
Minneapolis, Minnesota
November 23, 1998
14
<PAGE> 15
PART II - Item 7. Financial Statements
BALLISTIC RECOVERY SYSTEMS, INC.
BALANCE SHEETS
September 30, 1998 and 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
---- ----
<S> <C> <C>
Current assets:
Cash $ 20,100 $ 119,197
Accounts receivable - net of allowance for doubtful
accounts of $2,500 and $12,500, respectively 401,822 210,006
Inventories 252,713 266,484
Deferred tax asset - current portion 25,000 138,000
Prepaid expenses 3,198 2,984
---------- ----------
Total current assets 702,833 736,671
---------- ----------
Furniture, fixtures and leasehold improvements 160,139 147,473
Less accumulated depreciation (81,611) (60,184)
---------- ----------
Furniture, fixtures and leasehold improvements - net 78,528 87,289
---------- ----------
Other assets:
Patents less accumulated amortization of
$7,924 and $7,238, respectively 3,740 4,426
Deferred tax asset - long-term portion 275,000 62,000
Other intangible assets less accumulated amortization of
$5,140 and $0, respectively 46,258 --
Covenant not to compete less accumulated
amortization of $110,669 and $72,726, respectively 268,769 306,712
---------- ----------
Total other assets 593,767 373,138
---------- ----------
Total assets $1,375,128 $1,197,098
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 166,159 $ 51,961
Customer deposits 73,180 95,401
Accrued payroll 48,792 31,031
Other accrued liabilities 65,075 141,744
Line-of-credit borrowings 35,884 --
Current portion of bank note 13,566 12,219
Current portion of covenant not to compete 23,460 30,806
---------- ----------
Current liabilities 426,116 363,162
---------- ----------
Long-term bank note and covenant, less current portions 250,770 289,639
---------- ----------
Shareholders' equity:
Common stock ($.01 par value; 10,000,000 shares authorized;
5,696,927 and 4,468,772 shares, respectively, issued
and outstanding) 56,969 44,688
Additional paid-in capital 2,622,888 2,625,639
Accumulated deficit (1,981,615) (2,126,030)
---------- ----------
Total shareholders' equity 698,242 544,297
---------- ----------
Total liabilities and shareholders' equity $1,375,128 $1,197,098
========== ==========
</TABLE>
The Accompanying Notes are an Integral Part of these Financial Statements.
15
<PAGE> 16
BALLISTIC RECOVERY SYSTEMS, INC.
STATEMENTS OF OPERATIONS
Years Ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Sales $1,622,544 $1,855,094
Cost of sales 1,046,934 1,222,546
---------- ----------
Gross profit 575,610 632,548
Selling, general and administrative 456,733 429,801
Research and development, net (Notes 2, 3 and 4) (9,061) (50,667)
---------- ----------
Income from operations 127,938 253,414
Other income (expense):
Interest expense (40,439) (44,532)
Intangible amortization (43,084) (37,944)
Other - net -- 3,358
---------- ----------
Income before income taxes 44,415 174,296
Income taxes expense (benefit) (Notes 1 and 9) (100,000) (198,000)
---------- ----------
Net income $ 144,415 $ 372,296
========== ==========
Basic earnings per share $ 0.03 $ 0.08
========== ==========
Weighted average number of shares outstanding 4,657,469 4,457,718
========== ==========
Diluted earnings per share $ 0.03 $ 0.07
========== ==========
Weighted average number of shares outstanding 4,841,400 5,006,007
========== ==========
</TABLE>
The Accompanying Notes are an Integral Part of these Financial Statements.
16
<PAGE> 17
BALLISTIC RECOVERY SYSTEMS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
Common Stock
------------ Additional Share-
Number of Paid-in Accumulated holders'
Shares Amount Capital Equity(Deficit) Equity
--------- ------ ----------- --------------- ----------
<S> <C> <C> <C> <C> <C>
Balance 10/1/96 4,454,474 $44,545 $2,620,282 ($2,498,326) $ 166,501
Issuance of stock in
lieu of director fees 14,298 143 5,357 -- 5,500
Net income -- -- -- 372,296 372,296
--------- ------- ---------- ----------- ----------
Balance 9/30/97 4,468,772 $44,688 $2,625,639 ($2,126,030) $ 544,297
Issuance of stock in
lieu of director fees 7,438 74 4,926 -- 5,000
Stock options
exercised 10,000 100 4,430 -- 4,530
Net stock issued
under cashless
transaction 1,210,717 12,107 (12,107) -- --
Net income -- -- -- 144,415 144,415
--------- ------- ---------- ----------- ----------
Balance 9/30/98 5,696,927 $56,969 $2,622,888 ($1,981,615) $ 698,242
========= ======= ========== =========== ==========
</TABLE>
The Accompanying Notes are an Integral Part of these Financial Statements.
17
<PAGE> 18
BALLISTIC RECOVERY SYSTEMS, INC.
STATEMENTS OF CASH FLOW
Years Ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activity:
Net income $144,415 $ 372,296
Adjustments to reconcile net income to net cash
from operating activity:
Depreciation and amortization 27,253 14,141
Provision for deferred tax benefit (100,000) (200,000)
Amortization of covenant not to compete 37,943 37,944
Inventory valuation reserve (10,000) 25,000
Loss on disposal of fixed assets -- 773
Discount on covenant not to compete -- (17,345)
Stock issued in lieu of board fees 5,000 5,500
Provision for bad debts (10,000) --
(Increase) decrease in:
Accounts receivable (181,816) (136,213)
Inventories 23,771 15,729
Prepaid expenses (214) 1,213
Increase (decrease) in:
Accounts payable 114,198 (8,962)
Customer deposits (22,221) (30,616)
Accrued expenses (58,908) 28,715
-------- ---------
Net cash flows from operating activities (30,579) 108,175
-------- ---------
Cash flows from investing activities:
Investment in other intangible assets (51,398) --
Capital expenditures (12,666) (85,671)
-------- ---------
Net cash flows from investing activities (64,064) (85,671)
-------- ---------
Cash flows from financing activities:
Net borrowing under line-of-credit agreement 35,884 (25,000)
Exercise of stock options 4,530 --
Proceeds from bank note -- 70,030
Principal payments on debt (12,219) (9,327)
Principal payments on covenant not to compete (32,649) (56,353)
-------- ---------
Net cash flows from financing activities (4,454) (20,650)
-------- ---------
Increase (decrease) in cash (99,097) 1,854
Cash - beginning of year 119,197 117,343
-------- ---------
Cash - end of period $ 20,100 $ 119,197
======== =========
</TABLE>
The Accompanying Notes are an Integral Part of these Financial Statements.
18
<PAGE> 19
BALLISTIC RECOVERY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1998 AND 1997
1. Summary of Significant Accounting Policies
Nature of Business
Ballistic Recovery Systems, Inc. (the "Company") designs, manufactures and
distributes ballistically deployed emergency parachute systems used on
recreational aircraft and certain models of general aviation aircraft. The
Company has also been successful in its efforts to receive outside funding
to expand its research and development activities through research grants
and contract R&D services. The Company has completed development of an
emergency recovery system for a four-place general aviation aircraft. This
aircraft was certified by the Federal Aviation Administration (FAA) on
October 23, 1998 and features the Company's parachute as standard
equipment. Production of the aircraft is underway and first deliveries,
which will include the Company's parachute system, are expected during the
Company's fiscal year 1999. Other research and development contracts
currently underway also have the potential to produce future business for
the Company. The Company's products are sold both domestically and
internationally.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Accounts Receivable
The Company sells to domestic and foreign companies. The Company grants
uncollateralized credit to some customers, but the majority of sales are
prepaid or shipped cash on delivery (COD). In addition, the Company's
research and development projects are billed to its customers on an
uncollateralized credit basis with terms of between net 15 and net 30 days.
The estimated loss that management believes is probable is included in the
allowance for doubtful accounts. Due to uncertainties in the collection
process, however, it is at least reasonably possible that management's
estimate will change during the next year. That amount cannot be estimated.
Three customers account for 92% of accounts receivable at September 30,
1998.
Inventories
Inventories are recorded at the lower of cost (determined on a first-in
basis) or market. The estimated loss that management believes is probable
is included in the inventory valuation allowance. Due to uncertainties,
however, it is at least reasonably possible that management's estimate will
change during the next year. That amount cannot be estimated.
Customer Deposits
The Company requires order deposits from most of its domestic and
international customers. These deposits represent either partial or
complete down payments for orders. These down payments are recorded as
customer deposits. The deposits are recognized as revenue when the product
is shipped.
19
<PAGE> 20
BALLISTIC RECOVERY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1998 AND 1997
1. Summary of Significant Accounting Policies (Continued)
Fixed Assets
Fixed assets are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the related assets,
ranging from three to seven years. When assets are retired or otherwise
disposed of, the cost and related accumulated depreciation are removed from
the accounts and the resulting gain or loss is recognized in income for the
period. The cost of maintenance and repairs is expensed as incurred;
significant renewals and betterments are capitalized. Deduction is made for
retirements resulting from renewals or betterments.
Intangibles
Patents are recorded at cost and are being amortized on a straight-line
method over 17 years. The covenant not to compete is recorded at cost and
is being amortized using the straight-line method over the ten-year term of
the agreement. Other intangible assets are recorded at cost and are being
amortized on a straight-line method over five years.
Earnings Per Share
Effective for fiscal year 1998 the company has implemented FASB 128:
Earnings Per Share. Accordingly, earnings per share (EPS) information for
prior periods has been restated to conform with FASB 128. FASB 128 replaces
the presentation of primary EPS with basic EPS. Basic EPS excludes dilution
and is computed by dividing net income by the weighted-average number of
common shares outstanding for the year. Diluted EPS reflects the potential
dilution from stock options and is computed using the treasury stock
method. Under the treasury stock method stock options are assumed to have
been exercised at the beginning of the period if the exercise price exceeds
the average market price during the period.
<TABLE>
<CAPTION>
Shares Days Weighted
Dates Outstanding Outstanding Outstanding Average Shares
------------------ ----------- ------------ -------------
<S> <C> <C> <C>
10/1/97 to 9/30/98 4,468,772 365 4,468,772
1/1/98 to 9/30/98 1,900 273 1,421
8/5/98 to 9/30/98 1,210,717 56 185,754
8/6/98 to 9/30/98 10,000 55 1,507
9/30/98 5,538 1 15
----------
Weighted-Average Shares for basic EPS 4,657,469
Incremental shares from assumed exercise of options 183,931
----------
Adjusted Weighted-Average Shares for diluted EPS 4,841,400
==========
Income available to common stockholders $ 144,415
==========
</TABLE>
20
<PAGE> 21
BALLISTIC RECOVERY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1998 AND 1997
1. Summary of Significant Accounting Policies (Continued)
Income Taxes
Timing differences relate primarily to: allowances for doubtful accounts;
inventory valuation allowances; and accrued expenses not currently
deductible. Beginning in fiscal year 1997 and continuing for fiscal year
1998, a deferred tax asset, net of a valuation reserve, has been reflected
for future benefit of the Company's net operating loss carry forwards and
net timing differences.
Research and Development Costs
Research and development costs are charged to expense as incurred.
Advertising Expenses
Advertising expenses are recognized in the period incurred. Advertising
expenses totaled $29,796 in 1998 and $28,929 in 1997.
2. New Product Development, Research and Development Funding and Income
Recognition
The Company has recently completed work under an agreement to receive
research and development funding from a privately held company that has
developed a four-place composite, certified aircraft. This aircraft, which
was successfully certified on October 23, 1998, is the first FAA certified
aircraft to offer one of the Company's recovery systems as standard
equipment. Although there is no assurance that this product will contribute
to the future operations and profitability of the Company, production of
this aircraft is currently underway. First deliveries, which will include
the Company's parachute system, are expected during the Company's fiscal
year 1999.
Under this agreement, $352,181 and $163,599 was reflected as an offset to
research and development expenses and is netted in the expense for 1998 and
1997, respectively. At the end of fiscal year 1998, the Company had a
receivable due under the first contract of $153,059. The Company is
currently preparing for production of parachute systems with the first
deliveries expected in January 1999.
The Company has retained the developed technology for the parachute systems
in general and the outside company has retained the developed technology
that is specific to their individual aircraft. In order to retain the
developed technology, the Company has offered the outside company a
discount on future purchases of completed systems, which will total 110% of
the advanced amount.
The Company did not establish a liability for the $549,295 taken as an
offset to expense to date under this project due to the uncertainty of the
future of the project and the future viability of the products to be
developed. In addition, it is the Company's belief that the establishment
of a reserve would have resulted in a misleading presentation of the
research and development costs incurred by the Company for this project.
Any future purchase discounts that will be earned upon delivery of
completed product will be offset against any future sales made to that
company.
The Company expects to be able to utilize the developed technology for
applications on a wide range of aircraft. The future applications will
depend on a complete review of market conditions, product acceptance and
available funding.
21
<PAGE> 22
BALLISTIC RECOVERY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1998 AND 1997
3. Small Business Innovation Research Grant (SBIR)
On March 8, 1996, the Company signed a follow -on Phase II contract under
the Small Business Innovation Research grant program (SBIR) through NASA
for use in the research of low-cost, lightweight aircraft emergency
recovery systems. The Phase II contract follows a Phase I award in 1995.
The Company has used the grant to expand its research in the area of
lightweight fabrics and components for use in recovery systems. The total
contract award was for a firm fixed price grant of $581,875 for a period
not to exceed 36 months.
For the years ended September 30, 1998 and 1997, the Company recognized
$254,032 and $157,842, respectively, as an offset to research and
development expenditures for work performed on the Phase II project. As of
September 30, 1998, the Company had recorded a receivable for $142,328 for
this contract.
4. Additional Contract Research and Development
In June 1996, the Company received a purchase order from a defense
subcontractor for the development of a parachute recovery system for an
unmanned aircraft that is being developed for possible military use. The
purchase order, with revisions, is for a total of $150,000 and will be
completed during the Company's fiscal year 1999. The purchase order calls
for development funding for the recovery system as well as the delivery of
completed recovery systems. $39,807 and $90,896, respectively, has been
recognized as an expense offset under this purchase order as of September
30, 1998 and 1997. As of September 30, 1998, the Company had recorded a
receivable for $15,402 for this contract. No assurances can be made as to
the success of the development project or if its completion will lead to
future revenues. Also, no assurances can be made that the project will
proceed as intended in the purchase order.
5. Covenant Not to Compete
On October 26, 1995 the Company entered into an agreement with the
president and majority shareholder of Second Chantz Aerial Survival
Equipment, Inc. (SCI), the Company's sole US competitor, whereby:
1. SCI ceased all business activities, and
2. SCI's president and majority shareholder entered into a ten year
covenant not to compete with the Company.
In exchange for the above the Company agreed to make payments on the
covenant not to compete. The agreement did not involve a stock or asset
purchase. In addition, the Company did not agree to assume any liabilities
of SCI or its president. The payments required under this agreement contain
a non-interest-bearing portion and a portion that bears interest at a rate
below the Company's incremental borrowing rate. Under generally accepted
accounting principles the future payments have been discounted at the
Company's incremental borrowing rate of 11.0% as follows:
22
<PAGE> 23
BALLISTIC RECOVERY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1998 AND 1997
5. Covenant Not to Compete (Continued)
<TABLE>
<CAPTION>
Future Present
Dollars Dollars
------- -------
<S> <C> <C>
Cash at signing $ 5,000 $ 5,000
Parachute systems 15,000 15,000
Non-interest bearing four year note 80,000 63,732
4% ten year note: principal 400,000 295,706
interest 84,362 --
-------- --------
$584,362 $379,438
======== ========
</TABLE>
The non interest bearing note called for monthly payments of $1,500 for
forty-six months (February 1996 to November 1999). However, the Company
negotiated a discount on this note and accelerated payments which were
completed in December 1997. This discount represented reductions in
principal and interest payments amounting to approximately $17,000 and was
reflected as Other Income in the financial statements for the period ending
September 30, 1997. The 4% ten year note calls for monthly payments of
$4,036 (November 1995 to October 2005).
Payments under this agreement are unsecured.
The present value of the Company's obligation under this agreement was
recorded as an intangible asset and is being amortized over ten years as
shown in the accompanying financial statements.
Future payments under this agreement are as follows:
<TABLE>
<CAPTION>
Future Present
Dollars Dollars
------- -------
<S> <C> <C>
1999 48,436 23,460
2000 48,436 26,176
2001 48,436 29,204
2002 48,436 32,583
2003 48,436 36,354
Thereafter 56,158 91,535
======== ========
$298,338 $239,312
</TABLE>
The Company also granted SCI's president an option to purchase 50,000
shares of the Company's common stock at an exercise price of $.25. This
option has a ten-year life and vests 20% per year over five years.
6. Long-Term Debt
On November 5, 1996, the Company signed a note payable with the bank in the
amount of $70,030. The purpose of the loan was to pay for renovations to
the current production facility that the company took possession of on
October 1, 1996. The note calls for interest at a rate 2% over the bank's
index rate, which was 8.25% at the time of signing. The index rate was
8.25% as of September 30, 1998, which computes to a total interest rate of
10.25%. The note has scheduled payments over a sixty-month period of $1,501
per month. The scheduled maturity date of the note is November 5, 2001.
However, the note has a demand provision, which can be exercised by the
bank at any time, but no demand for payment in full is expected during the
term of the note. The balance on the loan at September 30, 1998 was
$48,483. This loan is secured by all of the Company's assets.
23
<PAGE> 24
BALLISTIC RECOVERY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1998 AND 1997
6. Long-Term Debt (Continued)
Future maturities on long-term debt at September 30, 1998 are as follows:
<TABLE>
<S> <C>
1999 $ 13,566
2000 15,061
2001 16,721
2002 3,135
--------
$ 48,483
========
</TABLE>
7. Other Financial Information
Inventories
Inventories consisted of the following at September 30, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Raw materials $181,997 $160,555
Work in process 43,851 54,637
Finished goods 26,865 51,292
-------- --------
Total Inventories $252,713 $266,484
======== ========
</TABLE>
Depreciation Expense
Depreciation expense totaled $21,427 in 1998 and $13,455 in 1997.
Major Customers
During the fiscal years ended September 30, 1998 and 1997, the Company was
not dependent on any single customer that accounted for more that 10% of
its sales. The Company primarily distributes its products through dealers
and distributors who in turn sell to the end consumer. The Company believes
that in the event that any individual dealers or distributors cease to
represent the Company's products, that alternative dealers or distributors
can be established.
Export Sales
The Company's international sales are made through independent
representatives in various foreign countries. International sales as a
percentage of total sales were 32% in 1998 and 39% in 1997.
Major Suppliers
During the fiscal years ended September 30, 1998 and 1997, the Company
purchased its parachutes from a certain key vendor. Up until the current
fiscal year, ballistic devices were also purchased from an outside
supplier. During fiscal year 1998, the Company designed, tested and began
manufacturing its own ballistic devices. The Company routinely searches for
new suppliers and feels alternate sources can be found should any of these
suppliers be unable to meet the Company's needs.
24
<PAGE> 25
BALLISTIC RECOVERY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1998 AND 1997
7. Other Financial Information (Continued)
Related Party
The Company contracts with an officer/shareholder of the Company to
coordinate its advertising. Total advertising expenses were $29,796 and
$28,929 for 1998 and 1997, respectively. The advertising rates charged are
at or below current market rates. The Company owed this related party
$47,363 as of September 30, 1998 and $26,362 as of September 30, 1997.
8. Line-of Credit Borrowings
Beginning February 24, 1998, the Company was operating under a $150,000
line-of-credit for use in operations. The line-of-credit was established on
an annual renewal basis and is secured by all of the Company's assets. The
latest line-of-credit expires February 28, 1999. The line calls for a
variable interest rate of 2% over the bank's index rate. At September 30,
1998, the outstanding balance under the line was $35,884 at an interest
rate of 10.00%. The previous line-of-credit was for $35,000 and was in
place for the first portion of fiscal year 1998 as well as for all of
fiscal year 1997. The Company expects to renew the line each year following
the review of its financial results and projections with the bank.
9. Income Taxes
Income tax benefit (expense) consisted of the following at September 30:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Current:
Federal $ -- $ --
State (300) (2,000)
--------- ---------
(300) (2,000)
--------- ---------
Deferred:
Federal 75,000 138,000
State 25,300 62,000
--------- ---------
100,300 200,000
--------- ---------
Income tax benefit (expense) $ 100,000 $ 198,000
========= =========
</TABLE>
The reconciliation between expected federal income tax rate and actual
tax rates is as follows:
<TABLE>
<CAPTION>
1998 1997
------------------ -----------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Expected federal tax $ (15,100) (34.0%) $ (59,000) (34.0%)
Surtax exemption 8,400 18.9% 8,000 4.6%
State income tax, net
of federal tax
benefit (2,900) (6.5%) (11,000)
(6.3%)
Valuation and utilization
of net operating loss
carryforwards 109,900 247.5% 262,000 150.4%
State minimum fee (300) (0.7%) (2,000) (1.1%)
--------- ----- ------- -----
Income tax benefit (expense) $ 100,000 225.2% $ 198,000 113.6%
========= ===== ========= =====
</TABLE>
25
<PAGE> 26
BALLISTIC RECOVERY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1998 AND 1997
9. Income Taxes (Continued)
Differences between accounting rules and tax laws cause differences
between the bases of certain assets and liabilities for financial
reporting purposes and tax purposes. The tax effects of these
differences, to the extent they are temporary, are recorded as deferred
tax assets and liabilities under SFAS 109, and consisted of the
following:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 1,000 $ 5,000
Inventory valuation allowance 16,000 19,900
Section 263A adjustment 9,300 10,000
Depreciation of leaseholds 2,700 1,800
Vacation accrual 6,600 4,700
Other accruals 6,800 24,300
Net operating loss carryforwards 962,000 933,000
---------- ---------
Gross deferred tax asset 1,004,400 998,700
Valuation allowance (704,400) (798,700)
---------- ---------
Net deferred tax asset 300,000 200,000
Deferred tax liability -- --
---------- ----------
Net deferred tax asset (liability) $ 300,000 $ 200,000
========== ==========
Current deferred tax asset $ 25,000 $ 138,000
Long-term deferred tax asset 275,000 62,000
---------- ----------
$ 300,000 $ 200,000
========== ==========
</TABLE>
During 1998 and 1997 the Company reduced the valuation allowance
relating to the deferred tax assets to reflect current utilization and
to recognize a deferred tax asset. The recognized deferred tax asset is
based upon expected utilization of the net operating loss carryforwards
and reversal of certain timing differences.
The Company has assess its past earnings history and trends, sales
backlog, budgeted sales, and expiration dates of carryforwards and has
determined that it is more likely than not that $300,000 of deferred
tax assets will be utilized. The remaining valuation allowance of
$704,400 is maintained on deferred tax assets which the company has not
determined to be more likely than not realized at this time.
26
<PAGE> 27
BALLISTIC RECOVERY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1998 AND 1997
9. Income Taxes (Continued)
At September 30, 1998 the Company has carryforwards available to offset
future taxable income, as follows:
<TABLE>
<CAPTION>
State
Federal Federal State R&D
Regular NOL AMT NOL NOL Credit
----------- --------- -------- -------
<S> <C> <C> <C> <C>
2001 $ -- $ -- $ -- $ 4,000
2002 -- -- -- 4,000
2003 -- -- -- 5,000
2004 137,000 174,000 -- --
2005 519,000 512,000 -- --
2006 132,000 126,000 -- --
2007 113,000 107,000 12,000 --
2008 457,000 450,000 97,000 --
2009 181,000 175,000 182,000 --
2010 9,000 7,000 8,000 --
-------------------------------------------------
$1,548,000 $1,551,000 $299,000 $13,000
========== ========== ======== =======
</TABLE>
10. Common Stock
Stock Options
In fiscal year 1988, and as amended in fiscal year 1991, the Company
adopted a non qualified stock option plan that authorizes the grant to
officers and other employees of non qualified stock options for a maximum
of 400,000 shares. Under the terms of the plan, the options become
exercisable in annual increments of one-third of the shares covered by the
option, beginning one year after grant, the exercise price of each option
must be at least 85% of the fair market value of the stock as of the date
of grant, and the maximum term of each option is 10 years. This plan
expired on December 31, 1997.
In fiscal 1990, the Company adopted a stock option plan for non-employee
directors. The plan is authorized to grant options for a maximum, in the
aggregate, of 300,000 shares of the Company's common stock to non-employee
directors. Under the plan, an option to purchase 10,000 shares of common
stock, at an exercise price equal to the fair market value of the stock on
the date of grant, is to be granted each year on the next business day
following the annual shareholders meeting or April 1, whichever is later,
to each non employee director then in office. Each option becomes
exercisable in increments of 25% per quarter during the year of service and
terminates 10 years following the date of grant. Following the 1997 annual
shareholder meeting, there were no shares remaining under this plan.
In addition to options issued pursuant to the above-described plans, the
Company has issued options to various officers, employees and others on a
discretionary basis.
27
<PAGE> 28
BALLISTIC RECOVERY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1998 AND 1997
10. Common Stock (Continued)
Stock Options (Continued)
Transactions during 1998 and 1997, for the plans and other issuances above
were as follows:
<TABLE>
<CAPTION>
Number Option Price
Of Shares Range per Share
--------- ---------------
<S> <C> <C>
Balance at October 1, 1996 2,112,518 $0.25 to $0.8125
Granted 60,000 $0.56 to $0.69
---------
Balance at September 30, 1997 2,172,518 $0.25 to $0.8125
Granted 162,760 $0.4375 to $0.75
Exercised (21,500) $0.25 to $0.453
Converted to stock under cashless
transaction (1,614,416) $0.25 to $0.8125
-----------
Balance at September 30, 1998 699,362 $0.25 to $0.75
===========
At September 30, 1998:
Options vested and exercisable 559,362
Shares available for options -0-
</TABLE>
11. Commitments and Contingencies
Leases
The Company leases its production facility on an airport in South St. Paul,
Minnesota. Total rental expense for operating leases during 1998 and 1997
was $28,830 and $31,672, respectively.
Future minimum lease payments required on non-cancelable operating leases
at September 30, 1998 are as follows:
<TABLE>
<S> <C>
1999 $ 28,830
2000 28,830
2001 28,830
2002 28,200
2003 7,208
---------
$ 122,528
</TABLE>
28
<PAGE> 29
\
BALLISTIC RECOVERY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1998 AND 1997
12.Supplemental Cash Flow Information
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash paid for:
Interest $40,439 $44,532
Income taxes 1,830 1,637
</TABLE>
Summary of non cash activity:
- - Common stock was issued in lieu of director's fees of $5,000 and
$5,500, for 1998 and 1997, respectively.
- - Options to acquire 1,614,416 shares of the Company's common stock were
converted into 1,210,717 shares of the Company's common stock in a
cashless transaction on August 5, 1998.
29
<PAGE> 30
PART II (Continued)
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
There have been no disagreements with the Company's independent
certified public accountants on accounting principles or practices or
financial statement disclosures.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons:
Compliance with Section 16(a) of the Exchange Act
The information required by this item is incorporated by reference from
the Proxy Statement.
Item 10. Executive Compensation
The information required by this item is incorporated by reference from
the Proxy Statement.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated by reference from
the Proxy Statement.
Item 12. Certain Relationships and Related Transactions
The information required by this item is incorporated by reference from
the Proxy Statement.
PART IV
Item 13. Exhibits, Lists and Reports on Form 8-K.
(a) Exhibits
--------
Page Exhibit
Number Number Description
------ ------ -----------
3.1 Company's Articles of
Incorporation, as amended,
appear as Exhibit 3.1 to the
Company's Registration
Statement on Form S-1 (No.
33-21843) filed May 12, 1988
("Form S-1") and are
incorporated herein by
reference.
3.2 Company's Restated Bylaws
as amended, were filed as
Exhibit 3.2, under Form 8,
Amendment No. 1 ("1990
Amendment") to the
Company's Report on Form
10-K for the fiscal year
ended September 30, 1990
(the "1990 10-K") and are
incorporated herein by
reference.
10.1 Covenant not to Compete
Agreement dated October 26,
1995 between the Company
and the President and
majority shareholder of
Second Chantz Aerial
Survival Equipment, Inc.
appears as Exhibit 10.1 to
the Company's Report on
Form 10-KSB for the fiscal
year ended September 30,
1995 and is incorporated
herein by reference.
30
<PAGE> 31
PART IV (CONTINUED)
Item 13.Exhibits, Lists and Reports on Form 8-K (Continued).
(a) Exhibits
--------
Page Exhibit
Number Number Description
------ ------ -----------
10.2 Non-qualified Stock Option Plan
appears as Exhibit 10-1 to
Amendment No. 1 to the Form S-1
and is incorporated herein by
reference.
10.3 Stock Option Plan for
Non-employee Directors dated
February 12, 1990 appears as
Exhibit 10.5 to the 1989 10-K
and is incorporated herein by
reference.
(b) The Company did not file any Current Reports on Form 8-K during the fourth
quarter ended September 30, 1998.
31
<PAGE> 32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
BALLISTIC RECOVERY SYSTEMS, INC.
By /s/ Mark B. Thomas
---------------------------
Mark B. Thomas
Principal Executive Officer, Principal Financial Officer and
Principal Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Darrel D. Brandt Director December 10, 1998
- ---------------------------
Darrel D. Brandt
/s/ Boris Popov Director December 10, 1998
- ---------------------------
Boris Popov
/s/ Robert L. Nelson Director December 10, 1998
- ---------------------------
Robert L. Nelson
/s/ Thomas H. Adams Director December 10, 1998
- ---------------------------
Thomas H. Adams
32
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 20,100
<SECURITIES> 0
<RECEIVABLES> 404,322
<ALLOWANCES> 2,500
<INVENTORY> 252,713
<CURRENT-ASSETS> 702,833
<PP&E> 160,139
<DEPRECIATION> 81,611
<TOTAL-ASSETS> 1,375,128
<CURRENT-LIABILITIES> 426,116
<BONDS> 250,770
0
0
<COMMON> 56,969
<OTHER-SE> 641,273
<TOTAL-LIABILITY-AND-EQUITY> 1,375,128
<SALES> 1,622,544
<TOTAL-REVENUES> 1,622,544
<CGS> 1,046,934
<TOTAL-COSTS> 1,046,934
<OTHER-EXPENSES> 447,672
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 83,523
<INCOME-PRETAX> 44,415
<INCOME-TAX> (100,000)
<INCOME-CONTINUING> 144,415
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 144,415
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
</TABLE>
