<PAGE>
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, 1999
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.
(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: $1,798,300.
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 8, 1999 was approximately $4,126,000.
Number of shares outstanding as of December 8, 1999: 5,859,449.
Index for exhibits is located on page 31. This document contains 33 pages.
1
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Definitive Proxy Statement to be used in connection
with the election of directors at the 2000 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.
2
<PAGE>
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 recreational and general aviation
aircraft. The Company believes it is the only US manufacturer of whole
aircraft recovery systems. In addition, the Company has designed
systems for use with various military and civilian unmanned aircraft
markets.
Since its inception, the Company has delivered nearly 15,000 systems
that have been installed on recreational and general aviation aircraft.
To date, the Company has documented 129 lives spared through the use of
its systems in actual in-air emergencies.
Although the recreational aviation market presently accounts for the
majority of the Company's revenues, the Company has been expanding its
efforts in the general aviation market. During fiscal year 1999, the
Company began delivery of systems for a newly certified aircraft known
as the Cirrus Design SR20 (SR20). The Company believes that this and
other general aviation aircraft can offer a significant revenue growth
potential for the Company.
The SR20 aircraft received Federal Aviation Administration (FAA)
certification in October 1998 and includes the Company's parachute
system as a standard equipment feature. The SR20 system was the second
such system certified by the FAA for installation in general aviation
aircraft. In early 1993, the Company received FAA approval for the
GARD-150 product for installation on FAA-certified Cessna 150/152
aircraft. At the end of fiscal year 1999, the Company began marketing
efforts to receive funding for the development of a system for the
Cessna 172 aircraft. The Company intends for the marketing efforts to
provide the market research for the acceptance of such a system as well
as to provide a source of funding for development of such a system. To
date, the Company has received signed contracts with deposits from
three owners of Cessna 172 aircraft as well as contract requests from
50 additional prospects. The Company plans to continue its marketing
efforts during fiscal year 2000 and make a determination during that
year as to the viability of such development.
The development of the system for the SR20 was a joint effort between
the Company and Cirrus Design under an agreement that began in 1994 and
culminated with FAA certification in late 1998. Under terms of the
agreement, the Company retained all rights to the developed technology.
Over the past several years, 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 in this regard.
During fiscal year 1999, work was completed under the Company's Small
Business Innovation Research grant (SBIR) through NASA. The purpose of
the grant was to perform research on low-cost, lightweight aircraft
emergency recovery systems. The grant, which began in March 1996, was
for a maximum of $582,000 over the 36 month contract period.
Also during fiscal year 1999, the Company completed a development
contract for a recovery system for a prototype-unmanned aircraft being
developed by a government contractor. The contract, with a maximum
amount of $150,000, began in 1996 and called for the development and
delivery of a series of recovery devices both for use in testing, and
possibly in future production models.
3
<PAGE>
(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.
RECREATIONAL AVIATION PRODUCTS:
Recreational aviation products include products designed and
manufactured for use on unregistered aircraft such as ultralights 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 SR20, 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 began delivering
systems for the SR20 during fiscal year 1999. Production of systems is
scheduled to increase throughout the next several fiscal years as the
customer accelerates its production of the aircraft. See Note 2 of
Notes to Financial Statements for further information.
At the end of fiscal year 1999, the Company began efforts to generate
interest in a recovery system for the certified Cessna 172 aircraft.
The Company began a marketing and media campaign designed to solicit
purchase commitments from owners of Cessna 172 aircraft which would in
turn provide partial or complete funding for the development and
certification of the system. To date, the Company has received three
signed purchase commitments and requests for contracts from 50
additional prospects. The Company plans to continue its efforts during
fiscal year 2000 and assess the viability of such development during
that year.
CONTRACT RESEARCH AND DEVELOPMENT:
Contract research and development has allowed the Company to expand its
product line and expertise in whole aircraft recovery systems. It has
been and will continue to be a goal of the Company to receive outside
funding for its research and development activities.
4
<PAGE>
ITEM 1. DESCRIPTION OF BUSINESS (CONTINUED)
(b) NARRATIVE DESCRIPTION OF BUSINESS (CONTINUED)
The Company completed a project through the Small Business Innovation
Research grant (SBIR) program administered by NASA. The purpose of the
grant was to perform research on 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, was for a maximum of
$582,000 and was completed during the Company's fiscal year 1999. The
purpose of the grant was 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.
Also during fiscal year 1999, the Company completed work under a
development contract for a recovery system for a prototype-unmanned
aircraft being developed by a government contractor. The contract that
began in 1996 was for a maximum amount of $150,000, and called for the
development and delivery of a series of recovery devices both for use
in testing, and possibly in future production models. See Note 4 of
Notes to Financial Statements for further information.
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. The Company manufactures 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.
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 an 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.
5
<PAGE>
ITEM 1. DESCRIPTION OF BUSINESS (CONTINUED)
(b) NARRATIVE DESCRIPTION OF BUSINESS (CONTINUED)
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
expansion in the general aviation market through the production of
systems for the Cirrus Design SR20 will begin to lessen the impact of
seasonality on the Company during fiscal year 2000.
DEPENDENCE ON A SINGLE CUSTOMER:
During the fiscal years ended September 30, 1999 and 1998, 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, 1999 and 1998, the Company had a backlog of orders
totaling approximately $241,000 and $172,000, respectively. The 1999
backlog is expected to be filled during fiscal year 2000.
RESEARCH AND DEVELOPMENT:
A summary of research and development is as follows:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Total research and development
expenditures $218,500 $636,958
Revenues recognized under contract
research and development
relationships (97,138) (646,019)
--------- ---------
Research and development, net $121,362 ($ 9,061)
========= ==========
</TABLE>
The sources of the 1999 outside funding included the SBIR grant, and
the unmanned aircraft recovery system as discussed in Note 2 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.
6
<PAGE>
ITEM 1. DESCRIPTION OF BUSINESS (CONTINUED)
(b) NARRATIVE DESCRIPTION OF BUSINESS (CONTINUED)
COMPETITION (Continued):
The FAA as part of the Cirrus Design SR20 has certified the Company's
product, which is standard equipment on that aircraft. This is the
first whole aircraft recovery system ever certified by the FAA as
standard equipment. At present, there are no other manufacturers with
the FAA Supplemental Type Certificate or FAA certification under a
manufacturer's Type Certificate necessary to install a recovery system
for the 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 or 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, 1999, the Company had 13 full-time employees at its
South St. Paul facility.
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 contacted 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 as the Year 2000
approaches, the Company will continue to monitor the situation if any
further information presents itself based on 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.
7
<PAGE>
ITEM 1. DESCRIPTION OF BUSINESS (CONTINUED)
(b) NARRATIVE DESCRIPTION OF BUSINESS (CONTINUED)
YEAR 2000 COMPLIANCE ISSUE (CONTINUED):
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 10 of Notes to Financial Statements).
ITEM 3. LEGAL PROCEEDINGS
The Company was named in a lawsuit based on the crash of an ultralight
aircraft. The Company was released from the lawsuit during the first
quarter of the current fiscal year. The Company believes that there is
no potential for further liability in this matter.
The Company was named in a lawsuit based on a claim from a former
supplier of the Company. The Company has made a counter claim against
the vendor for damages sustained by the Company. The Company believes
that its counter claim is valid and that the potential for future
liability in this matter is not material to the Company's financial
position.
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.
8
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER 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 $2.25 and the bid price would be $2.1875 as of
September 30, 1999.
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>
1999 High $ 1.19 $ 0.94 $ 0.75 $ 3.00
Low $ 0.56 $ 0.44 $ 0.44 $ 0.50
1998 High $ 0.56 $ 1.06 $ 1.06 $ 1.50
Low $ 0.31 $ 0.25 $ 0.75 $ 0.56
</TABLE>
(b) HOLDERS
As of December 8, 1999, 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.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BUSINESS OVERVIEW:
During the current fiscal year, the Company turned the page of a new chapter in
its long history of providing whole aircraft parachute recovery systems. This
year marks the first time that a parachute system was delivered to a customer
that will install it as standard equipment on a certified general aviation
aircraft. The Cirrus Design SR20 (SR20) is the first in a series of aircraft to
be manufactured by Cirrus Design Corporation (Cirrus) that has chosen to offer
the Company's product as a standard feature. As of the beginning of December
1999, the customer has firm orders for approximately 430 aircraft that will all
include the Company's parachute systems. The customer expects to be able to fill
this backlog of orders during the next 24 to 30 months. Future production
volumes for the aircraft, and therefore, the Company's parachute systems, will
be dictated by ultimate market demands. The Company is currently discussing
offering its product to the customer for future models of aircraft that the
customer plans to manufacture. The Company believes that this will help to
propel it forward into offering its systems to other manufactures and customers
in the certified general aviation market.
On March 30, 1999, the Company made its first two scheduled deliveries under the
open purchase order with Cirrus. The open purchase order is for the first 100
units to be delivered. The Company delivered an additional twelve units by the
end of the fiscal year for a total of 14 units delivered. These sales accounted
for approximately 8% of the Company's total revenues for the current fiscal
year. The Company believes that the customer will gradually accelerate its
production schedule as indicated in current purchase orders. Although there can
be no assurances that the Cirrus aircraft will be successful in its continued
market acceptance, the Company expects to make an increasing number of sales to
Cirrus as they continue to increase production and fill their increasing backlog
of customer orders.
During the current fiscal year the Company has moved into a period of transition
from research and development to production and market development. This has
resulted in the Company's shift from its position of being able to sell its
research and development capabilities to a need to expend capital and resources
to get the developed products and technologies on the market and to look for new
applications for those products and technologies. The Company believes that this
shift, which has resulted in temporary reduction in operating profits, will
result in revenue growth and improved profitability.
In addition, the Company anticipated being able to expand its product line to
include other certified and uncertified aircraft as the recovery system gains
further market acceptance. The Company has been in discussions with the US
military and several foreign companies that have expressed interest in utilizing
the Company's newly developed technology. No assurance can be made as to the
future benefits that will be derived from these discussions.
At the end of July 1999, the Company announced a program that is intended to
lead to the introduction of a parachute recovery system for the Cessna 172
aircraft. The Cessna 172 is one of the most popular general aviation aircraft
with approximately 36,000 planes manufactured. Twenty-eight thousand Cessna
172's are estimated to be in active service in the United States at this time.
Under the program, the Company is asking 172 owners to make deposits towards the
purchase of a recovery system. Once a certain number of owners have made their
deposits, the Company will begin the certification process with the FAA. Once
certified, the Company will begin manufacturing and delivery of units to the
owners that have placed deposits. The Company expects to be successful in its
solicitation efforts, but no assurances can be made of its success or the
long-term financial benefits to the Company. As of the beginning of December
1999, the Company has received signed contracts with deposits from three owners
of 172 aircraft as well as contract requests from 50 additional prospects.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Another long-standing outside research and development project was for a
research grant under the SBIR program administered by NASA. Under the project,
the Company explored the possibilities of developing a new fabric for parachute
manufacturing that would reduce the weight and volume of currently existing
parachute recovery systems. Final testing was completed in February 1999 and
final reports and test articles were submitted to NASA on March 8, 1999. As a
result of the project, the Company applied for a patent for the new
manufacturing method that was developed. The Company expects to be able to
utilize the developed technology for a wide range of applications. This
expectation is based on the Company's belief in its ability to further develop
the technology either on its own or through cooperative efforts with outside
companies or agencies. The future applications will depend on a complete review
of market conditions, product acceptance and available funding. The Company has
begun discussions with a foreign company that has expressed interest in the
developed technology for currently existing commercial and military
applications. No assurance can be made as to the future benefits that will be
derived from these discussions.
RESULTS OF OPERATIONS:
SALES
Sales for the current fiscal year were ahead of the prior year by approximately
11%. The majority of the increase is a result of first deliveries for the Cirrus
Design SR20. Domestic sales have been strong, but throughout the prior fiscal
year and continuing on into the current fiscal year, the international markets
for the Company's products have been affected by a number of factors. These
factors include the economic unrest in Asia, a strong US currency that raises
the cost of the Company's exports, increased competition in Europe, and
increasing government regulations that make it more challenging to transport the
Company's product abroad. This has resulted in weaker sales internationally than
in previous years. 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 2000 are expected to
be even or slightly higher than the current fiscal year as a result of the
Company's efforts to improve international business and the improvement in
domestic aircraft sales. In addition to recreational market sales, it is
expected that the Company will continue delivery of systems for the newly
certified Cirrus Design SR20 aircraft. The Company made its first two scheduled
deliveries on March 30, 1999 with a total of 14 units delivered during fiscal
year 1999. These deliveries were under an open purchase order for the first 100
units. The remainder of these first 100 units is expected to be delivered within
the next 12 months. However, 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 better than that of the
previous fiscal year by a little more than 3%. 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 or if gross margins will decrease in the future.
OPERATING EXPENSES:
Selling, general and administrative costs have been held fairly constant in
actual dollars with that of the prior fiscal year and decreased as a percent of
sales by 2.5%. Expenditures in this category are expected to increase as the
Company accelerates its efforts to expand the general aviation market while
strengthening the sport and recreational market sales.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Outside funding has offset a portion of 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. In addition, personnel
added to complete certain outside research and development projects increased
the Company's expenses while funding for those projects was being reduced or had
come to an end. The Company believes that these added expenses were necessary to
complete its obligations under those projects. All of the outside research and
development projects underway at the end of fiscal year 1998 have been 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 as a result of
expenditures made to support the completion of outside research and development
projects without the benefit of offsetting revenues. Income in future fiscal
years is expected to increase as a result of increased sales and potential
offset of a portion of 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 prior fiscal year was a result of the valuation of
the Company's net operating loss carryforwards. The benefit was recorded based
on the Company's ability to demonstrate that there was a reasonable likelihood
of being able to utilize the carryforwards to offset State and Federal taxes on
future taxable income. No provision was recorded in the current fiscal year due
to the level of profitability attained in conjunction with past provisions
already recorded. 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 have been
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. It is currently the intention of the Company to fund the
expenditures through current operations as well as revenues generated by those
units.
With the receipt of certification on October 23, 1998, the Cirrus Design SR20
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 the first two end-customer aircraft were delivered in July 1999.
The Company made its first two scheduled deliveries of parachute systems on
March 30, 1999 with a total of 14 units delivered during the current fiscal
year. The Company is currently building parachute systems under an open 100-unit
purchase order, which is expected to be filled within the next 12 months.
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.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
The Company completed work on its Small Business Innovation Research grant
(SBIR) through NASA on March 8, 1999. The purpose of the grant was to perform
research of low-cost, lightweight aircraft emergency recovery systems. The Phase
II grant, which began in March 1996, was for a maximum of $582,000. The Company
is currently looking for applications of the developed technology and is in
discussions with a foreign company that is interested in the technology for
their current military and commercial products.
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.
13
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
Pg.
<S> <C>
(1) Financial Statements for the years ended September 30, 1999 and 1998:
Independent Auditors' Report 15
Balance Sheets as of September 30, 1999 and 1998 16
Statements of Operations for the years ended September 30, 1999
and 1998 17
Statements of Shareholders' Equity for the years ended
September 30, 1999 and 1998 18
Statements of Cash Flows for the years ended September 30,
1999 and 1998 19
Notes to Financial Statements 20
</TABLE>
(2) Financial Statement Schedules of Supplemental Information are no longer
required under Regulation S-B.
14
<PAGE>
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
Shareholders 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, 1999 and 1998 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, 1999 and 1998, 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 12, 1999
15
<PAGE>
PART II - Item 7. Financial Statements
BALLISTIC RECOVERY SYSTEMS, INC.
BALANCE SHEETS
September 30, 1999 and 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
---------- -----------
<S> <C> <C>
Current assets:
Cash $181,902 $20,100
Accounts receivable - net of allowance for doubtful
accounts of $2,500 and $2,500, respectively 59,074 401,822
Inventories 340,355 252,713
Deferred tax asset - current portion 25,000 25,000
Prepaid expenses 6,398 3,198
---------- -----------
Total current assets 612,729 702,833
---------- -----------
Furniture, fixtures and leasehold improvements 165,550 160,139
Less accumulated depreciation (104,158) (81,611)
---------- -----------
Furniture, fixtures and leasehold improvements - net 61,392 78,528
---------- -----------
Other assets:
Patents less accumulated amortization of
$8,611 and $7,924, respectively 3,054 3,740
Deferred tax asset - long-term portion 275,000 275,000
Other intangible assets less accumulated amortization of
$15,419 and $5,140, respectively 35,978 46,258
Covenant not to compete less accumulated
amortization of $148,613 and $110,669, respectively 230,825 268,769
---------- -----------
Total other assets 544,857 593,767
---------- -----------
Total assets $1,218,978 $1,375,128
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $58,580 $166,159
Customer deposits 94,257 73,180
Accrued payroll 35,958 48,792
Other accrued liabilities 67,450 65,075
Line-of-credit borrowings--- -- 35,884
Current portion of bank note 15,312 13,566
Current portion of covenant not to compete 26,175 23,460
---------- -----------
Current liabilities 297,732 426,116
---------- -----------
Long-term bank note and covenant, less current portions 207,275 250,770
---------- -----------
Shareholders' equity:
Common stock ($.01 par value; 10,000,000 shares authorized;
5,859,449 and 5,696,927 shares, respectively, issued
and outstanding) 58,595 56,969
Additional paid-in capital 2,631,762 2,622,888
Accumulated deficit (1,976,386) (1,981,615)
---------- -----------
Total shareholders' equity 713,971 698,242
---------- -----------
Total liabilities and shareholders' equity $1,218,978 $1,375,128
========== ===========
</TABLE>
The Accompanying Notes are an Integral Part of these Financial Statements.
16
<PAGE>
BALLISTIC RECOVERY SYSTEMS, INC.
STATEMENTS OF OPERATIONS
Years Ended September 30, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Sales $1,798,300 $1,622,544
Cost of sales 1,104,914 1,046,934
----------- -----------
Gross profit 693,386 575,610
Selling, general and administrative 460,750 456,733
Research and development, net (Note 2) 121,362 (9,061)
----------- -----------
Income from operations 111,274 127,938
Other income (expense):
Interest expense (42,158) (40,439)
Intangible amortization (48,223) (43,084)
Other - net (15,664) ---
----------- -----------
Income before income taxes 5,229 44,415
Income taxes expense (benefit) (Notes 1 and 8) --- (100,000)
----------- -----------
Net income $5,229 $144,415
=========== ===========
Basic earnings per share $0.00 $0.03
----------- -----------
Weighted average number of shares outstanding 5,731,131 4,657,469
=========== ===========
Diluted earnings per share $0.00 $0.03
----------- -----------
Weighted average number of shares outstanding 6,057,733 4,841,400
=========== ===========
</TABLE>
The Accompanying Notes are an Integral Part of these Financial Statements.
17
<PAGE>
BALLISTIC RECOVERY SYSTEMS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended September 30, 1999 and 1998
<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 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
Issuance of stock in
lieu of director fees 4,844 49 3,951 --- 4,000
Stock options
exercised 14,616 146 6,354 --- 6,500
Net stock issued
under cashless
transaction 143,062 1,431 (1,431) --- ---
Net income --- --- --- 5,229 5,229
---------- ---------- ---------- ---------- ----------
Balance 9/30/99 5,859,449 $58,595 $2,631,762 ($1,976,386) $713,971
========== ========== ========== ========== ==========
</TABLE>
The Accompanying Notes are an Integral Part of these Financial Statements.
18
<PAGE>
BALLISTIC RECOVERY SYSTEMS, INC.
STATEMENTS OF CASH FLOW
Years Ended September 30, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
Cash flows from operating activity:
<S> <C> <C>
Net income $5,229 $144,415
Adjustments to reconcile net income to net cash
from operating activity:
Depreciation and amortization 33,513 27,253
Provision for deferred tax benefit --- (100,000)
Amortization of covenant not to compete 37,944 37,943
Inventory valuation reserve 12,000 (10,000)
Stock issued in lieu of board fees 4,000 5,000
Provision for bad debts --- (10,000)
(Increase) decrease in:
Accounts receivable 342,748 (181,816)
Inventories (99,642) 23,771
Prepaid expenses (3,200) (214)
Increase (decrease) in:
Accounts payable (107,579) 114,198
Customer deposits 21,077 (22,221)
Accrued expenses (10,460) (58,908)
--------- --------
Net cash flows from operating activities 235,630 (30,579)
--------- --------
Cash flows from investing activities:
Investment in other intangible assets --- (51,398)
Capital expenditures (5,411) (12,666)
--------- --------
Net cash flows from investing activities (5,411) (64,064)
--------- --------
Cash flows from financing activities:
Net borrowing under line-of-credit agreement (35,884) 35,884
Exercise of stock options6,500 4,530
Principal payments on debt (13,853) (12,219)
Principal payments on covenant not to compete (25,180) (32,649)
--------- --------
Net cash flows from financing activities (68,417) (4,454)
--------- --------
Increase (decrease) in cash 161,802 (99,097)
Cash - beginning of year 20,100 119,197
--------- --------
Cash - end of period $181,902 $20,100
========= ========
</TABLE>
The Accompanying Notes are an Integral Part of these Financial Statements.
19
<PAGE>
BALLISTIC RECOVERY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
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) in
October 1998 and features the Company's parachute as standard equipment.
Production of the aircraft is underway and the Company began delivering the
first parachute systems to the customer during fiscal year 1999. Other
research and development contracts that were completed during fiscal year
1999 as well as newly proposed development projects 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.
CASH CONCENTRATIONS
Bank balances periodically exceeded federally insured levels during 1999
and 1998.
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.
Two customers account for 80% of accounts receivable at September 30, 1999.
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.
20
<PAGE>
BALLISTIC RECOVERY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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
The company has implemented SFAS 128: Earnings Per Share. 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>
10/1/98 to 9/30/99 5,696,927 365 5,696,927
1/2/99 to 9/30/99 4,616 210 2,656
6/1/99 to 9/30/99 10,000 121 3,315
7/20/99 to 9/30/99 143,062 72 28,220
9/30/99 4,844 1 13
-----------
Weighted-Average Shares for basic EPS 5,731,131
Incremental shares from assumed exercise of options 326,602
-----------
Adjusted Weighted-Average Shares for diluted EPS 6,057,733
===========
Income available to common shareholders $5,229
===========
</TABLE>
21
<PAGE>
BALLISTIC RECOVERY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
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 to the present, a
deferred tax asset, net of a valuation reserve, is 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
Non direct response advertising expenses are recognized in the period
incurred. Non direct response advertising expenses totaled $30,642 in 1999
and $29,796 in 1998.
At the end of fiscal year 1999 the Company commenced a direct response
advertising effort to receive funding for the development of a parachute
system for the Cessna 172 aircraft. Costs of this direct response
advertising of $4,523 were capitalized in fiscal year 1999. These
capitalized costs will be matched with the expected revenue stream in
fiscal year 2000 over a period currently estimated at six to twelve months.
2. NEW PRODUCT DEVELOPMENT, RESEARCH AND DEVELOPMENT FUNDING AND INCOME
RECOGNITION
During fiscal year 1999, the Company began delivery of systems for a newly
certified aircraft known as the Cirrus Design SR20 (SR20). The SR20
aircraft received Federal Aviation Administration (FAA) certification in
October 1998 and includes the Company's parachute system as a standard
equipment feature. The development of the system for the SR20 was a joint
effort between the Company and Cirrus Design under an agreement that began
in 1994 and culminated with FAA certification in late 1998. Under terms of
the agreement, 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.
Under terms of the original agreement, $352,181 was reflected as an offset
to research and development expenses and is netted in the expense for 1998.
No offset was recorded during fiscal year 1999. All amounts due to the
Company had been paid by the end of fiscal year 1999.
The Company completed a project through the Small Business Innovation
Research grant (SBIR) program administered by NASA. The purpose of the
grant was to perform research on 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, was for a maximum of $582,000 and was completed during
the Company's fiscal year 1999. The purpose of the grant was 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.
For the years ended September 30, 1999 and 1998, the Company recognized
$84,997 and $254,032, respectively, as an offset to research and
development expenditures for work performed on the Phase II project. All
amounts due under this contract were paid by the end of fiscal year 1999.
22
<PAGE>
BALLISTIC RECOVERY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
2. NEW PRODUCT DEVELOPMENT, RESEARCH AND DEVELOPMENT FUNDING AND INCOME
RECOGNITION (CONTINUED)
Also during fiscal year 1999, the Company completed work under a
development contract for a recovery system for a prototype-unmanned
aircraft being developed by a government contractor. The contract that
began in 1996 was for a maximum amount of $150,000, and called for the
development and delivery of a series of recovery devices both for use in
testing, and possibly in future production models. $4,704 and $39,807,
respectively, has been recognized as an expense offset under this purchase
order as of September 30, 1999 and 1998.
At the end of fiscal year 1999, the Company began efforts to generate
interest in a recovery system for the certified Cessna 172 aircraft. The
Company began a marketing and media campaign designed to solicit purchase
commitments from owners of Cessna 172 aircraft which would in turn provide
partial or complete funding for the development and certification of the
system. To date, the Company has received three signed purchase commitments
and requests for contracts from 50 additional prospects. The Company plans
to continue its efforts during fiscal year 2000 and assess the viability of
such development during that year.
3. PURCHASE AND SUPPLY AGREEMENT
On September 17, 1999, the Company entered into a Purchase and Supply
Agreement with Cirrus Design Corporation (Cirrus), the manufactured of the
SR20 aircraft that utilizes the Company's parachute system as standard
equipment. Under the Agreement, Cirrus has been issued four warrants to
acquire an aggregate of up to 1.4 million shares of restricted Company
stock. In order to execute the warrants, Cirrus must meet certain purchase
levels of the Company's emergency parachute systems for the SR20 aircraft
over the subsequent five years. The purchase levels that must be achieved
along with the corresponding number of shares under each warrant and
warrant strike price are as follows:
<TABLE>
<CAPTION>
Exercise Price per
Warr # Exercise Period Warrant Shares Warrant Share Purchase Commitment
------ --------------- -------------- ------------- --------------------
<S> <C> <C> <C> <C>
1 01-2002 to 02-2003 250,000 $1.00 250 units in calendar 2002
2 01-2003 to 02-2004 250,000 $1.00 400 units in calendar 2003
3 01-2003 to 02-2004 250,000 $1.25 400 units in calendar 2003
4 01-2004 to 02-2005 650,000 $1.25 500 units in calendar 2004
</TABLE>
If the minimum purchase levels are met, then Cirrus has the right to
exercise the warrant during the exercise period for the stated exercise
price. In the event that Cirrus does not meet the minimum purchase levels,
Cirrus will forfeit the right to exercise the corresponding warrant.
If Cirrus fulfills their purchase commitments and exercises their warrants,
the impact on equity may be as follows (Assumes equity contributions based
on the exercise of all warrants near the end of the exercise period):
<TABLE>
<CAPTION>
Fiscal Year Equity Contribution
----------- -------------------
<S> <C>
2003 $250,000
2004 562,500
2005 812,500
----------
Total $1,625,000
==========
</TABLE>
23
<PAGE>
BALLISTIC RECOVERY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
4. 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), whereby SCI ceased all
business activities, andSCI'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% resulting in a resulting in a
present dollar valuation of $379,438 on the $584,362 future dollar
valuation. The carrying amount of this debt approximates fair value because
the interest rate approximates the Company's incremental borrowing rate.
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 that were
completed in December 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>
2000 48,436 26,176
2001 48,436 29,204
2002 48,436 32,583
2003 48,436 36,354
2004 48,436 40,561
Thereafter 7,722 49,255
-------- --------
$249,902 $214,133
-------- --------
-------- --------
</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.
5. 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
7.75% as of September 30, 1999, which computes to a total interest rate of
9.75%. 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, 1999 was
$34,630. The carrying amount of this debt approximates fair value because
the interest rate changes with market rates. This loan is secured by all of
the Company's assets.
24
<PAGE>
BALLISTIC RECOVERY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
5. LONG-TERM DEBT (CONTINUED)
Future maturities on long-term debt at September 30, 1999 are as follows:
<TABLE>
<S> <C>
2000 $15,312
2001 16,873
2002 2,445
-------
$34,630
=======
</TABLE>
6. OTHER FINANCIAL INFORMATION
INVENTORIES
Inventories consisted of the following at September 30, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Raw materials $230,455 $181,997
Work in process 88,837 43,851
Finished goods 21,063 26,865
-------- ------
Total Inventories $340,355 $252,713
======== ========
</TABLE>
DEPRECIATION EXPENSE
Depreciation expense totaled $22,547 in 1999 and $21,427 in 1998.
LONG-LIVED ASSETS
In accordance with SFAS 121, Accounting For The Impairment Of Long-Lived
Assets And For Long-Lived Assets To Be Disposed Of, the Company reviews its
long-lived assets and intangibles related to those assets periodically to
determine potential impairment by comparing the carrying value of the
long-lived assets outstanding with estimated future cash flows expected to
result from the use of the assets, including cash flows from disposition.
Should the sum of the expected future cash flows be less than the carrying
value, the Company would recognize an impairment loss. An impairment loss
would be measured by comparing the amount by which the carrying value
exceeds the fair value of the long-lived assets and intangibles. To date,
management has determined that no impairment of long-lived assets exists.
MAJOR CUSTOMERS
During the fiscal years ended September 30, 1999 and 1998, 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.
25
<PAGE>
BALLISTIC RECOVERY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
6. OTHER FINANCIAL INFORMATION (CONTINUED)
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 24% in 1999 and 32% in 1998.
MAJOR SUPPLIERS
During the fiscal years ended September 30, 1999 and 1998, the Company
purchased its parachutes from a certain key vendor. 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.
RELATED PARTY
The Company contracts with an officer/shareholder of the Company to
coordinate its advertising. Total advertising expenses were $30,642 and
$29,796 for 1999 and 1998, respectively. The advertising rates charged are
at or below current market rates. The Company owed this related party
$53,696 as of September 30, 1999 and $47,363 as of September 30, 1998.
7. 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, 2000. The line calls for a
variable interest rate of 2% over the bank's index rate. At September 30,
1999, there was no outstanding balance under the line, which carried an
interest rate of 9.75%. The previous line-of-credit was for $35,000 and was
in place for the first portion of fiscal year 1998. The Company expects to
renew the line each year following the review of its financial results and
projections with the bank.
8. INCOME TAXES
Income taxes consisted of the following at September 30:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Current:
Federal $ - $ -
State - -
State minimum fee (300) (300)
------ --------
(300) (300)
------ --------
Deferred:
Federal - 75,000
State - 25,300
------ --------
- 100,300
------ --------
Income tax benefit (expense) $ (300) $100,000
====== ========
</TABLE>
26
<PAGE>
BALLISTIC RECOVERY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
8. INCOME TAXES (CONTINUED)
The reconciliation between expected federal income tax rates is as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Expected federal tax $(1,800) (34.0%) $ (15,200) (34.0%)
Surtax exemption 800 15.3 8,400 18.9
State income tax, net
of federal tax
benefit (300) (5.7) (2,900) (6.5)
Valuation and utilization
of net operating loss
carryforwards 1,300 24.4 109,900 247.5
State minimum fee (300) (5.7) (300) (0.7)
--------- --------- --------- ---------
$ (300) (5.7)% $ 100,000 225.2%
========= ========= ========= =========
</TABLE>
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>
1999 1998
---- ----
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 1,000 $ 1,000
Inventory valuation allowance 21,000 16,000
Section 263A adjustment 12,000 9,300
Depreciation of leaseholds (4,000) 2,700
Vacation accrual 5,400 6,600
Other accruals 2,600 6,800
Net operating loss carryforward 942,000 962,000
---------- ----------
Gross deferred tax asset 980,000 1,004,400
Valuation allowance (680,000) (704,400)
---------- ----------
Net deferred tax asset 300,000 300,000
Deferred tax liability - -
---------- ----------
Net deferred tax asset (liability) $300,000 $ 300,000
========== ==========
Current deferred tax asset $ 25,000 $ 25,000
Long-term deferred tax asset 275,000 275,000
---------- ----------
$300,000 $ 300,000
========== ==========
</TABLE>
During 1998 the Company reduced the valuation allowance relating to the
deferred tax assets to reflect current and projected utilization. The
recognized deferred tax asset is based upon expected utilization of the
net operating loss carryforwards and reversal of certain timing
differences.
27
<PAGE>
BALLISTIC RECOVERY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
8. INCOME TAXES (CONTINUED)
The Company has assessed 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
$680,000 at September 30, 1999 is maintained on deferred tax assets
which the Company has not determined to be more likely than not
realized at this time.
At September 30, 1999, the Company has carryforwards available to
offset future taxable income as follows:
<TABLE>
<CAPTION>
Federal State
------- -----
Regular NOL AMT NOL NOL R&D Credit
----------- ------- --- ----------
<S> <C> <C> <C> <C>
2002 $ - $ - $ - $ 4,000
2003 111,000 150,000 - 4,000
2004 519,000 512,000 - 5,000
2005 713,000 706,000 - -
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 -
2013 9,000 7,000 8,000 -
---------- ---------- ---------- ----------
$2,235,000 $2,234,000 $ 299,000 $ 13,000
========== ========== ========== ==========
</TABLE>
9. 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.
The Company has also issued options under a stock option plan for
non-employee directors. The plan was approved by shareholders in 1990 and
shares were issued under the plan through 1997. 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 directors, officers, employees and
others on a discretionary basis.
28
<PAGE>
BALLISTIC RECOVERY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
9. COMMON STOCK (CONTINUED)
STOCK OPTIONS (CONTINUED)
Transactions during 1999 and 1998, 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 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
Granted 60,000 $ 0.50
Exercised (14,616) $0.25 to $0.56
Converted to stock under cashless
transaction (190,134) $0.25 to $0.75
-----------
Balance at September 30, 1999 554,612 $0.25 to $0.75
===========
</TABLE>
At September 30, 1999:
Options vested and exercisable 454,612
Shares available for options -0-
10. 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 1999 and 1998
was $32,307 and $28,830, respectively.
Future minimum lease payments required on non-cancelable operating leases
at September 30, 1999 are as follows:
<TABLE>
<S> <C>
2000 $ 33,396
2001 33,396
2002 33,396
2003 8,349
--------
$108,537
========
</TABLE>
29
<PAGE>
BALLISTIC RECOVERY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
11. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Cash paid for:
Interest $42,158 $40,439
Income taxes 325 1,830
</TABLE>
Summary of non cash activity:
- Common stock was issued in lieu of director's fees of $4,000 and
$5,000, for 1999 and 1998, respectively.
- Options to acquire 190,134 and 1,614,416 shares of the Company's
common stock were converted into 143,063 and 1,210,717 shares of the
Company's common stock in a cashless transaction on July 20, 1999 and
August 5, 1998, respectively.
- Stock options for common stock were exercised in lieu of director's
fees of $1,500 for 1999.
30
<PAGE>
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
<TABLE>
<CAPTION>
Page Exhibit
Number Number Description
------ ------ -----------
<S> <C> <C>
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 Purchase and Supply
Agreement dated September
17, 1999 between the
Company and Cirrus Design
Corporation appears as
exhibit 10.1 to the
Company's Report on Form
8-K filed September 20,
1999 and is incorporated
herein by reference.
</TABLE>
31
<PAGE>
PART IV (CONTINUED)
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K (CONTINUED).
(a) EXHIBITS (CONTINUED)
<TABLE>
<CAPTION>
Page Exhibit
Number Number Description
------ ------ -----------
<S> <C> <C>
10.2 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.
10.3 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.
10.4 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.
27 Financial Data Schedule for
the 1999 10KSB is
incorporated herein by
reference.
</TABLE>
(b) The Company filed one Current Report on Form 8-K during the fourth
quarter ended September 30, 1999 and is referenced as exhibit 10-1
above.
32
<PAGE>
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 14, 1999
- -----------------------
Darrel D. Brandt
/s/ Boris Popov Director December 14, 1999
- -----------------------
Boris Popov
/s/ Robert L. Nelson Director December 14, 1999
- -----------------------
Robert L. Nelson
/s/ Thomas H. Adams Director December 14, 1999
- -----------------------
Thomas H. Adams
/s/ Mark B. Thomas Director December 14, 1999
- -----------------------
Mark B. Thomas
33
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<CASH> 181,902
<SECURITIES> 0
<RECEIVABLES> 61,574
<ALLOWANCES> 2,500
<INVENTORY> 340,355
<CURRENT-ASSETS> 612,729
<PP&E> 165,550
<DEPRECIATION> 104,158
<TOTAL-ASSETS> 1,218,978
<CURRENT-LIABILITIES> 297,732
<BONDS> 207,275
0
0
<COMMON> 58,595
<OTHER-SE> 655,376
<TOTAL-LIABILITY-AND-EQUITY> 1,218,978
<SALES> 1,798,300
<TOTAL-REVENUES> 1,798,300
<CGS> 1,104,914
<TOTAL-COSTS> 1,104,914
<OTHER-EXPENSES> 582,112
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 42,158
<INCOME-PRETAX> 5,229
<INCOME-TAX> 0
<INCOME-CONTINUING> 5,229
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,229
<EPS-BASIC> 0.00
<EPS-DILUTED> 0.00
</TABLE>
