1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
X Quarterly Report Under Section 13 or 15(d) of the Securities Exchange
- ------ Act of 1934 (No Fee Required)
For the quarterly period ended JUNE 30, 1996
- ------ 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)
1845 Henry Avenue, South St. Paul, Minnesota, 55075-3541
--------------------------------------------------------
(Address of Principal Executive Offices)
(612) 457-7491
----------------------------------------------
Issuer's Telephone Number Including Area Code)
N/A
--------------------------------------------------------------------------
(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 X No
------ ------
Number of shares outstanding as of August 9,1996: 4,454,474
---------------
1
2
INDEX
BALLISTIC RECOVERY SYSTEMS, INC.
PART I. FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements (Unaudited). Page
----
Balance sheets as of June 30, 1996 and September
30, 1995. 3
Statements of operations for the three months and nine
months ended June 30, 1996 and 1995. 4
Statements of cash flow for the nine months ended
June 30, 1996 and 1995. 5
Notes to financial statements at June 30, 1996. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 9
PART II. OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 11
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
- ----------
2
3
PART I FINANCIAL INFORMATION - Item I. Financial Statements
BALLISTIC RECOVERY SYSTEMS, INC.
BALANCE SHEETS
(UNAUDITED)
June 30, September 30,
ASSETS 1996 1995
---- ----
Current assets:
Cash $ 53,650 $ 16,977
Accounts receivable - net of allowance for doubtful
accounts of $5,000 70,407 66,038
Inventories 277,134 175,354
Prepaid expenses 5,630 2,969
----------- -----------
Total current assets 406,821 261,338
----------- -----------
Furniture and fixtures 74,729 67,005
Less accumulated depreciation (58,090) (53,061)
----------- -----------
Furniture and equipment - net 16,639 13,944
----------- -----------
Other assets:
Patents less accumulated amortization of
$6,380 and $5,866, respectively 5,284 5,799
Covenant not to compete less accumulated
amortization of $25,296 (Note F) 354,142 ---
----------- -----------
Total assets $ 782,886 $ 281,081
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 71,322 $ 61,563
Customer deposits 92,849 75,183
Accrued payroll 20,988 20,099
Other accrued liabilities 64,797 62,114
Deferred research and development funding (Note D) --- 7,789
Line-of-credit borrowings 30,000 ---
Current portion of covenant not to compete (Note F) 30,487 ---
----------- -----------
Current liabilities 310,443 226,748
----------- -----------
Long-term covenant not to compete, less current portion (Note F) 326,735 ---
----------- -----------
Shareholders' equity:
Common stock ($.01 par value; 10,000,000 shares
authorized; shares issued and outstanding of
4,454,474) 44,545 44,545
Additional paid-in capital 2,620,282 2,620,282
Accumulated deficit (2,519,119) (2,610,494)
----------- -----------
Total shareholders' equity 145,708 54,333
----------- -----------
Total liabilities and shareholders' equity $ 782,886 $ 281,081
=========== ===========
See Notes to Financial Statements.
3
4
BALLISTIC RECOVERY SYSTEMS, INC.
STATEMENTS OF OPERATIONS
For the Three Months and Nine Months Ended June 30, 1996 and 1995
(UNAUDITED)
Three Months Ended Nine Months Ended
June 30, June 30,
1996 1995 1996 1995
---- ---- ---- ----
Sales $ 579,124 $ 388,783 $1,348,813 $ 766,074
Cost of sales 361,875 260,165 866,090 516,752
---------- ---------- ---------- ----------
Gross profit 217,249 128,618 482,723 249,322
Selling, general and administrative 120,876 95,443 292,326 220,772
Research and development (3,092) 15 43,710 (641)
---------- ---------- ---------- ----------
Income from operations 99,465 33,160 146,687 29,191
Other income (expense):
Interest expense (12,247) (1,818) (30,017) (6,736)
Covenant amortization (9,486) --- (25,296) ---
Other income - net --- 172 --- 449
---------- ---------- ---------- ----------
Net income (loss) $ 77,732 $ 31,514 $ 91,374 $ 22,904
========== ========== ========== ==========
Earnings (loss) per share $0.02 $0.01 $0.02 $0.01
========== ========== ========== ==========
Weighted average number of shares
outstanding 4,454,474 4,421,324 4,454,474 4,421,324
========== ========== ========== ==========
See Notes to Financial Statements.
4
5
BALLISTIC RECOVERY SYSTEMS, INC.
STATEMENTS OF CASH FLOW
Increase (Decrease) in Cash
For the Nine Months Ended June 30, 1996 and 1995
(UNAUDITED)
1996 1995
---- ----
Cash flow from operating activity:
Net income $ 91,374 $ 22,904
Adjustments to reconcile net income to net cash
from operating activity:
Depreciation and amortization 5,544 4,506
Amortization of discount on debt --- 986
Amortization of covenant not to compete 25,296 ---
Inventory valuation reserve 24,000 8,000
(Increase) decrease in:
Accounts receivable (4,369) 78
Inventories (125,780) (66,887)
Prepaid expenses (2,661) (3,201)
Increase (decrease) in:
Accounts payable 9,760 (18,414)
Accrued expenses 13,449 34,762
-------- --------
Net cash from operating activities 36,613 (17,266)
-------- --------
Cash flow from investing activities:
Capital expenditures (7,724) (5,281)
-------- --------
Net cash from investing activities (7,724) (5,281)
-------- --------
Cash flow from financing activities:
Net borrowing under line-of-credit agreement 30,000 ---
Principal payments on debt --- (19,128)
Principal payments on covenant not to compete (22,216) ---
-------- --------
Net cash from financing activities 7,784 (19,128)
-------- --------
Increase (decrease) in cash 36,673 (41,675)
Cash - beginning of year 16,977 53,138
-------- --------
Cash - end of period $ 53,650 $ 11,463
======== ========
See Notes to Financial Statements.
5
6
BALLISTIC RECOVERY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1996
(UNAUDITED)
A. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles 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 generally accepted accounting
principles 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 and nine month periods ended June 30, 1996 are not
necessarily indicative of the results that may be expected for the year
ended September 30, 1996. 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, 1995.
B. INVENTORIES
The components of inventory consist of the following:
06/30/96 09/30/95
-------- --------
Raw materials $262,504 $166,544
Work in process 28,645 18,125
Finished goods 9,985 5,685
Less valuation reserve (24,000) (15,000)
-------- --------
Total inventories $277,134 $175,354
======== ========
C. CUSTOMER DEPOSITS
The Company periodically receives 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.
D. RESEARCH AND DEVELOPMENT FUNDING AND INCOME RECOGNITION
In 1994, the Company received initial funding and signed letters of
intent for two research and development contracts for larger emergency
parachute systems. One of the companies is developing a four place
composite, certified aircraft and this project is ongoing. The other
company is developing three experimental category aircraft consisting of two
place, five place and seven place composite aircraft. This second project
was suspended during fiscal year 1995. Both of the companies are privately
held.
Total funding received to date is $36,000, of which $28,212 was reflected
as an offset to research and development expenses and was netted in the
expense for 1995 and 1994. The remaining $7,789 was taken as an offset to
research and development expenses for the quarter ended December 31, 1995.
Additional work was performed during the current quarter resulting in an
additional offset to research and development expenses of $10,238. The
balance of the receivable was outstanding at the end of the quarter.
Additional funding, although not guaranteed, is expected to be received
on a monthly basis over the next 12 to 18 months as the research and
development progresses. Although exact time lines and production volumes
are uncertain, it is expected that manufacturing of production units will
commence at the end of the funding time line.
6
7
BALLISTIC RECOVERY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1996
(UNAUDITED)
D. RESEARCH AND DEVELOPMENT FUNDING AND INCOME RECOGNITION - (Continued)
The Company will retain the developed technology for the parachute
systems in general and the outside companies will retain the developed
technology that is specific to their individual aircraft. In order to
retain the developed technology, the Company will offer the company with the
ongoing project, a discount on future purchases of completed systems which
will total 110% of the advanced amount. The other company's project has
been suspended and future work with this company is not certain. The
Company did not establish a liability for the funding that was taken as an
offset to expense due to the uncertainty of the future of the project and
the future viability of the products to be developed. In addition, the
Company feels that the establishment of a reserve for a potential future
obligation would be misleading to the financial statements as presented.
Any future purchase discounts that will be earned upon completion of the
project will be offset against any future sales made to that company.
The Company expects to be able to utilize the developed technology for
applications on a wide range of aircraft. The future applications will
depend on a complete review of market conditions, product acceptance and
available funding.
E. SMALL BUSINESS INNOVATION RESEARCH GRANT (SBIR)
In December 1994, the Company was awarded a Phase I, Small Business
Innovation Research grant (SBIR) through NASA for use in the research of
low-cost, lightweight aircraft emergency recovery systems. The $70,000
grant over a six month period was used by the Company to expand its research
in the area of lightweight fabrics and components for use in recovery
systems. The Phase I was completed in June 1995 and a proposal for Phase II
funding was submitted at that time.
The Company signed a Phase II contract with NASA on March 8, 1996 and
work on that project commenced at that time. The total contract award was
for a firm fixed price grant of $581,875 for a period not to exceed 24
months. Of the total contract price, the Company has received an allocation
of $300,000 at this time. Future allocations are expected throughout the
term of the contract, but it is not guaranteed as the allocations are part
of the federal budget process.
For the quarter ended June 30, 1996, the Company recognized $41,446 as an
offset to research and development expenditures and $46,910 year to date
for work performed on the Phase II project.
F. COVENANT NOT TO COMPETE
On October 26, 1995 the Company entered into an agreement with the
president and majority shareholder of Second Chantz Aerial Survival
Equipment, Inc. (SCI), the Company's sole U.S. competitor, whereby:
1. SCI ceased all business activities, and
2. SCI's president and majority shareholder entered into a ten year
covenant not to compete with the Company.
In exchange for the above the Company has 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
contains a non-interest bearing portion and a portion that bears interest at
a rate below the Company's incremental borrowing rate. Under generally
accepted accounting principles the future payments have been discounted at
the Company's incremental borrowing rate of 11.0% as follows:
7
8
BALLISTIC RECOVERY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1996
(UNAUDITED)
F. COVENANT NOT TO COMPETE - (Continued)
Future Present
Dollars Dollars
------- -------
Cash at signing $ 5,000 $ 5,000
Parachute systems 15,000 15,000
Non-interest bearing four year note 80,000 63,732
4% ten year note 400,000 295,706
--------- ---------
$ 500,000 $ 379,438
========= =========
The covenant not to compete will be amortized on a straight-line method
over its ten year life.
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.
G. SUBSEQUENT EVENT
In July 1996, the Company received a purchase order from a defense
subcontractor for the development of a parachute recovery system for an
unmanned aircraft that is being developed for possible military use. The
purchase order was for a total of $97,000 and covers an 18 month period.
The purchase order calls for development funding of the recovery system as
well as the delivery of completed recovery systems. No assurances can be
made as to the success of the development project or if its completion will
lead to future revenues. Also, no assurances can be made that the project
will proceed as intended in the purchase order.
8
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS:
Sales for the third quarter of the current fiscal year were up by 49%
over the same prior year period. Year to date sales were up by 76%.
The increase in sales is attributable to continuing improvement
in ultralight aircraft sales for both currently existing aircraft
designs as well as those of new manufacturers. In addition, the
Company believes that the departure of the Company's only domestic
competitor has stimulated an increase in the Company's sales. The
sales plans that were implemented in the second and third quarters of
the previous fiscal year have also contributed by expanding the
Company's dealer base and expanding sales to the existing dealers. By
the end of the preceding quarter, the flow of new orders had begun to
stabilize at levels slightly ahead of the previous year.
Gross margins for the current quarter also improved by 4.4% up to
37.5% from 33.5%. The improvement was generated by increases in
labor and overhead efficiencies resulting from the higher and more
efficient sales volumes for the quarter. In addition, minor pricing
and discount adjustments implemented in the early part of the second
quarter contributed to the current quarter margin increases.
Selling, general and administrative expenses went down as a
percentage of sales. The actual dollar increase in expenses was a
result of several factors including the addition of sales personnel
during the second quarter of the prior fiscal year, increased support
staff costs due to the increased sales volumes, and increased travel
expenses and legal fees.
Gross research and development costs were up over the prior year
for the current quarter as well as year to date. The increase was a
result of increased wage rates for the engineering staff, the addition
of a technician to assist in the expanded research and development
activities, and increased out of pocket costs to support the research
projects. The year to date increase reflects expenditures incurred by
the Company while outside funding was not available due to timing of
the contacts.
The other income and expense category increased as a direct result of
the covenant not to compete agreement entered into by the Company in
October of the current fiscal year.
LIQUIDITY AND CAPITAL RESOURCES:
Management intends to continue to improve the Company's operations and
cash flows in 1996 by continuing to monitor and enhance cost saving
plans adopted in the prior years and implementation of new ones. The
following outlines management's plans:
-- The Company's focus on research and development has shifted over
the past several years. Following the completion of the GARD-150
project, it became the intention of the Company to find outside
sources for research and development funding in order to continue
its efforts towards long-term product development and expansion.
In 1994, the Company received initial funding and signed letters
of intent for two research and development contracts for larger
emergency parachute systems. One of the projects is ongoing and
that company is developing a four place composite, certified
aircraft. The other project was for a company developing three
experimental category aircraft consisting of two place, five
place and seven place composite aircraft. This second project was
suspended in 1995. The successful completion of either of these
projects cannot be assured. With the signing of these two
agreements, the Company believes that it has begun the process of
possibly expanding its research and development efforts into a
profit center for the Company through outside funding. In
addition, the receipt of outside funding has increased the
Company's opportunities to develop products for expanded
applications throughout the general aviation and experimental
aircraft markets. It will always be the intention of the Company
to retain the rights to any developed technology and the rights to
manufacture any related products. See Note D of Notes to Financial
Statements for further information.
9
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (Continued)
LIQUIDITY AND CAPITAL RESOURCES: - (Continued)
-- In December 1994, the Company was awarded a Phase I, Small Business
Innovation Research grant (SBIR) through NASA for use in the
research of low-cost, lightweight aircraft emergency recovery
systems. The $70,000 grant was used to provide a feasibility study
to determine whether or not future funding through NASA in the form
of a Phase II grant is warranted. The Phase I research was
completed in June 1995 and the Phase II grant was applied for as
part of the final report.
The Company signed a Phase II contract with NASA on March 8, 1996
and work on that project commenced at that time. The total
contract award was for a firm fixed price grant of $581,875 for a
period not to exceed 24 months. See Note E of Notes to Financial
Statements for additional information. No assurances can be made
as to the future success of this project, or whether or not all of
the contract amount will be allocated and received over the life of
the contract.
The Company anticipates applying for additional grants over the
coming fiscal years through the SBIR program and other programs
sponsored by NASA. No assurances can be made as to the future
success of the current grant nor the likelihood of the receipt or
success of any future grants.
-- In October 1995, the Company entered into an agreement with its
only domestic competitor to effectively eliminate its domestic
competition. The Company believes that the effects of this
transaction began to become evident in the positive sales trends
that were shown for the Company's second and third quarters of
fiscal year 1996. As a result of other sales efforts that were
underway, the exact benefit of this transaction in terms of sales
volumes cannot be specifically determined. Although the agreement
calls for debt service over a ten year period, the Company believes
that the agreement will have a positive impact on both
profitability and cash flow.
This agreement in addition to other sales programs that have
been implemented by the Company over the past several years should
continue to strengthen the Company's revenues and profitability
into the future. See Note F. of Notes to Financial Statements for
further information.
-- In July 1996, the Company received a purchase order from a defense
subcontractor for the development of a parachute recovery system
for an unmanned aircraft that is being developed for possible
military use. The purchase order was for a total of $97,000 and
covers an 18 month period. The purchase order calls for development
funding of the recovery system as well as the delivery of completed
recovery systems. No assurances can be made as to the success of
the development project or if its completion will lead to future
revenues. Also, no assurances can be made that the project will
proceed as intended in the purchase order.
Management intends to fund all of its continuing operation out of its current
revenues with the exception of expanded research and development. 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
expenses at the necessary levels until further funding opportunities
materialize.
10
11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company has been named in a lawsuit claiming that the Company
manufactured a device that detonated, causing injury to one
individual. The Company has submitted evidence supporting its position
that the product involved was not manufactured by the Company. The
Company has asked to be released from the lawsuit and believes it has
no exposure in this matter.
The Company was named in a second lawsuit which claims that the
Company's product failed to perform when called upon. The plaintiff
alleges that he was injured in an accident involving an ultralight that
had one of the Company's parachute recovery systems on board.
Subsequently, a representative of the Company performed an inspection
of the recovery system and actually fired the system. The system
deployed as expected. Preliminary correspondence indicates that the
plaintiff's counsel does not intend to release the Company from the
suit at this time. The claim is for damages in excess of $15,000, but
the exposure to the Company is uncertain at this time.
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 June 30, 1996.
11
12
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 August 13, 1996
12