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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, 2000
------- 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
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BALLISTIC RECOVERY SYSTEMS, INC.
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(Name of Small Business Issuer in its Charter)
MINNESOTA 41-1372079
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(State or other jurisdiction of (IRS Employer ID Number)
incorporation or organization)
300 AIRPORT ROAD, SOUTH ST. PAUL, MINNESOTA 55075-3541
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(Address of Principal Executive Offices) (Zip Code)
Issuer's telephone number including area code: (651) 457-7491
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01
Par Value
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(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: $2,353,876.
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 November 10, 2000 was approximately $1,808,000.
Number of shares outstanding as of November 10, 2000: 5,905,798.
Index for exhibits is located on page 32. This document contains 34 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 2001 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 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 over 15,000 systems that
have been installed on recreational and general aviation aircraft. To
date, the Company has documented 134 lives saved through the use of its
systems in actual in-air emergencies.
The recreational aviation market presently accounts for approximately
69% of the Company's revenues. The Company has been expanding its
efforts in the general aviation market, and during fiscal year 1999, the
Company began delivery of systems for a newly certified aircraft known
as the Cirrus Design SR20 (SR20). For fiscal year 2000, general aviation
sales accounted for approximately 31% of revenues and the Company
believes that general aviation aircraft can offer 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. The development of the system for the SR20 was a joint effort
between the Company and Cirrus Design Corporation 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.
During fiscal year 2000, the Company began development and testing to
receive certification of a parachute recovery system for the next
generation Cirrus Design aircraft called the SR22. The SR22 is a heavier
and faster version of the SR20 and will use similar technology for the
parachute system. Certification testing and FAA approval of the
parachute system as a standard feature on the SR22 is expected to
completed by the end of calendar year 2000 with production beginning in
early calendar year 2001.
In early 1993, the Company received FAA approval for the GARD-150
product for installation on FAA certified Cessna 150/152 aircraft. At
the close of fiscal year 2000, the Company signed an agreement to
reintroduce theGARD-150 product under an exclusive marketing agreement.
At the end of fiscal year 1999, the Company began marketing efforts to
receive funding for the development of a parachute system for the Cessna
172 aircraft. Subsequent to the close of fiscal year 2000, the Company
signed an agreement with an individual investor to provide for a
substantial portion of the funding needed to develop and certify the
Cessna 172 parachute system. The Company will begin the development and
certification process by the end of calendar year 2000. The process is
expected to take 12 to 18 months from commencement. In conjunction with
the start of the development and certification process, the Company
intends to solicit additional funding for the project from up to 50
additional Cessna 172 owners. To date, the Company has received signed
contracts with deposits from four owners of Cessna 172 aircraft as well
as contract requests from over 100 additional prospects.
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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 for use in testing.
(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 entered the general aviation market 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. The GARD-150 was not successfully marketed as a product by
the Company, and resulted in low sales volumes. However, at the close of
fiscal year 2000, the Company signed an agreement to reintroduce the
GARD-150 product under an exclusive marketing agreement with Charles F.
Parsons (d.b.a. Millennium Aerospace). See Note 2 of Notes to Financial
Statements for further information.
Another product developed for the general aviation market is for Cirrus
Design Corporation, 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 (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 and continuing throughout fiscal year 2000. The SR20 is in serial
production and production is scheduled to increase throughout the next
several fiscal years as the customer accelerates its manufacturing
processes for of the aircraft. See Note's 2 and 3 of Notes to Financial
Statements for further information.
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During fiscal year 2000, the Company began development and certification
efforts for the next generation of Cirrus Design aircraft called the
SR22. The SR22 is a heavier and faster version of the SR20 and utilizes
much of the same parachute technology developed for the SR20. The
system, which is expected to be completed by the end of calendar year
2000, will be certified as a standard equipment component of the
aircraft when it receives its FAA certification. This will become the
third of the Company's products that has received FAA certification. 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. Subsequent to the close of fiscal year
2000, the Company signed an agreement relating to and received funding
for a substantial portion of the development costs for this project. In
addition, the Company will continue to solicit direct commitment from
owners of Cessna 172 aircraft. To date, the Company has received four
signed purchase commitments and requests for contracts from over 100
additional prospects. The Company plans to continue its efforts during
fiscal year 2001 with plans to receive additional project funding from
up to 50 Cessna 172 owners. See Note's 2 and 12 of Notes to Financial
Statements for further information.
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.
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 Company was
paid the complete $582,000 of the grant allocation. 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 2 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. The Company was paid
the complete $150,000 of the contract amount. See Note 2 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.
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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 products. Current development projects also utilize
the reefing device as an integral design component.
On May 2, 2000, United States Patent No. 6,056,241 was issued to the
Company on behalf of one of the Company's employees for a "Thin Film
Parachute with Continuous Lateral Reinforcing Fibers ". The employee
assigned the patent to the Company, which with the payment of continuing
maintenance fees is effective until 2017. The Company in connection with
its NASA SBIR grant program that was completed during fiscal year 1999
developed this patented process. The Company does not have a current
application for the patented process, but the Company hopes that the
patented process can be used in both military and civilian applications
complimenting or enhancing the Company's current product line.
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
expansion in the general aviation market through the production of
systems for the Cirrus Design SR20 will began to lessen the impact of
seasonality on the Company during fiscal year 2000. This trend is
expected to continue as the Company increases its deliveries in the
general aviation market over the next several years.
DEPENDENCE ON A SINGLE CUSTOMER:
During the fiscal year ended September 30, 2000, the Company was
dependent on one customer, Cirrus Design Corporation, for 31.5% of the
Company's total sales. During the fiscal year ended September 30, 1999,
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.
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BACKLOG OF ORDERS:
As of September 30, 2000 and 1999, the Company had a backlog of orders
totaling approximately $6,381,000 and $241,000, respectively. The 2000
backlog includes over $6.2 million of orders for the Cirrus Design SR20.
This backlog is expected to be filled within 24 months. Due to the
probable introduction of the Cirrus Design SR22, which will also include
the Company's product, it is likely that some of the current position
holders for the SR20 will convert over to the SR22. This will result in
sales by the Company of systems for that model of aircraft, but could
result in the cancellation of a portion of the SR20 backlogged orders.
The Company expected to fund the build out and sale of the backlogged
orders through cash flow provided by the sale of those orders. The
Company cautions readers who may utilize published bookings and backlog
information as tools to forecast the Company's revenue during a given
timeframe since certain purchase orders may be subject to cancellation
and/or delivery schedule revision.
RESEARCH AND DEVELOPMENT:
A summary of research and development is as follows:
<TABLE>
<CAPTION>
2000 1999
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<S> <C> <C>
Total research and development expenditures $235,280 $218,500
Revenues recognized under contract research
and development relationships (49,261) (97,138)
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Research and development, net $186,019 $121,362
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</TABLE>
The source for the 2000 outside funding was from Cirrus Design as part
of a cost sharing agreement for the development and certification of the
SR22 parachute system. 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.
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.
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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, 2000, the Company had 14 full-time employees at its
South St. Paul facility.
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 a claim from a former
supplier of the Company. The Company has made a counter claim against
such supplier 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.
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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 or BRSI.OB. 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 $0.75 and the bid price would be $0.6875 as of
September 30, 2000.
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
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Common Stock:
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<S> <C> <C> <C> <C> <C>
2000 High $2.19 $1.56 $1.38 $0.88
Low $1.25 $1.00 $0.75 $0.63
1999 High $1.19 $0.94 $0.75 $3.00
Low $0.56 $0.44 $0.44 $0.50
</TABLE>
(b) HOLDERS
As of November 10, 2000, the Company estimates there were approximately
1,600 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 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BUSINESS OVERVIEW:
Fiscal year 1999 marked the first time that a parachute system was delivered to
a customer that was installed 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 mid-November
2000, Cirrus has firm orders for 462 aircraft that will all include the
Company's parachute systems (Cirrus has delivered 76 aircraft though that time).
Cirrus expects to be able to fill this backlog of orders during the next 24
months. Future production volumes for the aircraft, and therefore, the Company's
parachute systems, will be dictated by ultimate market demands.
During fiscal year 2000, the Company began testing and development of the next
generation of aircraft offered by Cirrus. The SR22 is the next in what is
expected to be an expanding line of aircraft for Cirrus. Testing and
certification of the system is expected as part of the aircraft certification by
the end of calendar year 2000. As of mid-November, Cirrus had firm orders for
188 aircraft that will include the Company's parachute system. The Company
understands that Cirrus expects to be able to fill this backlog of orders during
the next 24 months. As with the SR20, future production volumes for the
aircraft, and therefore, the Company's parachute systems, will be dictated by
ultimate market demands.
During the prior fiscal year the Company moved into a period of transition from
research and development to production and market development. This was a result
of 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. That shift resulted in a
reduction in operating profits for the prior fiscal year, but the Company made
strides to improve the bottom line in addition to improving gross revenues
during the current fiscal year.
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
domestic and 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.
Subsequent to the close of fiscal year 2000, the Company entered into an
agreement that will provide $200,000 towards the funding that will be needed to
develop and certify this system. In addition, the Company is asking up to 50
Cessna 172 owners to make deposits towards the purchase of a recovery system.
Once certified, the Company will begin manufacturing and delivery of units. The
Company expects to be successful in its solicitation, development and
certification efforts, but no assurances can be made of its success or the
long-term financial benefits to the Company. As of the beginning of November
2000, the Company has received signed contracts with deposits from four owners
of 172 aircraft as well as contract requests from over 100 additional prospects.
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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 and received a patent for the new
manufacturing method that was developed. The Company hopes 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 had
discussions with a foreign company that are ongoing and began discussions with a
domestic company that has expressed interest in the developed technology for
currently existing military applications. No assurance can be made as to the
future benefits that will be derived from these discussions.
RESULTS OF OPERATIONS:
Year ended September 30, 2000 compared to September 30, 1999
SALES
Sales in 2000 were $2,353,876, an increase of $555,576 or 30.9% from the
$1,798,300 reported in 1999. The increase is primarily attributed to the
Company's new general aviation product. In 2000, revenues derived from the
Company's general aviation product accounted for 31.5% of revenues as compared
to 8.4% during the prior year. The Company's primary customer for its general
aviation product, Cirrus, is expected to continue to increase its manufacturing
volumes for its current aircraft in addition to introduce a new aircraft during
2001. As a result, the Company is forecasting further growth in 2001 in its
general aviation revenues. However, volume projections and timing of those
volumes is uncertain at this time.
The Company's sport aviation business has maintained levels consistent with that
of the prior year. Within the sport aviation business, the international markets
for the Company's products have been affected by a number of factors. These
factors include 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
sport aviation product. The Company has expanded its efforts to improve
international business for its sport aviation products, but there can be no
assurances that these efforts will produce increased sales for the Company.
GROSS MARGIN
Gross margin as a percentage of revenues was 38.4% compared to 38.6% in 1999.
Despite increases in raw materials and labor costs, the consistent gross margin
is the result of leveraging the Company's operations personnel and manufacturing
overhead over a larger revenue base. The Company's gross margin percentage has
varied each year, and each quarter, in both a positive and negative fashion due
to a variety of factors including customer and specific product mix, inventory
provisions, and volume related efficiencies. Such variations will probably
continue to impact gross margin percentages in future reporting periods.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative costs were up in actual dollars in 2000
compared to 1999 but decreased as a percent of sales by 3.4%. The dollar
increase is primarily due to increased advertising and shareholder related
expenditures, and bonuses. 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.
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RESEARCH AND DEVELOPMENT
Outside funding has offset a portion of research and development costs for both
years. Net research and development costs were higher in 2000, but still
remained a relatively low 7.9% of sales compared to 6.7% in 1999. The gross
dollars spent on research and development held relatively constant between the
two years. Research and development is an integral part of the growth strategy
for the Company, and will continue to play an important role in the Company's
success. This role will include not only that of future product developments,
but in the exploitation of currently developed products for additional
applications. 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
For 2000, income before income taxes was $78,715 or 3.3% of revenues compared to
$5,229 or 0.3% of revenues in 1999. 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)
A benefit was recorded in prior fiscal years and 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
or previous fiscal years 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. 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.
Subsequent to the close of fiscal year 2000, the Company entered into an
agreement, which will provide for a substantial portion of the funding necessary
to develop and certify a parachute recovery system for the Cessna 172 aircraft.
The agreement provides funding that will be utilized to offset a portion of the
expenditures necessary for that project. In addition, the Company will continue
to seek funding from individual Cessna 172 owners that will be required to make
non-refundable deposits towards the future delivery of the product. The Company
is confident that the development and certification of the Cessna 172 system
will be completed within 12 to 18 months, but there can no assurance that the
system will receive certification or if certified, will obtain adequate funding
or sell in volumes that will have a material impact on the Company.
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.
12
<PAGE>
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. The aircraft is in serial production
and the Company delivered 66 units during fiscal year 2000 as compared to 14
units during fiscal year 1999. 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.
The Company is currently completing development and required certification
testing for the Cirrus Design SR22. Certification of the aircraft, which
includes the Company's parachute system, is expected to be received by the end
of calendar year 2000. If successfully certified, the customer will begin
production in early calendar year 2001. Production volumes and ultimate customer
demand will dictate the actual impact on the Company's financial results.
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 domestic company that is interested in the technology for
their current military 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 orders and schedules, development, certification and
financing of the Cessna 172 system, other business development activities as
well as other capital spending, financial sources, and the effects of
competition. 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, 2000 and 1999:
Independent Auditors' Report 15
Balance Sheets as of September 30, 2000 and 1999 16
Statements of Operations for the years ended September 30, 2000
and 1999 17
Statements of Shareholders' Equity for the years ended
September 30, 2000 and 1999 18
Statements of Cash Flows for the years ended September 30,
2000 and 1999 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
(952) 858-7207 Fax (952) 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, 2000 and 1999 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, 2000 and 1999, 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 10, 2000
15
<PAGE>
PART II - Item 7. Financial Statements
BALLISTIC RECOVERY SYSTEMS, INC.
BALANCE SHEETS
September 30, 2000 and 1999
<TABLE>
<CAPTION>
ASSETS 2000 1999
---- ----
<S> <C> <C>
Current assets:
Cash $ 33,858 $ 181,902
Accounts receivable - net of allowance for doubtful
accounts of $2,500 and $2,500, respectively 98,391 59,074
Inventories 846,109 340,355
Deferred tax asset - current portion 25,000 25,000
Prepaid expenses -- 6,398
----------- -----------
Total current assets 1,003,358 612,729
----------- -----------
Furniture, fixtures and leasehold improvements 170,004 165,550
Less accumulated depreciation (116,339) (104,158)
----------- -----------
Furniture, fixtures and leasehold improvements - net 53,665 61,392
----------- -----------
Other assets:
Patents less accumulated amortization of
$7,308 and $8,611, respectively 4,356 3,054
Deferred tax asset - long-term portion 275,000 275,000
Other intangible assets less accumulated amortization of
$25,699 and $15,419, respectively 25,699 35,978
Covenant not to compete less accumulated
amortization of $186,557 and $148,613, respectively 192,881 230,825
----------- -----------
Total other assets 497,936 544,857
----------- -----------
Total assets $ 1,554,959 $ 1,218,978
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 143,990 $ 58,580
Customer deposits 74,693 94,257
Accrued payroll 35,039 35,958
Other accrued liabilities 65,738 67,450
Line-of-credit borrowings 220,600 --
Current portion of bank note 16,874 15,312
Current portion of covenant not to compete 29,204 26,175
----------- -----------
Current liabilities 586,138 297,732
----------- -----------
Long-term bank note and covenant, less current portions 161,198 207,275
----------- -----------
Shareholders' equity:
Common stock ($.01 par value; 10,000,000 shares authorized; 5,905,798 and
5,859,449 shares, respectively, issued
and outstanding) 59,058 58,595
Additional paid-in capital 2,646,236 2,631,762
Accumulated deficit (1,897,671) (1,976,386)
----------- -----------
Total shareholders' equity 807,623 713,971
----------- -----------
Total liabilities and shareholders' equity $ 1,554,959 $ 1,218,978
=========== ===========
</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, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Sales $ 2,353,876 $ 1,798,300
Cost of sales 1,450,963 1,104,914
----------- -----------
Gross profit 902,913 693,386
Selling, general and administrative 523,113 460,750
Research and development, net (Note 2) 186,019 121,362
----------- -----------
Income from operations 193,781 111,274
Other income (expense):
Interest expense (37,261) (42,158)
Intangible amortization (48,223) (48,223)
Other - net (28,582) (15,364)
----------- -----------
Income before income taxes 79,715 5,529
Income taxes expense (benefit) (Notes 1 and 8) 1,000 300
----------- -----------
Net income $ 78,715 $ 5,229
=========== ===========
Basic earnings per share $ 0.01 $ 0.00
=========== ===========
Weighted average number of shares outstanding 5,896,026 5,731,131
=========== ===========
Diluted earnings per share $ 0.01 $ 0.00
=========== ===========
Weighted average number of shares outstanding 6,109,802 6,057,733
=========== ===========
</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, 2000 and 1999
<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 9/30/98 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
Issuance of stock in
lieu of director fees 3,334 33 3,967 -- 4,000
Stock options
exercised 25,000 250 10,687 -- 10,937
Net stock issued
under cashless
transaction 18,015 180 (180) -- --
Net income -- -- -- 78,715 78,715
----------- ----------- ----------- ----------- -----------
Balance 9/30/00 5,905,798 $ 59,058 $ 2,646,236 ($1,897,671) $ 807,623
=========== =========== =========== =========== ===========
</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, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activity:
Net income $ 78,715 $ 5,229
Adjustments to reconcile net income to net cash
from operating activity:
Depreciation and amortization 21,158 33,513
Amortization of covenant not to compete 37,944 37,944
Inventory valuation reserve (2,000) 12,000
Stock issued in lieu of board fees 4,000 4,000
(Increase) decrease in:
Accounts receivable (39,317) 342,748
Inventories (503,754) (99,642)
Prepaid expenses 6,398 (3,200)
Increase (decrease) in:
Accounts payable 85,410 (107,579)
Customer deposits (19,564) 21,077
Accrued expenses (2,631) (10,460)
--------- ---------
Net cash flows from operating activities (333,641) 235,630
--------- ---------
Cash flows from investing activities:
Capital expenditures (4,454) (5,411)
--------- ---------
Net cash flows from investing activities (4,454) (5,411)
--------- ---------
Cash flows from financing activities:
Net borrowing under line-of-credit agreement 220,600 (35,884)
Exercise of stock options 10,937 6,500
Principal payments on debt (15,312) (13,853)
Principal payments on covenant not to compete (26,174) (25,180)
--------- ---------
Net cash flows from financing activities 190,051 (68,417)
--------- ---------
Increase (decrease) in cash (148,044) 161,802
Cash - beginning of year 181,902 20,100
--------- ---------
Cash - end of period $ 33,858 $ 181,902
========= =========
</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, 2000 AND 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Ballistic Recovery Systems, Inc. (the "Company") designs, manufactures and
distributes rocket deployed whole-aircraft emergency parachute systems for
use on recreational aircraft and certain models of general aviation
aircraft. The emergency parachute systems are intended to be used in the
event of an in-air emergency and are designed to bring down the entire
aircraft and its occupants under a parachute canopy.
The Company has also been successful in its efforts to expand its product
line through the use of company sponsored development and outside
engineering contracts. The Company has completed development of an emergency
recovery system for a four-place general aviation aircraft, known as the
Cirrus Design SR20 (SR20). This aircraft was certified by the Federal
Aviation Administration (FAA) in October 1998 and features the Company's
parachute as standard equipment. The SR20 is in serial production and the
Company began delivering the first parachute systems to the customer during
fiscal year 1999 with deliveries continuing throughout fiscal year 2000. The
Company began development of an emergency parachute system for the next
generation of Cirrus Design aircraft known as the SR22. Development and
certification is expected to be completed by the end of calendar year 2000
with deliveries beginning during the first quarter of calendar year 2001. In
September 2000, the Company entered into an agreement to bring production of
its system for the Cessna 150/152 model aircraft . The Company expects this
system to be produced and distributed in early calendar year 2001.
Subsequent to fiscal year 2000, the Company also entered into a contract to
develop and market a product for the Cessna 172 model of aircraft. The
development and certification for the Cessna 172 is expected to take 12 to
18 months to complete. 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 2000 and
1999.
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.
20
<PAGE>
BALLISTIC RECOVERY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2000 AND 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LEGAL MATTER
The Company was named in a lawsuit based on a claim from a former supplier
of the Company. The Company 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. Nevertheless, it is at
least reasonably possible that a judgment could be entered against the
Company, although that amount, if any, cannot be estimated. Resolution of
this matter is expected within the next year.
CUSTOMER CONCENTRATION
One major customer, Cirrus Design Corporation, represented 31.5% of the
Company's total sales in fiscal year 2000. This customer also accounted for
68.2% of accounts receivable at September 30, 2000. During the fiscal year
ended September 30, 1999, 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.
INVENTORIES
Inventories are recorded at the lower of cost (determined on a first-in
basis) or market. 35.4% of the inventory on hand at September 30, 2000
related to unique components used in products for the Company's major
customer as referred to above. 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.
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.
21
<PAGE>
BALLISTIC RECOVERY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2000 AND 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED CONSIDERATION
The Company has applied the fair value based method of accounting for
employee and non-employee stock-based consideration and/or compensation in
accordance with FASB Statement 123.
COMPREHENSIVE INCOME
SFAS No. 130 establishes standards for the reporting and disclosure of
comprehensive income and its components which will be presented in
association with a company's financial statements. Comprehensive income is
defined as the change in a business enterprise's equity during a period
arising from transactions, events or circumstances relating to non-owner
sources, such as foreign currency translation adjustments and unrealized
gains or losses on available-for-sale securities. It includes all changes in
equity during a period except those resulting from investments by or
distributions to owners. For the fiscal years ended September 30, 2000 and
1999, net income and comprehensive income were equivalent.
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments"
requires disclosure of the estimated fair value of financial instruments as
follows:
SHORT-TERM ASSETS AND LIABILITIES:
The fair values of cash, accounts receivable, accounts payable, accrued
liabilities, and short-term debt approximate their carrying values due
to the short-term nature of these financial instruments.
LONG-TERM DEBT:
The fair value of long-term debt approximate their carrying value
because the terms are equivalent to borrowing rates currently available
to the company for debt with similar terms and maturities.
EARNINGS PER SHARE
The company has implemented FASB 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>
10/1/99 to 9/30/00 5,859,449 365 5,859,449
11/17/99 to 9/30/00 15,158 317 13,165
11/22/99 to 9/30/00 25,000 312 21,370
1/12/00 to 9/30/00 2,857 261 2,043
9/30/00 3,334 0 0
---------
Weighted-Average Shares for basic EPS 5,896,026
</TABLE>
22
<PAGE>
BALLISTIC RECOVERY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2000 AND 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE (CONTINUED)
<TABLE>
<S> <C>
Incremental shares from assumed exercise of options 213,776
---------
Adjusted Weighted-Average Shares for diluted EPS 6,109,802
=========
Income available to common stockholders $ 78,715
=========
</TABLE>
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 $45,804 in 2000
and $30,642 in 1999.
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 were expensed during fiscal year 2000 as the program took
on a new direction.
2. NEW PRODUCT DEVELOPMENT, RESEARCH AND DEVELOPMENT FUNDING AND INCOME
RECOGNITION
During fiscal year 1999 and continuing throughout fiscal year 2000, 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. The Company shared in the costs to develop and
certify the parachute system for this aircraft.
During fiscal year 2000, the Company began development and testing for the
next generation of Cirrus Design aircraft called the SR22. The SR22 is
heavier and faster than the predecessor SR20. Development and certification
is expected to be completed by the end of calendar year 2000 with deliveries
beginning during the first quarter of calendar year 2001. The Company shared
in the costs to develop the parachute system for this aircraft. The net
amount of expenses incurred by the Company is reflected in Research and
Development expenses in the financial statements.
23
<PAGE>
BALLISTIC RECOVERY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2000 AND 1999
2. NEW PRODUCT DEVELOPMENT, RESEARCH AND DEVELOPMENT FUNDING AND INCOME
RECOGNITION (CONTINUED)
In September 2000, the Company entered into an agreement to bring back its
product for the Cessna 150/152 model aircraft which is expected to be back
on the market in early calendar year 2001. Under the agreement the Company
will develop a new rocket motor that will be used for the product and once
reintroduced, the product will be marketed under an exclusive marketing
agreement with an outside company. All expenditures to reintroduce the
product will be recorded as expense as incurred.
During 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 Company was paid the
complete $582,000 of the grant allocation. 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, the Company
recognized $84,997 as an offset to research and development expenditures for
work performed on the Phase II project.
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. The Company was paid the complete
$150,000 of the contract amount. $4,704 has been recognized as an expense
offset under this purchase order as of September 30, 1999.
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 four signed purchase commitments
and requests for contracts from over 100 additional prospects. Subsequent to
the conclusion of fiscal year 2000, the Company entered into an agreement
that would provide a substantial portion of the funding needed to develop
and certify a recovery system for the Cessna 172. This agreement, in
addition to the direct solicitations is expected to provide adequate funding
for the development. and certification, which is expected to take 12 to 18
months from the end of calendar year 2000. The funding received will in part
become an offset to research and development expenses in the future as
expenses for the project are incurred.
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:
24
<PAGE>
BALLISTIC RECOVERY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2000 AND 1999
3. PURCHASE AND SUPPLY AGREEMENT (CONTINUED)
<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>
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, and 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% 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 was paid off 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.
25
<PAGE>
BALLISTIC RECOVERY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2000 AND 1999
4. COVENANT NOT TO COMPETE (CONTINUED)
Future payments under this agreement are as follows:
<TABLE>
<CAPTION>
Future Present
Dollars Dollars
------- -------
<S> <C> <C>
2001 48,436 29,204
2002 48,436 32,584
2003 48,436 36,354
2004 48,436 40,561
2005 48,436 45,255
Thereafter 4,036 3,999
--------- ---------
$246,216 $187,957
========= =========
</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 9.75% as of
September 30, 2000, which computes to a total interest rate of 11.75%. 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, 2000 was $19,318. 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.
Future maturities on long-term debt at September 30, 2000 are as follows:
<TABLE>
<S> <C>
2001 $16,873
2002 2,445
-----
$19,318
=======
</TABLE>
6. OTHER FINANCIAL INFORMATION
INVENTORIES
Inventories consisted of the following at September 30, 2000 and 1999:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Raw materials $219,175 $230,455
Work in process 506,281 88,837
Finished goods 120,653 21,063
-------- --------
Total Inventories $846,109 $340,355
======== ========
</TABLE>
26
<PAGE>
BALLISTIC RECOVERY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2000 AND 1999
6. OTHER FINANCIAL INFORMATION (CONTINUED)
DEPRECIATION EXPENSE
Depreciation expense totaled $22,630 in 2000 and $22,547 in 1999.
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.
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 11% in 2000 and 24% in 1999.
MAJOR SUPPLIERS
During the fiscal years ended September 30, 2000 and 1999, the Company
purchased its parachutes from a certain key vendor. The Company manufactures
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 $50,327 for
fiscal year 2000, with $34,888 of this total being paid to this individual.
Total advertising expenses for 1999 were $30,642. The advertising rates
charged are at or below current market rates. The Company owed this related
party $20,358 as of September 30, 2000 and $53,696 as of September 30, 1999.
PROFIT SHARING PLAN
The Company adopted a defined contribution profit sharing plan in fiscal
year 2000, which covers most of its employees. The Company contribution to
this plan totaled $5,974 in 2000.
7. LINE-OF CREDIT BORROWINGS
Since February 28, 2000, the Company has been operating under a $250,000
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, 2001. The line calls for a
variable interest rate of 1.5% over the bank's index rate. At September 30,
2000, the Company had balance due of $220,600 under the line, which carried
an interest rate of 11.25%. The previous line-of-credit was for $150,000 and
was in place for the first portion of fiscal year 1999. The Company expects
to renew the line each year following the review of its financial results
and projections with the bank.
27
<PAGE>
BALLISTIC RECOVERY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2000 AND 1999
8. INCOME TAXES
Income taxes consisted of the following at September 30:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Current:
Federal $ -- $ --
State -- --
State alternative minimum tax and minimum fee (1,000) (300)
------- -------
(1,000) (300)
------- -------
Deferred:
Federal -- --
State -- --
------- -------
-- --
------- -------
Income tax benefit (expense) $(1,000) $ (300)
======= =======
</TABLE>
The reconciliation between expected federal income tax rates is as follows:
<TABLE>
<CAPTION>
2000 2000 1999 1999
Amount Percent Amount Percent
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Expected federal tax $(26,800) (34.0%) $ (1,800) (34.0%)
Surtax exemption 8,300 10.5 800 15.3
State income tax, net
of federal tax
benefit (5,100) (6.5) (300) (5.7)
Valuation and utilization
of net operating loss
carryforwards 23,600 30.0 1,300 24.5
State AMT (700) (.9) -- --
State minimum fee (300) (.4) (300) (5.7)
-------- ------ -------- ------
$ (1,000) (1.3)% $ (300) (5.7)%
======== ====== ======== ======
</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>
2000 1999
---------- ----------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 1,000 $ 1,000
Inventory valuation allowance 20,000 21,000
Section 263A adjustment 28,500 12,000
Depreciation of leaseholds (7,100) (4,000)
Amortization of fuel formulations 4,100 -
Vacation accrual 5,200 5,400
Other accruals (10,000) 2,600
Net operating loss carryforwards 871,000 942,000
---------- ---------
</TABLE>
28
<PAGE>
BALLISTIC RECOVERY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2000 AND 1999
8. INCOME TAXES (CONTINUED)
<TABLE>
<S> <C> <C>
Gross deferred tax asset 912,700 980,000
Valuation allowance (612,700) (680,000)
--------- ---------
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
--------- ---------
Net deferred tax asset (liability) $ 300,000 $ 300,000
========= =========
</TABLE>
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 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 $612,700 at September 30, 2000 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, 2000, the Company has carryforwards available to offset
future taxable income as follows:
<TABLE>
<CAPTION>
Federal Federal State
Regular NOL AMT NOL NOL
----------- ------- ---
<S> <C> <C> <C>
2003 $ -- $ 10,000 $ --
2004 474,000 512,000 --
2005 713,000 706,000 --
2006 132,000 126,000 --
2007 113,000 106,000 --
2008 457,000 450,000 --
2009 181,000 175,000 110,000
2013 9,000 7,000 8,000
---------- ---------- ---------
$2,079,000 $2,095,000 $ 118,000
========== ========== =========
</TABLE>
9. COMMON STOCK
STOCK OPTIONS
The Company has issued options to various directors, officers, employees and
others on a discretionary basis.
29
<PAGE>
BALLISTIC RECOVERY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2000 AND 1999
9. COMMON STOCK (CONTINUED)
STOCK OPTIONS (CONTINUED)
Transactions during 2000 and 1999, for these issuances were as follows:
<TABLE>
<CAPTION>
Number Option Price
of Shares Range per Share
--------- ---------------
<S> <C> <C>
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
Granted 87,500 $0.50 to $1.25
Exercised (25,000) $0.44
Converted to stock under cashless
transaction (22,850) $0.25 to $0.56
Expired (122,000) $0.43 to $0.56
----------
Balance at September 30, 2000 472,262 $0.25 to $1.25
==========
At September 30, 2000:
Options vested and exercisable 432,262
Shares available for options -0-
</TABLE>
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 2000 and 1999
was $36,017 and $32,307, respectively.
Future minimum lease payments required on non-cancelable operating leases at
September 30, 2000 are as follows:
<TABLE>
<S> <C>
2001 $34,224
2002 34,224
2003 8,556
-------
$77,004
=======
</TABLE>
30
<PAGE>
BALLISTIC RECOVERY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2000 AND 1999
11.SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Cash paid for:
Interest $37,262 $42,158
Income taxes 1,000 325
</TABLE>
Summary of non cash activity:
- Common stock was issued in lieu of director's fees of $4,000 and $4,000,
for 2000 and 1999, respectively.
- Options to acquire 5,000 shares, 17,850 shares and 190,134 shares of the
Company's common stock were converted into 2,857 shares, 15,158 shares
and 143,063 shares of the Company's common stock in a cashless
transaction on January 12, 2000, November 17, 1999 and July 20, 1999,
respectively.
- Stock options for common stock were exercised in lieu of director's fees
of $1,500 for 1999.
12.SUBSEQUENT EVENT
Upon satisfaction of contingencies on November 2, 2000, an agreement between
the Company and Charles F. Parsons (d.b.a. Millennium Aerospace) dated
October 26, 2000 became effective. The purpose of the agreement was to
provide specific funding for a parachute recovery system for the Cessna 172
model aircraft to be developed and certified by the Company. The Agreement
called for an investment by Parsons of $200,000. The investment took the form
of an equity infusion valued at $110,000 for 200,000 restricted shares of the
Company's Common Stock and $90,000 for research and development. The funding
will be used towards research and development for the BRS GARD-172 product,
which is expected to be carried out over the next 12 to 18 months. Following
completion of the product, the Company will seek Federal Aviation
Administration (FAA) approval, which will allow the product to be installed
on certified Cessna 172 series aircraft. Once certified by the FAA, the
Company will begin production and distribution of the product and Parsons
will market and distribute the product.
31
<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>
32
<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
2000 10KSB is incorporated herein by
reference.
</TABLE>
(b) The Company did not file any Current Reports on Form 8-K during the
fourth quarter ended September 30, 2000.
33
<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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Darrel D. Brandt Director November 30, 2000
---------------------------
Darrel D. Brandt
/s/ Boris Popov Director November 30, 2000
---------------------------
Boris Popov
/s/ Robert L. Nelson Director November 30, 2000
---------------------------
Robert L. Nelson
/s/ Thomas H. Adams Director November 30, 2000
---------------------------
Thomas H. Adams
/s/ Mark B. Thomas Director November 30, 2000
---------------------------
Mark B. Thomas
</TABLE>
34
