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 DECEMBER 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 __________
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)
(612) 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 X No
---- ----
Number of shares outstanding as of February 12,1999: 5,701,543
------------------
1
2
INDEX
BALLISTIC RECOVERY SYSTEMS, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited). Page
Balance sheets as of December 31, 1998 and September
30, 1998. 3
Statements of operations for the three months ended
December 31, 1998 and 1997. 4
Statements of cash flow for the three months ended
December 31, 1998 and 1997. 5
Notes to financial statements at December 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 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
2
3
PART I FINANCIAL INFORMATION - Item I. Financial Statements
BALLISTIC RECOVERY SYSTEMS, INC.
BALANCE SHEETS
(UNAUDITED)
December 30, September 30,
ASSETS 1998 1998
---- ----
Current assets:
Cash $ 46,875 $ 20,100
Accounts receivable - net of allowance for doubtful
accounts of $2,500 and $12,500, respectively 203,493 401,822
Inventories 297,138 252,713
Deferred tax asset - current portion 25,000 25,000
Prepaid expenses 2,500 3,198
----------- -----------
Total current assets 575,006 702,833
----------- -----------
Furniture, fixtures and leasehold improvements 162,302 160,139
Less accumulated depreciation (87,022) (81,611)
----------- -----------
Furniture, fixtures and leasehold improvements - net 75,280 78,528
----------- -----------
Other assets:
Patents less accumulated amortization of
$8,096 and $7,924, respectively 3,568 3,740
Deferred tax asset - long-term portion 275,000 275,000
Other intangible assets less accumulated amortization
of $5,140 and $5,140, respectively 48,133 46,258
Covenant not to compete less accumulated
amortization of $120,155 and $110,669, respectively 259,283 268,769
----------- -----------
Total other assets 585,984 593,767
----------- -----------
Total assets $ 1,236,270 $ 1,375,128
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 123,066 $ 166,159
Customer deposits 89,874 73,180
Accrued payroll 30,710 48,792
Other accrued liabilities 71,988 65,075
Line-of-credit borrowings 35,884 35,884
Current portion of bank note 13,925 13,566
Current portion of covenant not to compete 24,111 23,460
----------- -----------
Current liabilities 389,558 426,116
----------- -----------
Long-term bank note and covenant, less current portions 243,286 250,770
----------- -----------
Shareholders' equity:
Common stock ($.01 par value; 10,000,000 shares authorized;
4,468,772 issued and outstanding) 56,969 56,969
Additional paid-in capital 2,622,888 2,622,888
Accumulated deficit (2,076,431) (1,981,615)
----------- -----------
Total shareholders' equity 603,426 698,242
----------- -----------
Total liabilities and shareholders' equity $ 1,236,270 $ 1,375,128
=========== ===========
See Notes to Financial Statements.
3
4
BALLISTIC RECOVERY SYSTEMS, INC.
STATEMENTS OF OPERATIONS
For the Three Months Ended December 30, 1998 and 1997
(UNAUDITED)
1998 1997
---- ----
Sales $ 313,514 $ 307,985
Cost of sales 218,933 215,262
----------- -----------
Gross profit 94,581 92,723
Selling, general and administrative 123,578 96,404
Research and development, net 42,457 4,083
----------- -----------
Income (loss) from operations (71,454) (7,764)
Other income (expense):
Interest expense (13,875) (11,244)
Covenant not to compete amortization (9,486) (9,486)
----------- -----------
Net income (loss) ($ 94,815) ($ 28,494)
=========== ===========
Basic earnings (loss) per share ($ 0.02) ($ 0.01)
=========== ===========
Weighted average number of shares outstanding 4,657,469 4,457,718
=========== ===========
Diluted earnings (loss) per share ($ 0.02) ($ 0.01)
=========== ===========
Weighted average number of shares outstanding 4,841,400 5,006,007
=========== ===========
See Notes to Financial Statements.
4
5
BALLISTIC RECOVERY SYSTEMS, INC.
STATEMENTS OF CASH FLOW
Increase (Decrease) in Cash
For the Three Months Ended December 30, 1998 and 1997
(UNAUDITED)
1998 1997
---- ----
Cash flow from operating activity:
Net income (loss) ($ 94,815) ($ 28,494)
Adjustments to reconcile net income to net cash
from operating activity:
Depreciation and amortization 5,583 5,110
Amortization of covenant not to compete 9,486 9,485
Inventory valuation reserve 3,000 3,000
(Increase) decrease in:
Accounts receivable 198,329 45,224
Inventories (47,425) (21,451)
Prepaid expenses 698 (7,425)
Increase (decrease) in:
Accounts payable (43,093) (8,411)
Accrued expenses 5,525 (56,481)
--------- ---------
Net cash from operating activities 37,288 (59,443)
--------- ---------
Cash flow from investing activities:
Investment in other intangible assets (1,875) ---
Capital expenditures (2,163) (675)
--------- ---------
Net cash from investing activities (4,038) (675)
--------- ---------
Cash flow from financing activities:
Principal payments on bank note (2,765) (2,936)
Principal payments on covenant not to compete (3,710) (15,372)
--------- ---------
Net cash from financing activities (6,475) (18,308)
--------- ---------
Increase (decrease) in cash 26,775 (78,426)
Cash - beginning of year 20,100 119,197
--------- ---------
Cash - end of period $ 46,875 $ 40,771
========= =========
See Notes to Financial Statements.
5
6
BALLISTIC RECOVERY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 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 month period ended December 31, 1998
are not necessarily indicative of the results that may be expected for
the year ended September 30, 1999. 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,
1998.
B. INVENTORIES
The components of inventory consist of the following:
12/31/98 09/30/98
-------- --------
Raw materials $213,990 $181,997
Work in process 51,560 43,851
Finished goods 31,588 26,865
-------- --------
Total inventories $297,138 $252,713
======== ========
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. NEW PRODUCT DEVELOPMENT, R&D FUNDING AND INCOME RECOGNITION
The Company has recently completed work under an agreement to receive
research and development funding from a privately held company that has
developed a four-place composite, certified aircraft. This aircraft,
which was successfully certified on October 23, 1998, is the first FAA
certified aircraft to offer one of the Company's recovery systems as
standard equipment. Although there is no assurance that this product
will contribute to the future operations and profitability of the
Company, production of this aircraft is currently underway. First
deliveries, which will include the Company's parachute system, are
expected during the Company's fiscal year 1999. The Company is
currently preparing for production of parachute systems with the first
deliveries expected in April 1999.
6
7
BALLISTIC RECOVERY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
(UNAUDITED)
E. NEW PRODUCT DEVELOPMENT, R&D FUNDING AND INCOME RECOGNITION (CON'T)
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. 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 $549,295 taken as an
offset to expense to date under this project due to the uncertainty of
the future of the project and the future viability of the products to
be developed. In addition, it is the Company's belief that the
establishment of a reserve would have resulted in a misleading
presentation of the research and development costs incurred by the
Company for this project. Any future purchase discounts that will be
earned upon delivery of completed product 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 a period not to exceed 36 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, was for a total of $150,000 and has
been completed during the Company's first quarter of fiscal year 1999.
The purchase order called 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.
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 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% as follows:
7
8
BALLISTIC RECOVERY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 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 amounting to approximately $17,000 and
was reflected as Other Income in the financial statements for the
period ending September 30, 1997. The 4% ten year note calls for
monthly payments of $4,036 (November 1995 to October 2005).
Payments under this agreement are unsecured.
The present value of the Company's obligation under this agreement was
recorded as an intangible asset and is being amortized over ten years
as shown in the accompanying financial statements.
Future payments under this agreement are as follows:
Future Present
Dollars Dollars
------- -------
1999 48,436 23,460
2000 48,436 26,176
2001 48,436 29,204
2002 48,436 32,583
2003 48,436 36,354
Thereafter 56,158 91,535
-------- --------
$298,338 $239,312
======== ========
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 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 8.25% as of September 30, 1998, which computes to a
total interest rate of 10.25%. 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.
8
9
BALLISTIC RECOVERY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
(UNAUDITED)
J. LINE-OF-CREDIT BORROWINGS
Beginning February 24, 1998, the Company was operating under a $150,000
line-of-credit for use in operations. The line-of-credit was
established on an annual renewal basis and is secured by all of the
Company's assets. The latest line-of-credit expires February 28, 1999.
The line calls for a variable interest rate of 2% over the bank's index
rate, currently 10.00%. The previous line-of-credit was for $35,000 and
was in place for the first portion of fiscal year 1998. The Company
expects to renew the line each year following the review of its
financial results and projections with the bank.
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.
During 1998 the Company reduced the valuation allowance relating to the
deferred tax assets to reflect current utilization and to recognize a
deferred tax asset. 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 assess 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
$704,400 is maintained on deferred tax assets which the company has not
determined to be more likely than not realized at this time.
9
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
Business Overview:
The Company has been working diligently over the past several years in an effort
to expand its revenue opportunities beyond the existing sport and recreational
aircraft markets. The sport and recreational markets have been the main stay of
the Company's revenues since the early 1980s, but a review of the financial
statements will show these markets have limited revenue possibilities. With
relatively low volumes, any downturn in the marketplace has a significant impact
on revenues, efficiency and profitability.
October 23, 1998 was a very significant date in the history of the Company. That
was the date that the Cirrus Design SR-20 aircraft received its certification
from the Federal Aviation Administration (FAA). Cirrus Design has agreed to
utilize the Company's product as standard equipment on its aircraft. The receipt
of certification finalized one of the Company's long-standing outside research
and development projects. This project was for a recovery system that is
standard equipment on this new general aviation aircraft. Since the recovery
system will be standard equipment, the Company believes that the introduction of
this aircraft on the market will begin to have a positive impact on the
Company's revenues and profitability during fiscal year 1999. As orders and
production of this aircraft expand, the Company will directly benefit from that
growth. In addition, the Company anticipated being able to expand its product
line to include other general aviation aircraft as the recovery system gains
further market acceptance. No assurance can be given, however, that the Cirrus
Design aircraft will be successful in its initial market acceptance.
Another long-standing outside research and development project is for a research
grant under the SBIR program administered by NASA. Initial development and
testing has been performed with final testing scheduled for completion in the
second quarter of fiscal year 1999. If further development and testing show
promise, the Company will consider further development and testing beyond the
grant period.
Sales and Gross Profit
Sales and gross profit for the current fiscal year quarter were consistent with
those of the prior year. The first quarter of the fiscal year is historically
soft for sales of the Company's products since this is the inactive flying
season around the world for aircraft that use the Company's current product
line. Throughout the prior fiscal year and continuing on into the current fiscal
year, the international markets for the Company's products have been affected by
a number of factors including: (1) the economic unrest in Asia; (2) a strong US
currency that raises the cost of the Company's exports; and (3) increased
competition in Europe. In addition, certain markets may be reaching a saturation
point for the Company's product. The Company has expanded its efforts to improve
international business, but there can be no assurances that these efforts will
produce increased sales for the Company.
Sales in the recreational aircraft market for fiscal year 1999 are expected to
be even or slightly higher than the prior fiscal year as a result of the
Company's efforts to improve international business and an anticipated
improvement in domestic aircraft sales. In addition to recreational market
sales, it is expected that the Company will begin delivery of systems for the
newly certified Cirrus Design SR-20 aircraft. This aircraft utilizes the
Company's parachute system as standard equipment, and production of that
aircraft has begun with first deliveries, which will include the Company's
parachute system, expected in April 1999. The Company has received a purchase
order for the first 100 units. These first 100 units are expected to be
delivered within 12 months from the date of first delivery, which is scheduled
for April 1999. Volume projections and timing of those volumes is uncertain at
this time. Although certified, there can be no assurances that this aircraft
will actually be produced in volumes that will have a material effect on the
Company.
10
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED):
Operating Expenses:
Selling, general and administrative costs were higher in the current fiscal year
as compared to the prior fiscal year as a result of several factors. Legal fees
increased due to the Company's defense against a lawsuit, which was subsequently
dismissed. The Company added personnel in an effort to implement a new
accounting system for the current fiscal year to afford enhanced management of
the Company's finances, sales activities and inventory. In addition, the current
fiscal year quarter reflects pay rate adjustments for sales and administrative
personnel that were implemented at the beginning of the second fiscal quarter of
the prior fiscal year.
Outside funding has offset a portion of research and development costs for both
fiscal years. Net research and development costs were higher in the current
fiscal year as the Company made contributions towards the expenses necessary to
complete development and testing of certain projects. In addition, personnel
added to complete certain outside research and development projects increased
the Company's expenses while funding for those projects was being reduced or had
come to an end. The Company's believes that these added expenses were necessary
to complete its obligations under those projects. All of the outside research
and development projects underway at the end of fiscal year 1998 are expected to
be completed during the Company's fiscal year 1999. The Company will continue to
look for sources for further outside funding of research and development, but
there can be no assurances that the Company will be successful in those efforts.
LIQUIDITY AND CAPITAL RESOURCES:
Management intends to fund all of its continuing operation out of its current
revenues with the exception of its contract research and development projects.
The Company has also established a line-of-credit for use in operations as
required. Management believes that the current business operation is adequate to
support the ongoing operations of the Company during the next twelve-month
period and will maintain and adjust expenses as necessary to improve
profitability. Current contract research and development projects are expected
to be completed during the Company's fiscal year 1999. The Company will continue
to look for sources for contract research and development projects, but there
can be no assurances that the Company will be successful in its efforts.
The Company anticipates a need to make capital improvements to its current
production facility as well as expenditures to increase inventory levels as a
result of the production of general aviation units for the recovery system that
was recently certified. However, 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 recently completed development and testing for a newly certified
general aviation aircraft. With the receipt of certification on October 23,
1998, the Cirrus Design SR-20 aircraft became the first FAA certified aircraft
to offer one of the Company's parachute systems as standard equipment.
Production of the aircraft is currently underway and first deliveries, which
will include the Company's parachute system, are expected to begin in April
1999. 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.
One of the Company's ongoing projects is the 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 and is scheduled to be completed during the second quarter of fiscal
year 1999.
11
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED):
Another 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 was completed during the first quarter of fiscal year 1999. The
purchase order called for the development and delivery of a series of recovery
devices both for use in testing, and possibly in future production models.
The Private Securities Litigation Reform Act of 1995 provides "safe harbor" for
forward-looking statements. Certain information included in this Form 10-KSB and
other materials filed or to be filed by the Company with the Securities and
Exchange Commission (as well as information included in oral statements or other
written statements made or to be made by the Company) contain statements that
are forward-looking, such as statements relating to plans for research projects,
anticipated Cirrus delivery schedules, other business development activities as
well as other capital spending, financial sources, the effects of competition
and resolution of any Year 2000 issues. Such forward-looking information
involves important risks and uncertainties that could significantly affect
anticipated results in the future and, accordingly, such results may differ from
those expressed in any forward-looking statements made by or on behalf of the
Company. These risks and uncertainties include, but are not limited to, the
elimination of funding for new research and development projects, the decline in
unregistered aircraft sales, potential product liability claims, dependence on
discretionary consumer spending, dependence on existing management, general
economic conditions, changes in federal or state laws or regulations.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company was named in a lawsuit based on the crash of an ultralight
aircraft. The Company was released from the lawsuit during the current
fiscal year quarter. The Company believes that there is no potential
for further liability in this matter.
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, 1998.
12
13
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 12, 1999
13