Ballistic Recovery Systems (BRSI) 10QSB 2002 Q1 Quarterly report (small business)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-QSB

(Mark One)

ý Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934
(No Fee Required)

For the quarterly period ended December 31, 2001

Transition Report Under 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.

(Exact Name of Small Business Issuer as Specified 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)

(651) 457-7491

(Issuer's Telephone Number Including Area Code)

(Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report)

Check whether the issuer: (1) filed all reports required to be filed by section 13 or 15(d) of the Securities 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.

Yes   ý   No   o

Number of shares outstanding as of February 1, 2002:       6,119,701

INDEX

BALLISTIC RECOVERY SYSTEMS, INC.

PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited).
	Balance sheets as of December 31, 2001 and September 30, 2001.
	Statements of operations for the three months ended December 31, 2001 and 2000.
	Statements of cash flow for the three months ended December 31, 2001 and 2000.
	Notes to financial statements at December 31, 2001.
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations.
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings
Item 6.	Exhibits and Reports on Form 8-K
SIGNATURES

Part I Financial Information – Item 1.  Financial Statements

BALLISTIC RECOVERY SYSTEMS, INC.

BALANCE SHEETS

(UNAUDITED)

	December 31,			September 30,
ASSETS	2001			2001
Current assets:
Cash	$	362,166		$	667,608
Accounts receivable - net of allowance for doubtful accounts of $10,000 and $10,000, respectively	15,982			17,388
Inventories	812,645			686,402
Deferred tax asset – current portion	280,000			280,000
Prepaid expenses	14,240			14,113
Total current assets	1,485,033			1,665,511
Furniture, fixtures and leasehold improvements	309,249			198,006
Less accumulated depreciation	(134,730		)	(127,066		)
Furniture, fixtures and leasehold improvements - net	174,519			70,940
Other assets:
Patents less accumulated amortization of $8,166 and $7,995, respectively	3,498			3,670
Deferred tax asset - long-term portion	220,000			220,000
Other intangible assets less accumulated amortization of $38,548 and $35,978, respectively	12,849			15,419
Covenant not to compete less accumulated amortization of $233,987 and $224,501, respectively	145,451			154,937
Total other assets	381,798			394,026
Total assets	$	2,041,350		$	2,130,477
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	121,500		$	106,353
Customer deposits	92,297			86,061
Accrued payroll	40,938			41,902
Other accrued liabilities	50,830			213,525
Current portion of covenant not to compete	33,488			32,584
Current liabilities	342,053			480,425
Long-term bank note and/or covenant , less current portions	117,581			126,169
Shareholders’ equity:
Common stock ($.01 par value; 10,000,000 shares authorized; 6,119,701 and 6,119,701 shares, respectively, issued and outstanding)	61,197			61,197
Additional paid-in capital	2,761,347			2,761,347
Accumulated deficit	(1,240,828		)	(1,298,661		)
Total shareholders’ equity	1,581,716			1,523,883
Total liabilities and shareholders’ equity	$	2,041,350		$	2,130,477

See notes to financial statements.

BALLISTIC RECOVERY SYSTEMS, INC.

STATEMENTS OF OPERATIONS

For the Three Months Ended December 31, 2001 and 2000

(UNAUDITED)

	2001			2000
Sales	$	785,244		$	794,470
Cost of sales	506,231			524,313
Gross profit	279,013			270,157
Selling, general and administrative	154,857			142,814
Research and development	41,976			61,094
Income from operations	82,180			66,249
Other income (expense):
Interest expense	(4,425		)	(11,381		)
Intangible amortization	(12,056		)	(12,056		)
Other income (expense)	(7,866		)	(6,563		)
Net income (loss)	$	57,833		$	36,249
Basic earnings per share	$	0.01		$	0.01
Weighted average number of shares outstanding	6,119,701			6,034,059
Diluted earnings per share	$	0.01		$	0.01
Weighted average number of shares outstanding	6,225,295			6,247,835

See notes to financial statements.

BALLISTIC RECOVERY SYSTEMS, INC.

STATEMENTS OF CASH FLOW

Increase (Decrease) in Cash

For the Three Months Ended December 31, 2001 and 2000

(UNAUDITED)

	2001			2000
Cash flow from operating activity:
Net income (loss)	$	57,833		$	36,249
Adjustments to reconcile net income to net cash from operating activity:
Depreciation and amortization	10,406			8,150
Amortization of covenant not to compete	9,486			9,486
Inventory valuation reserve	6,000			9,000
(Increase) decrease in:
Accounts receivable	1,279			73,321
Inventories	(132,243		)	185,412
Increase (decrease) in:
Accounts payable	15,147			(75,749		)
Customer deposits	9,236			18,618
Accrued expenses	(163,659		)	56,253
Net cash from operating activities	(186,515		)	320,740
Cash flow from investing activities:
Capital expenditures	(111,243		)	(10,902		)
Net cash from investing activities	(111,243		)	(10,902		)
Cash flow from financing activities:
Net payments under line-of-credit agreement	---			(150,000		)
Proceeds from sale of stock	---			110,000
Principal payments on bank note	---			(4,066		)
Principal payments on covenant not to compete	(7,684		)	(7,004		)
Net cash from financing activities	(7,684		)	(51,070		)
Increase (decrease) in cash	(305,442		)	258,768
Cash  - beginning of year	667,608			33,858
Cash - end of period	$	362,166		$	292,626

See notes to financial statements.

BALLISTIC RECOVERY SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS

December 31, 2001

(UNAUDITED)

A.    Basis of Presentation

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-QSB and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  Operating results for the three month period ended December 31, 2001 are not necessarily indicative of the results that may be expected for the year ended September 30, 2002.  For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's summary annual report for the year ended September 30, 2001.

B.    Inventories

The components of inventory consist of the following:

	12/31/01		09/30/01
Raw materials	$	615,059	$	519,511
Work in process	159,795		134,971
Finished goods	37,791		31,920
Total inventories	$	812,645	$	686,402

C.    Cash Concentrations

Bank balances periodically exceeded federally insured levels during the first quarter of fiscal year 2002 and 2001, and exceeded federally insured levels as of December 31, 2001.

D.    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.

E.     Customer Concentration

One major customer, Cirrus Design Corporation, represented 71.4%and 53.4% of the Company’s total sales in the first quarter of fiscal year 2002 and 2001, respectively.  The Company supplies parachute systems to Cirrus from its general aviation product line.

In its recreational aviation product line, 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.

F.     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.

G.    New Product Development, Research and Development Funding and Income Recognition

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-172 product, with completion expected by mid-fiscal year 2002.  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.  Under additional terms of the agreement, the Company will continue its efforts to solicit Cessna 172 owners for deposits, which will secure their purchase commitments for the product once certified.  The Company has received 10 deposits from customers.  To date, including the 10 deposits, the Company has 22 firm pre-production orders for the BRS-172 systems.

During the past several years, the Company’s primary general aviation product has been for the Cirrus Design SR20 (SR20).  During the first quarter of fiscal year 2001, Cirrus Design completed testing and certification of its next generation aircraft called the SR22.  First deliveries of parachute systems for the SR22 were made in December 2000, and continue through the present.  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 of the SR20 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.  The SR22 received FAA certification in November 2000 and also has the Company’s product installed as standard equipment.  The SR22 is heavier and faster than the predecessor SR20.  The Company shared in the costs to develop the parachute system for the SR22 as well.  The net amount of expenses incurred by the Company is reflected in Research and Development expenses in the financial statements.

Cirrus Design announced in April 2001 that it would introduce a diesel version of its aircraft called the SR21TDi (SR21).  The SR21 will be first introduced in the European market and is expected to be on the market sometime in the next several years.  This model, which is similar to the SR20 and SR22 aircraft, is expected to utilize the Company’s parachute system as standard equipment as well.

In September 2000, the Company entered into an agreement to bring back its product for the Cessna 150/152 model aircraft (the “BRS-150”).  The Company received the revised supplemental type certificate on January 9, 2002.  The product will be marketed under an exclusive marketing agreement with an outside company.  To date, the Company has 6 firm orders for the BRS-150 systems.

On November 2, 2001, the Company entered into a contact with NASA through its Small Business Innovation Research (SBIR) program.  The contract, which is a Phase I feasibility study, covers a six month period and is a firm-fixed grant for $68,571.  The Phase I award is entitled “Advanced Aircraft Parachute Recovery System” and has been granted to allow the company to investigate the feasibility of developing parachute systems for larger and faster aircraft than those currently supported by the Company.  If Phase I is successful, the Company will apply for a follow-on Phase II grant.  Successful Phase II proposals result in firm fixed price contracts not exceeding $600,000 with a period of performance not exceeding 24 months.

H.    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 and derivative 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:

Warr #	Exercise Period	Warrant Shares	Exercise Price per Warrant Share	Purchase Commitment
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

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):

Fiscal Year	Equity Contribution
2003	$	250,000
2004	562,500
2005	812,500
Total	$	1,625,000

I.      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.  The payments required under this agreement contained 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 were discounted at the Company's incremental borrowing rate.

The 4% ten year note calls for monthly payments of $4,036 through 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:

	Future		Present
	Dollars		Dollars
2002	36,327		24,897
2003	48,436		36,354
2004	48,436		40,561
2005	48,436		45,255
Thereafter	4,036		4,002
	$	185,671	$	151,069

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 expires October 2005.

J.     Line-of Credit Borrowings

The Company has 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, 2002.  The line calls for a variable interest rate of 1.5% over the bank’s index rate.  At December 31, 2001 and September 30, 2001 there was no outstanding balance under the line of credit.  The Company expects to renew the line each year following the review of its financial results and projections with the bank.

K.    Income Taxes

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.

In fiscal year 2001the 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.

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 $500,000 of deferred tax assets will be utilized.  The remaining valuation allowance of approximately $140,000 at December 31, 2001 is maintained on deferred tax assets, which the Company has not determined to be more likely than not realized at this time.

Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations:

Sales

Sales for the first quarter of 2002 were consistent with levels attained in the prior fiscal year, which was a record year for the Company.  Although at the same level as the previous year, the mix of products sold shifted during the current fiscal year with the Company’s general aviation business increasing while the Company’s sport aviation business declined. In the current fiscal year quarter, revenues derived from the Company’s general aviation products accounted for approximately 71% of revenues compared to 53% in the prior fiscal year.  The Company’s primary customer, Cirrus Design Corporation (Cirrus), is expected to continue to increase manufacturing volumes for its aircraft throughout the next fiscal year for both its SR20 and SR22 models.  As a result, the Company is forecasting further growth in 2002 and beyond in its general aviation revenues.  However, volume projections and timing of those volumes is uncertain at this time.

The Company’s sport aviation business declined in the current fiscal year quarter compared to the prior fiscal year as a result of several factors.  The events of September 11, 2001 dramatically affected the sport aviation business inside of the United States.  The industry is showing some signs of recovery, but the final implications on the industry are still unknown at this time.  Also within the United States, there are new regulations being proposed that will affect future sport aviation aircraft designs and sales.  The new regulations are expected to strengthen the industry, and should therefore strengthen the Company’s position within the industry as well.  In addition, 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.  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

For the first quarter of fiscal year 2002, gross margin as a percentage of revenues was 35.5% compared to 34.0% for the same prior year quarter.  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 as a percentage of revenues have increased to 19.7% for the quarter ended December 31, 2001 as compared to 18.0% for the prior fiscal year quarter.  The increase is primarily as a result of increases in support function expenses and pay rate adjustments.  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.

Research and Development

Outside funding has offset a portion of research and development costs for both years.  Net research and development costs were lower on a comparative basis in actual dollars and a percentage of sales that that of the prior year.  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.

Net Income and Earnings per Share

Net income in actual dollars and as a percentage of revenues was up for the current fiscal quarter over that of the prior year.  Net income of $57,833 for the quarter ended December 31, 2001 was 7.4% of revenues or $0.01 per share, as compared to net income of $36,249, which was 4.6% of revenues or $0.01 per share for the same prior year period.

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.  Based upon the Company’s current projections, the Company believes that it has sufficient cash from reserves and cash flow to finance operations through the next twelve-month period. The Company has also established a line-of-credit for use in operations as required.  The current line-of-credit is for $250,000 and is established on an annual renewal basis with the current agreement expiring February 28, 2002.  The Company has no balance currently outstanding under the line-of-credit.  Management believes that the current business operation, along with the line-of-credit, 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 non-equity sources to fund contract research and development projects, but there can be no assurances that the Company will be successful in its efforts.

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 military and several domestic and foreign companies that have expressed interest in utilizing the Company’s products.  No assurance can be made as to the future benefits that will be derived from these discussions.

In November 2000, the Company entered into an agreement which provided $200,000 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.  The Company is confident that the development and certification of the Cessna 172 system will be completed during the current fiscal year, but there can no assurance that the system will receive certification or if certified, will 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 during the fiscal year as a result of the production of general aviation recovery systems.  It is currently the intention of the Company to fund the expenditures through current operations as well as revenues generated by those units.

The Company’s general aviation product is standard equipment on the Cirrus Design SR20 and SR22 model aircraft.  The Company delivered 50 units in the first quarter of fiscal year 2002 as compared to 39 units for the same prior year quarter.  As of the middle of January 2002, Cirrus has firm orders for 359 SR20 models and 167 SR22 models which will include the Company’s parachute systems.  Cirrus has delivered 292 aircraft as of the same time period.  Cirrus expects to be able to fill the backlog of firm orders during the next 24 months.  Future production volumes for the Cirrus aircraft, and therefore, the Company’s parachute systems, will be dictated by ultimate market demands for Cirrus’ products.  Accordingly, the Company is dependent on Cirrus for its revenues.  Any negative impact on Cirrus’ sales would negatively impact the Company’s projected revenues.

At the beginning of November 2001, the Company entered into a contract with NASA through it’s Small Business Innovation Research (SBIR) grant program.  The Phase I grant, is a six-month feasibility study to explore the possibility of the Company’s ability to develop recovery systems for use of faster and larger aircraft than those currently supported by the Company.  The contract is a firm-fixed contract for $68,571.  If Phase I is successful, the Company will apply for a Phase II grant which would be for a firm-fixed grant of up to $600,000 over a two year period.  No assurances can be made as to the success of Phase I, or if successful, that a Phase II grant will be awarded.  Nor can assurances be made that if either or both Phases, if granted, are successful, that they will result in future products and revenues for the Company.

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, re-certification and financing of the Cessna 150/152 system, success of and follow-on contracts for NASA SBIR research projects, 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.

PART II.  OTHER INFORMATION

Item 1.    Legal Proceedings

The Company is not currently involved in any legal proceedings.

Item 2.    Dividends

The Company declared a dividend in the amount of $0.02 per share, payable February 22, 2002 to all Common Shareholders of record on February 8, 2002.

Item 6.    Exhibits and Reports on Form 8-K

There are no exhibits and the Company did not file any reports on Form 8-K for the three months ended December 31, 2001.

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant 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
	Chief Executive Officer and Chief Financial Officer

Dated February 4, 2002