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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
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Act of 1934 (No Fee Required)
For the quarterly period ended March 31, 1998
Transition Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934 (No Fee Required)
For the transition period from to
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Commission file number 0-15318
BALLISTIC RECOVERY SYSTEMS, INC.
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(Exact Name of Small Business Issuer as Specified 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)
(612) 457-7491
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(Issuer's Telephone Number Including Area Code)
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(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
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Number of shares outstanding as of May 13, 1998: 4,468,772
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INDEX
BALLISTIC RECOVERY SYSTEMS, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited). Page
Balance sheets as of March 31, 1998 and September
30, 1997. 3
Statements of operations for the three months and six
months ended March 31, 1998 and 1997. 4
Statements of cash flow for the six months ended
March 31, 1998 and 1997. 5
Notes to financial statements at March 31, 1998. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
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PART I FINANCIAL INFORMATION - Item I. Financial Statements
BALLISTIC RECOVERY SYSTEMS, INC.
BALANCE SHEETS
(UNAUDITED)
March 31, September 30,
ASSETS 1998 1997
---------- -------------
Current assets:
Cash $ 50,142 $ 119,197
Accounts receivable - net of allowance for doubtful
accounts of $12,500 and $12,500, respectively 151,598 210,006
Inventories 301,314 266,484
Deferred tax asset - current portion 138,000 138,000
Prepaid expenses 7,933 2,984
----------- -----------
Total current assets 648,987 736,671
----------- -----------
Furniture, fixtures and leasehold improvements 152,114 147,473
Less accumulated depreciation (70,063) (60,184)
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Furniture, fixtures and leasehold improvements - net 82,051 87,289
----------- -----------
Other assets:
Patents less accumulated amortization of
$7,581 and $7,238, respectively 4,083 4,426
Deferred tax asset - long-term portion 62,000 62,000
Other intangible assets 11,125 --
Covenant not to compete less accumulated
amortization of $91,697 and $72,726, respectively 287,741 306,712
----------- -----------
Total other assets 364,949 373,138
----------- -----------
Total assets $ 1,095,987 $ 1,197,098
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 66,850 $ 51,961
Customer deposits 100,360 95,401
Accrued payroll 33,249 31,031
Other accrued liabilities 79,366 141,744
Current portion of bank note 12,730 12,219
Current portion of covenant not to compete 22,810 30,806
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Current liabilities 315,365 363,162
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Long-term bank note and covenant, less current portions 272,343 289,639
----------- -----------
Shareholders' equity:
Common stock ($.01 par value; 10,000,000 shares authorized;
4,468,772 issued and outstanding) 44,688 44,688
Additional paid-in capital 2,625,639 2,625,639
Accumulated deficit (2,162,048) (2,126,030)
----------- -----------
Total shareholders' equity 508,279 544,297
----------- -----------
Total liabilities and shareholders' equity $ 1,095,987 $ 1,197,098
=========== ===========
See Notes to Financial Statements.
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BALLISTIC RECOVERY SYSTEMS, INC.
STATEMENTS OF OPERATIONS
For the Three Months and Six Months Ended March 31, 1998 and 1997
(UNAUDITED)
Three Months Ended Six Months Ended
March 31, March 31,
1998 1997 1998 1997
---- ---- ---- ----
Sales $ 380,837 $ 470,261 $ 688,822 $ 844,162
Cost of sales 264,641 310,791 479,903 553,250
----------- ----------- ----------- -----------
Gross profit 116,196 159,470 208,919 290,912
Selling, general and administrative 125,466 101,827 221,870 199,586
Research and development (22,446) (5,961) (18,363) (2,152)
----------- ----------- ----------- -----------
Income from operations 13,176 63,604 5,412 93,478
Other income (expense):
Interest expense (11,213) (12,145) (22,457) (22,842)
Covenant amortization (9,486) (9,486) (18,972) (18,972)
Other income (expense) -- 407 -- (13,169)
----------- ----------- ----------- -----------
Net income (loss) ($7,523) $ 42,380 ($36,017) $ 38,495
=========== =========== =========== ===========
Primary earnings per share ($0.00) $ 0.01 ($0.01) $ 0.01
=========== =========== =========== ===========
Weighted average number of shares
outstanding 4,895,332 5,042,576 4,895,332 5,042,576
=========== =========== =========== ===========
Fully diluted earnings per share ($0.00) $ 0.01 ($0.01) $ 0.01
=========== =========== =========== ===========
Weighted average number of shares
outstanding 5,006,007 5,582,692 5,006,007 5,582,692
=========== =========== =========== ===========
See Notes to Financial Statements.
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BALLISTIC RECOVERY SYSTEMS, INC.
STATEMENTS OF CASH FLOW
Increase (Decrease) in Cash
For the Six Months Ended March 31, 1998 and 1997
(UNAUDITED)
1998 1997
---- ----
Cash flow from operating activity:
Net income ($36,017) $ 38,495
Adjustments to reconcile net income to net cash
from operating activity:
Depreciation and amortization 10,222 8,849
Amortization of covenant not to compete 18,971 18,972
Inventory valuation reserve 6,000 6,000
(Increase) decrease in:
Accounts receivable 58,408 (16,261)
Inventories (40,830) (39,671)
Prepaid expenses(4,949) (9,546)
Increase (decrease) in:
Accounts payable 14,889 14,370
Accrued expenses (55,202) (35,812)
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Net cash from operating activities (28,508) (14,604)
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Cash flow from investing activities:
Increase in intangible assets (11,125) --
Capital expenditures (4,641) (75,317)
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Net cash from investing activities (15,766) (75,1317)
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Cash flow from financing activities:
Net borrowing under line-of-credit agreement -- (25,000)
Proceeds from bank note -- 70,000
Principal payments on bank note (5,528) (3,098)
Principal payments on covenant not to compete (19,253) (28,959)
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Net cash from financing activities (24,781) 12,943
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Increase (decrease) in cash (69,055) (76,978)
Cash - beginning of year 119,197 117,343
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Cash - end of period $ 50,142 $ 40,365
========= =========
See Notes to Financial Statements.
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BALLISTIC RECOVERY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 1998
(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 and six month periods ended March
31,1998 are not necessarily indicative of the results that may be
expected for the year ended September 30, 1998. 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, 1997.
B. INVENTORIES
The components of inventory consist of the following:
03/31/98 09/30/97
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Raw materials $181,540 $160,555
Work in process 61,778 54,637
Finished goods 57,996 51,292
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Total inventories $301,314 $266,484
======== ========
C. 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.
D. 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.
E. RESEARCH AND DEVELOPMENT FUNDING AND INCOME RECOGNITION
The Company is currently working under an agreement to receive research
and development funding from a privately held company that is
developing a four-place composite, certified aircraft. If successfully
certified, this aircraft will be the first FAA certified aircraft to
offer one of the Company's recovery systems as standard equipment.
Although not guaranteed, certification and production of this aircraft
is expected to begin during the Company's fiscal year 1998.
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BALLISTIC RECOVERY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 1998
(UNAUDITED)
E. RESEARCH AND DEVELOPMENT FUNDING AND INCOME RECOGNITION (Continued)
The Company will retain the developed technology for the parachute
systems in general and the outside company will retain the developed
technology that is specific to their individual aircraft. In order to
retain the developed technology, the Company has offered the outside
company a discount on future purchases of completed systems which will
total 110% of the advanced amount.
The Company did not establish a liability for the offset to expense to
date under this projects due to the uncertainty of the future of the
project and the future viability of the products to be developed. 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.
F. SMALL BUSINESS INNOVATION RESEARCH GRANT (SBIR)
On March 8, 1996, the Company signed a follow -on Phase II contract
under the Small Business Innovation Research grant program (SBIR)
through NASA for use in the research of low-cost, lightweight aircraft
emergency recovery systems. The Phase II contract follows a Phase I
award in 1995. The Company has used the grant to expand its research in
the area of lightweight fabrics and components for use in recovery
systems. The total contract award was for a firm fixed price grant of
$581,875 for an extended period not to exceed 30 months.
G. ADDITIONAL CONTRACT RESEARCH AND DEVELOPMENT
In June 1996, the Company received a purchase order from a defense
subcontractor for the development of a parachute recovery system for an
unmanned aircraft that is being developed for possible military use.
The purchase order, with revisions, is for a total of $151,000 and
covers approximately 22 months. The purchase order calls for
development funding for 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.
H. COVENANT NOT TO COMPETE
On October 26, 1995 the Company entered into an agreement with the
president and majority shareholder of Second Chantz Aerial Survival
Equipment, Inc. (SCI), the Company's sole US competitor, whereby: (1)
SCI ceased all business activities, and (2) SCI's president and
majority shareholder entered into a ten year covenant not to compete
with the Company.
In exchange for the above the Company agreed to make payments on the
covenant not to compete. The agreement did not involve a stock or asset
purchase. In addition, the Company did not agree to assume any
liabilities of SCI or its president. The payments required under this
agreement 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:
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BALLISTIC RECOVERY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 1998
(UNAUDITED)
H. 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: principal 400,000 295,706
interest 84,362 ---
-------- --------
$584,362 $379,438
======== ========
The non interest bearing note called for monthly payments of $1,500 for
forty-six months (February 1996 to November 1999). However, the Company
negotiated a discount on this note and accelerated payments which were
completed in December 1997. This discount represented reductions in
principal and interest payments. The 4% ten year note calls for monthly
payments of $4,036 (November 1995 to October 2005). Payments under this
agreement are unsecured.
The present value of the Company's obligation under this agreement was
recorded as an intangible asset and is being amortized over ten years
as shown in the accompanying financial statements.
Future payments under this agreement are as follows:
Future Present
Dollars Dollars
------- -------
1998 60,276 30,806
1999 48,436 25,302
2000 48,436 26,176
2001 48,436 29,204
2002 48,436 32,583
Thereafter 91,882 126,170
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$345,902 $270,241
======== ========
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.
I. 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 which the company took
possession of on October 1, 1996. The note calls for interest at a rate
2% over the bank's index rate which was 8.25% at the time of signing.
The index rate was 8.75% as of March 31, 1998 which computes to a total
interest rate of 10.75%. 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. This loan is
secured by all of the Company's assets.
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BALLISTIC RECOVERY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 1998
(UNAUDITED)
I. LINE OF CREDIT BORROWINGS
In February 1998, the Company negotiated a $150,000 line-of-credit for
use in operations. The line-of-credit was established on a annual
renewal basis and is secured by all of the Company's assets. The latest
line-of-credit expires February 28, 1999. The line calls for a variable
interest rate of 2% over the bank's index rate. At March 31, 1998,
there was no outstanding balance under the line. The Company expects to
renew the line each year following the review of its financial results
and projections with the bank. The Company's previous line-of-credit
was $35,000.
J. 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.
During 1997, the Company reduced the valuation allowance to reflect the
deferred tax assets utilized in 1997 to reduce current income taxes,
approximately $62,000, and to recognize a deferred tax asset of
$200,000. 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 $200,000 of deferred
tax assets will be realized. The remaining valuation allowance of
$798,700 is maintained on deferred tax assets which the Company has not
determined to be more likely than not realized at this time.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS:
Sales
Sales for the current fiscal year quarter were down by 19%. The decrease is a
result of soft sales of ultralight aircraft in both the domestic and
international markets. The soft sales performance by the manufacturers of
aircraft resulted in a direct decrease in Company sales. At the beginning in the
current fiscal year quarter, order volumes were beginning to follow trends
consistent with those of the prior fiscal year. However, order volumes later
slowed and continue to be slow through the beginning of the third fiscal
quarter. Sales of ultralights have begun to increase during the Company's third
fiscal quarter, but the Company `s product sales lag behind ultralight sales by
several months as buyers assemble their aircraft.
Sales in the recreational aircraft market for the current fiscal year are
expected to be lower than the prior fiscal year as a result of the downturn in
order volumes during the first two quarters of fiscal year 1998. Order flows,
and therefore production, for the remainder of the third fiscal quarter are
expected to remain at levels below the prior year, but sales for the remainder
of the year are expected to continue at levels consistent with those of fiscal
year 1997. As an offset to the lower revenues in the recreational market, the
Company anticipates receiving orders and producing units in the general aviation
market for the new to-be-certified four-place composite aircraft which is
currently under development. Volume projections and timing of those volumes is
uncertain at this time. There can be no assurances that this aircraft will
actually receive certification during the Company's fiscal year 1998 or at any
future time, nor that its volumes, if certified, will have a material affect on
the Company.
Gross Margin
The gross margin for the current fiscal year quarter was down 3.4% from the
prior fiscal year as a result of several factors. One factor was a continuing
increase in component costs for the Company's products. The Company's product
components are primarily made of nylon and aluminum which have both seen
substantial increases in raw material costs to the Company's vendors.
Manufacturing overhead was consistent with that of the prior year quarter, but
due to the lower sales volume, it resulted in a higher percentage of sales. In
addition, the sales mix for the current quarter, as well as the previous current
fiscal year quarter, was weighted heavier towards the lower-gross-margin smaller
units produced by the Company. The mix of sales is historically inconsistent
between quarters, but no assurances can be made that the mix will change and
result in a higher average gross margin for the remainder of the fiscal year.
Income (Loss) from Operations
Operating expenses were maintained at levels consistent with that of the prior
fiscal year quarter, with a few exceptions. Those exceptions includes increases
in outside service fees for proxy solicitations, legal fees and directors fees.
In addition, salaries for certain key employees were adjusted upwards at the
beginning of the current fiscal year quarter. Outside funding resulted in the
offset of all of the Company's research and development expenditures for both
yearly quarters.
All of the outside research and development projects underway at the end of
fiscal year 1997 are expected to be completed during the Company's fiscal year
1998. 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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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.
Management believes that the current business operation is adequate to support
the ongoing operations of the Company during the next twelve month period and
will maintain and adjust expenses as necessary to improve profitability. Current
contract research and development projects are expected to be completed during
the Company's fiscal year 1998. The Company will continue to look for sources
for contract research and development projects, but there can be no assurances
that the Company will be successful in its efforts.
The Company anticipates a need to make capital improvements to its current
production facility as well as expenditures to increase inventory levels as a
result of the production of general aviation units for the recovery system
currently under development. However, it is currently the intention of the
Company to fund the expenditures through current operations as well as revenues
generated by those units.
In addition, the cash flow needed for current debt service was reduced by the
end of the first quarter of fiscal year 1998 as a portion of the covenant not to
compete debt was retired.
The Company is currently involved in three outside funded research and
development projects. The first of the three began in 1994 and calls for the
development of an emergency parachute system for use on a four-place composite,
certified aircraft. The agreement is with a privately held company that
anticipates certification and production beginning during the Company's fiscal
year 1998. If successfully certified, the aircraft will become the first FAA
certified aircraft to offer one of the Company's parachute systems as standard
equipment.
In April 1998, the Company completed the first successful inflight deployment on
this four-place composite aircraft. Further testing is scheduled throughout the
Company's third fiscal year quarter. No assurances can be made that future
testing will be successful, or even if successful, that the project will
continue.
The second ongoing project is the Company's Small Business Innovation Research
grant (SBIR) through NASA. The purpose of the grant is to perform research of
low-cost, lightweight aircraft emergency recovery systems. The Company received
a Phase I grant during 1994. All work under this Phase I grant was completed
during fiscal year 1995. With the completion of Phase I, the Company applied for
and received a Phase II grant to continue on with the research that it began in
the first phase. The Phase II grant, which began in March 1996, is for a maximum
of $582,000 over an extended period of 30 months.
The third project began in June 1996, when the Company received a development
contract for a recovery system for a prototype unmanned aircraft being developed
by a government contractor. The contract, with revisions, is for a total of
$151,000 and covers approximately 22 months. The purchase order calls for the
development and delivery of a series of recovery devices both for use in
testing, and possibly in future production models.
In October 1995, the Company entered into a non-compete agreement with its only
domestic competitor, SCI. As a result of other sales efforts that were underway,
the exact benefit of the SCI 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 sales, 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, despite the current downturn in order and sales
volumes.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED):
The 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
and 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.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company has been named in a lawsuit which claims that the Company's
product failed to perform when called upon. Preliminary information in
the suit has not established that the Company's product was at fault,
and no detail of the allegations have been provided. The father of a
person who was fatally injured in an ultralight accident has brought
the suit. The Company has filed a response to the suit . 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 March 31, 1998.
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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 May 13, 1998
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