PROSPECTUS SUMMARY
This summary provides a brief overview of the key
aspects of this offering. Because it is
only a summary, it does not contain all of the detailed information contained
elsewhere in this prospectus or included as exhibits to the registration
statement that contains this prospectus.
This summary may not contain all of the information that may be
important to you. We urge you to read
this entire prospectus carefully, including the risks of investing in our
common stock discussed under “Risk Factors” and the consolidated financial
statements and other information contained elsewhere in this prospectus, before
making an investment decision. All
references in this prospectus to “BRS”, “we”, “us”, “our” or “our Company”
refer to Ballistic Recovery Systems, Inc. and its consolidated subsidiary.
The Company
Ballistic Recovery Systems,
Inc. (Ticker: “BRSI.OB”) is one of the leading aviation safety companies in the
United States. Founded in 1980 and based in South St. Paul, Minnesota, we
are engaged in the business of developing and commercializing whole-aircraft
emergency recovery parachute systems for use primarily with general aviation
and recreational aircraft.
The parachute systems are
designed to safely descend the entire aircraft and its occupants in the event
of an in-air emergency. The parachute system is designed for in-air
emergencies that include mid-air collisions, structure failure, engine failure,
pilot incapacitation, and unstable meteorological conditions, among other things.
We believe we are the largest manufacturer of whole aircraft recovery systems
in the world. Since our inception 26 years ago, we have delivered over
27,000 systems that have been installed on general aviation aircraft (including
over 3,500 on Federal Aviation Administration (FAA) certified aircraft) and
recreational aircraft throughout the world.
To date, we have been credited with saving the lives of 205 pilots and
passengers.
Our principal
office is located at 300 Airport Road,
South St. Paul, Minnesota 55075-3541.
Our telephone number is (651) 457-7491and
our internet address is www.brsparachutes.com.
Our common stock trades at the Over-the-Counter Bulletin Board under the
symbol “BRSI.OB”.
Recent Developments
On
June 25, 2007, we completed a private placement offering to CIMSA Ingenieria de
Sistemas, S.A., a Spanish company, of 1,102,941 shares of our common stock and
a three-year warrant to acquire up to 275,735 shares of our common stock at
$2.00 per share. We received gross
proceeds of $1,500,000 in the offering.
We did not engage a placement agent or broker in connection with the
transaction. We have agreed to register
the resale of the common stock, including the common stock issuable upon
exercise of the warrants issued in the offering.
Pursuant to the terms of the securities purchase
agreement entered into with CIMSA, we appointed Fernando Caralt, the President,
Chief Executive Officer and a director of CIMSA, to our board of directors on
June 25, 2007.
Risk Factors
An investment in the shares
of our common stock involves a high degree of risk and may not be an
appropriate investment for persons who cannot afford to lose their entire
investment. For a discussion of some of
the risks you should consider before purchasing shares of our common stock, you
are urged to carefully review and consider the section entitled “Risk Factors”
beginning on page 3 of this prospectus.
1
The Offering
The selling shareholders
identified on page 37 of this prospectus are offering on a resale basis a total
of 1,490,676 shares of our common stock, including 275,735 shares issuable upon
the exercise of outstanding warrants.
For a complete description of the terms and conditions of our common
stock, you are referred to the section in this prospectus entitled “Description
of Capital Stock.”
|
Common stock offered
|
|
1,490,676
shares
|
|
|
|
|
|
|
|
Common stock
outstanding before the offering (1)
|
|
11,304,767
shares
|
|
|
|
|
|
|
|
Common stock
outstanding after the offering (2)
|
|
11,580,502
shares
|
|
|
|
|
|
|
|
Common stock OTCBB
trading symbol
|
|
BRSI.OB
|
|
(1)
Based on the number of shares outstanding as
of September 14, 2007, but not including 978,894 shares issuable upon exercise
of outstanding warrants to purchase our common stock and 45,000 shares issuable
upon the exercise of outstanding options to purchase our common stock not
covered under this registration statement.
(2)
Assumes the issuance of all shares of common
stock offered hereby that are issuable upon exercise of warrants covered under
this registration statement.
2
RISK FACTORS
The
purchase of shares of our common stock is very speculative and involves a very
high degree of risk. An investment in
our company is suitable only for the persons who can afford the loss of their
entire investment. Accordingly, investors
should carefully consider the following risk factors, as well as other
information set forth herein, in making an investment decision with respect to
our common stock
.
Risks relating to our business
General
economic conditions may adversely affect our sales and profitability.
For
the most part, purchases of the aircraft for which our products exist are
discretionary. Additionally, a
significant portion of our business relates to products that are optional, and
not standard equipment, on aircraft. As
a result, demand for our products may be affected by general economic trends in
the geographical areas in which our products are sold, which may have an
adverse effect on our operations.
We rely on the knowledge and business and technical
expertise of key executive officers and directors, whose services would be
difficult to replace
.
We are highly dependent on our executive officers and
directors for their substantial experience in the aviation industry. Other than for our chief executive officer,
we do not carry “key person” life insurance policies for any of our officers or
directors. The loss of the technical
knowledge and management and industry expertise of any of these key individuals
could result in delays in product development, loss of customers and sales and
diversion of management resources, which could adversely affect our operating
results.
If we fail to comply with FAA standards, or if
those standards change, our business may be negatively impacted.
The aviation industry is
highly regulated in the United States by the Federal Aviation Administration,
and in other countries by similar agencies, to ensure that aviation products
and services meet stringent safety and performance standards. Additionally,
these standards and the related aircraft regulations may evolve over time. With respect to our general
aviation
products, we are required to obtain
certifications from the FAA, the scope of which are dependent upon whether our
product is optional or standard equipment in the related aircraft. Our business depends on our ability to keep
effective existing certifications and obtain necessary certifications in the
future, whether for our general aviation products or other products. We cannot assure that we will continue to
have success in obtaining or maintaining necessary certifications, and our
failure to do so could adversely affect our operations.
Cirrus
represents a substantial amount of our revenues.
During
our fiscal years ended September 30, 2006 and 2005, Cirrus Design Corporation
accounted for approximately 70.7% and 74.0% of our revenues, respectively. Additionally, for the nine months ended June
30, 2007 and 2006, Cirrus accounted for 75.1% and 70% of our revenues,
respectively. Although our growth
strategy contemplates diversification of our sales to manufacturers other than
Cirrus, we anticipate that we will continue to be dependent upon Cirrus for a
large portion of revenues for at least the near future. To the extent that Cirrus’ business declines,
Cirrus utilizes other suppliers of parachute recovery systems, or payments from
Cirrus are delayed, our business, including our cash flow from operations, may
be materially adversely affected.
3
Cirrus owns a significant portion of our
outstanding voting power and of our outstanding common stock and has a director
on our board of directors.
As of September 14, 2007, Cirrus currently owns
approximately 10.2% of our outstanding common stock. Furthermore, a director of Cirrus, Edward
Underwood, is on our board of directors.
While Cirrus does not have any warrants, preemptive rights or rights to
additional securities and while Mr. Underwood does not have a contractual right
to be on our board of directors, the voting power held by Cirrus, together with
Mr. Underwood’s position on the board, enables Cirrus to exert considerable
influence over our management and direction and all matters requiring
shareholder approval. Additionally, the
composition of our board could impact our ability to obtain additional non-Cirrus
general aviation customers.
The board of directors and management team own a significant amount of
our common stock.
As
of September 14, 2007, our board of directors and management team held
approximately 34% of our shares, on a fully-diluted basis assuming the exercise
or conversion of all outstanding derivative securities held by them. This percentage includes 1,102,941 shares of
common stock and 275,735 shares of common stock issuable upon exercise of a
warrant held by CIMSA Ingenieria de Sistemas, S.A., of which Fernando Caralt,
one of our directors, is the President, Chief Executive Officer and a
director. This amount does not include
the 11.3% of our outstanding common stock owned by Cirrus, of which Mr.
Underwood is a director. In addition to
the significant control these individuals have over our operations and affairs
by nature of their membership on our board, these individuals collectively
exert a significant voting power as shareholders.
We do not have products liability insurance or
indemnification rights with respect to certain current Cirrus-related products
liability litigation.
We are involved in products liability litigation
involving Cirrus aircraft (see “Description of Business -
Legal
Proceedings
” on page 24).
Although one such matter, the Sedgwick/Fischer litigation, was settled
without any liability of damages against us, additional products liability
litigation exists for which we have no indemnification or insurance. In February 2006, Cirrus agreed to indemnify
us for all related product liability claims involving our parachute system on
general aviation with Cirrus (except for claims for economic losses or damage
related solely to the aircraft). While
we believe our existing litigation will not result in any liability to us and
that our current arrangement with Cirrus protects us from additional claims,
there can be no assurance that we are protected from a unfavorable outcome on
existing claims relating to our general aviation relating to Cirrus.
We do not currently have products liability
insurance for our non-Cirrus general aviation or recreational aviation markets.
We have been and may continue in the future to be
involved in products liability litigation involving non-Cirrus general aviation
aircraft and recreational aircraft (see “Description of Business -
Legal Proceedings
” on page 24). We do not currently maintain insurance for
products liability litigation for our non-Cirrus products. Although we are currently contemplating
obtaining products liability insurance for non-Cirrus general aviation products
liability litigation, no assurance can be given that we will decide to obtain
such coverage or that such coverage will be available at terms we believe
reasonable. Even if we do obtain such
coverage, we do not have insurance coverage for such existing liability, if
any, or any non-Cirrus general aviation products liability litigation that
would not be covered by such insurance coverage. Although we are confident that we will be
successful in existing litigation, an unexpected negative result in such litigation
could have a material adverse effect on us and our operations.
4
Furthermore, we do not expect to obtain products
liability insurance for our recreational aviation market. Historically, we have been successful in
settling such claims for a minimal and non-material amount of funds. However, any adverse judgment or settlement
in a products liability litigation involving recreational aircraft could have a
materially adverse effect on us and our operations.
Risks relating to our common
stock
The limited trading of our common stock may make it
difficult to sell shares of our common stock.
Trading of our common stock
is conducted on the National Association of Securities Dealers’
Over-the-Counter Bulletin Board, or “OTC Bulletin Board.” This has an adverse effect
on the liquidity of our common stock, not only in terms of the number of shares
that can be bought and sold at a given price, but also through delays in the
timing of transactions and reduction in security analysts’ and the media’s
coverage of BRS. This may result in lower prices for our common stock than
might otherwise be obtained and could also result in a larger spread between
the bid and asked prices for our common stock.
The resale of shares offered by this prospectus could
adversely affect the market price of our common stock in the public market,
which result would in turn negatively affect our ability to raise additional
equity capital
.
The sale, or availability for sale, of common stock in
the public market pursuant to this prospectus may adversely affect the
prevailing market price of our common stock and may impair our ability to raise
additional capital by selling equity or equity-linked securities. This prospectus covers the resale of a
significant number of shares of our common stock. In fact, the registration
statement will make publicly available for resale
1,490,676 shares of our common stock
(including shares of common stock issuable upon the exercise of warrants that
are registered hereunder). This figure represents approximately 70% of the
shares of our common stock outstanding immediately after the effectiveness of
this registration statement (assuming the exercise of the warrants for which
the underlying common stock is registered hereunder).
When the registration statement that includes this
prospectus is declared effective,
1,490,676 shares being offered hereby will be available for
resale. Additionally, we currently have effective a prospectus (SEC File No.
333-140841) relating to the resale of an aggregate of 3,060,955 shares of our
common stock (including shares of common stock issuable upon the exercise of
warrants). The resale of a substantial
number of shares of our common stock in the public market pursuant to this
offering and our other effective resale prospectus, and afterwards, could
adversely affect the market price for our common stock and make it more
difficult for you to sell our shares at times and prices that you feel are
appropriate. Furthermore, we expect that, because there is a large number of
shares offered hereby, the selling shareholders will continue to offer shares
covered by this prospectus for a significant period of time, the precise
duration of which we cannot predict. Accordingly, the adverse market and price
pressures resulting from this offering may continue for an extended period of
time and continued negative pressure on the market price of our common stock
could have a material adverse effect on our ability to raise additional equity
capital.
Our
Articles of Incorporation grants our board of directors the power to designate
and issue additional shares of common and/or preferred stock.
Our authorized capital consists of 50,000,000 shares,
of which 15,000,000 are designated as common stock, par value $.01 per share,
and 35,000,000 are undesignated. Pursuant
to authority granted by our Articles of Incorporation, our board of directors,
without any action by the shareholders, may designate and issue, from our
authorized capital, shares in such classes or series (including classes or
series of common stock and/or preferred stock) as it deems appropriate and
establish the rights, preferences, and privileges of such shares, including
dividends, liquidation and voting rights. The rights
5
of holders of classes or
series of common stock or preferred stock that may be issued could be superior
to the rights of the common stock offered hereby. Our board of directors’ ability to designate
and issue shares could impede or deter an unsolicited tender offer or takeover
proposal. Further, the issuance of additional shares having preferential rights
could adversely affect other rights appurtenant to the shares of common stock
offered hereby. Any such issuances will dilute the percentage of ownership
interest of our shareholders and may dilute our book value.
We are subject to Sarbanes-Oxley and the reporting
requirements of federal securities laws, which can be expensive.
As a public reporting company, we are subject to the
Sarbanes-Oxley Act of 2002, as well as the information and reporting
requirements of the Securities Exchange Act of 1934, as amended, and other
federal securities laws. The costs of compliance with the Sarbanes-Oxley Act
and of preparing and filing annual and quarterly reports, proxy statements and
other information with the SEC, and furnishing audited reports to shareholders,
are significant and may increase in the future.
NOTE REGARDING FORWARD-LOOKING
STATEMENTS
This registration statement contains statements that
are forward-looking in nature, including statements regarding the expectations,
beliefs, intentions or strategies regarding the future. We use words such
as we “expect,” “anticipate,” “believe,” and “intend” and similar expressions
to identify forward-looking statements. Investors should be aware that
actual results may differ materially from our expressed expectations because of
risks and uncertainties inherent in future events, including, but not limited
to, our dependence on Cirrus Design Corporation, potential product liability
claims and payment if such claims are successful, federal transportation rules
and regulation which may negatively impact our ability to ship our products in
a cost efficient manner, the elimination of funding for new research and
development projects, the decline in registered and unregistered aircraft
sales, dependence on discretionary consumer spending, dependence on existing
management, general economic conditions, and changes in federal or state laws
or regulations. Investors should not unduly rely on these forward looking
statements.
We
assume no obligation to update these statements, except as required by law.
6
MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
You should read the following
discussions in conjunction with our consolidated financial statements and
related notes included in this prospectus.
This discussion includes forward-looking statements that involve risk
and uncertainties. As a result of many factors, such as those set forth under “Risk
Factors,” actual results may differ materially from those anticipated in these
forward-looking statements.
Introduction
We derive approximately 82%
of our revenue from contracted sales to aircraft original equipment
manufacturers (“OEMs”). Approximately 10% of our sales are through agents
or representatives throughout the world and approximately 8% of our sales are
through direct sales to aircraft owners. Per unit revenue depends on
various factors, including the discounts given to large OEM customers, the
commissions or discounts given to dealers and the type of product sold.
All individual orders are pre-paid before the order ships.
Results of Operations
Fiscal year ended September 30,
2006 compared to fiscal year ended September 30, 2005
Sales
Total sales increased
$1,076,185, or 13.3%, from $8,115,544 for the year ended September 30, 2005 to
$9,191,729 for the year ended September 30, 2006. Sales from our general
aviation products, which consist primarily of sales to Cirrus, increased
$306,257, or 4.8% from $6,328,436 for the year ended September 30, 2005 to
$6,634,693 for the year ended September 30, 2006. Sales from our
general aviation products accounted for 72.2% of total revenue for fiscal year
2006 compared to 78.0% of total sales for fiscal year 2005. Sales from
our recreational and LSA products increased $764,666, or 47.0% from $1,627,114
for the year ended September 30, 2005 to $2,391,780 for the year ended
September 30, 2006. Other revenue decreased by $2,661, or -1.7% from
$160,588 for the year ended September 30, 2005 to $157,927 for the year ended
September 30, 2006 due to reductions in shipping and packing charges. The
effect on total revenue caused by the reduction in shipping and packing charges
was more than offset by new sales activity as well as increases in pricing on
direct sales units.
Our general aviation
products are standard equipment on the Cirrus SR20 and SR22 model
aircraft. We delivered 706 and 633 units to Cirrus in fiscal years 2006
and 2005, respectively. We believe that Cirrus has a backlog of aircraft
orders, all of which are required to include our parachute systems. We
understand that Cirrus expects to be able to fill the backlog of firm aircraft
orders during the next 12 months. We also understand that Cirrus is
expected to maintain fiscal year 2006 manufacturing volumes for its aircraft
throughout fiscal year 2007. As a result, we are forecasting flat growth
in 2007 in our general aviation revenues. No assurance can be given that
general aviation revenues will remain as anticipated. Future production
volumes for the Cirrus aircraft, and therefore, our parachute systems, will be
dictated by ultimate market demands for Cirrus’ products. Accordingly, we
are, and will likely be, dependent on Cirrus for a material portion of our
revenues for fiscal year 2007. Any negative impact on Cirrus’ sales would
have a significant negative impact on our revenues.
Near the end of fiscal year
2004, we finalized development of a parachute recovery system for the Cessna
182 model of aircraft, which is called the BRS-182. We received the
Supplemental Type Certificate, or STC, from the FAA in June 2004.
This STC allows the product to be installed on certified Cessna 182 series
aircraft. The first customer delivery and installation was completed in
July 2004. Our sales and marketing efforts resulted in the sale and delivery
of five BRS-182 units during fiscal year 2006. We continue direct sales
and marketing for the BRS-182. No assurances can be made as to the
7
success of sales efforts or if the product will sell
in sufficient volumes to impact our financial performance.
We also have in production
the BRS-172 product for the Cessna 172 model aircraft certified in
July 2002. Our sales and marketing efforts resulted in the sale and
delivery of five BRS-172 units during fiscal year 2006. Although
certified, there can be no assurances that the BRS-172 product will sell in
volumes that will have a material impact on us.
Our recreational and LSA
aircraft product line sales increased by 47.0% during fiscal year 2006 compared
to the prior fiscal year driven mostly by increased sales to Flight Design for
the CT aircraft. LSA and recreational sales accounted for 26.0% of our
revenues for fiscal year 2006 versus 20.1% of our revenues for the prior fiscal
of 2005. The LSA and recreational aircraft products business relies on
customer acceptance of our parachute concept and the existence of installation
designs for light sport and recreational aircraft.
We anticipate being able to
expand our general aviation and recreational product lines to include other
certified and non-certified aircraft as our recovery systems gain further
market acceptance. We are in ongoing discussions with domestic and
foreign general aviation and recreational aircraft companies that have
expressed interest in utilizing certain of our products. These companies
produce both certified and non-certified aircraft. No assurance can be
made as to the future benefits, if any, that we will derive from these
discussions.
We have commenced the
establishment of a repack center which will have the capacity to repack the
parachute systems. Cirrus will be notifying its owners on a systematic
basis of the need to have the parachute system repacked. We anticipate
that we will be the exclusive provider of repacking services on Cirrus
aircraft.
Gross Margin
Gross margin as a percentage
of revenues was 36.2% for fiscal year 2006 compared to 38.3% for fiscal year
2005. The largest factor contributing to this 2.1% reduction in gross
margin was a price reduction for Cirrus associated with increased purchase
quantities. We expect to provide additional pricing reductions to our
larger customers in the future and as a result, the gross margins could be
impacted. However, we have been successful in identifying cost savings
and receiving material cost reductions and will continue to look for further
savings and cost reductions on an ongoing basis. Our objective is to
maintain or improve overall gross margins in the future.
Selling, General and
Administrative
Selling, general and
administrative costs as a percentage of sales were 27.9% for fiscal year 2006
as compared to 29.4% for fiscal year 2005. Administrative costs decreased
in fiscal year 2006 driven by significant reductions in legal expenses, outside
consulting services, and outside labor. We have focused our advertising
and marketing efforts and reduced overall expenditures on advertising space and
marketing services. Director’s fees decreased by $26,029 during fiscal
year 2006. Legal fees decreased $365,428 in fiscal year 2006 compared to
fiscal year 2005 primarily due to legal proceedings noted in Item 3.
Delays in the regulatory requirements under the Sarbanes-Oxley Act have
resulted in a decrease in expenditures by $18,833 for fiscal year 2006.
Management expects selling, general and administrative costs as a percentage of
sales to remain relatively stable going forward.
Research and Development
Research and development
costs were 5.1%, or $465,415, and 4.4%, or $357,702, of sales for fiscal years
2006 and 2005, respectively. Management believes that research and development
is an integral part of the growth strategy for us, and will continue to play an
important role in our success.
8
Therefore, increases in research and development
expenditures are planned for the future in the areas of new product development
and in the expansion of currently developed products for additional
applications. We have budgeted approximately $900,000 for engineering and
2% of net projected sales, or $215,000, for research and development
expenditures for fiscal 2007.
We have undertaken research
and development on potential new products and services including enhancements
to current products. Such efforts may result in future offerings and
model upgrades to existing products. The development efforts are funded
through current operations and it is unclear what impact, if any, these will
have on our future sales or financial performance.
Payroll and Employee
Benefit Expenses
Payroll and employee benefit
expenses increased $190,835, or 11.4%, from $1,669,351 for the year ended
September 30, 2005 to $1,860,186 for the year ended September 30, 2006.
This increase was primarily due to the addition of personnel to respond to
increased business and new markets. However, as a percentage of overall
sales, the payroll and employee benefit expenses decreased by 0.4%, from 20.6%
for the year ended September 30, 2005 to 20.2% for the year ended September 30,
2006. We expect these average labor costs to remain stable in the future.
Depreciation
Depreciation increased
$47,834, or 47.0%, from $101,790 for the year ended September 30, 2005 to
$149,624 for the year ended September 30, 2006, primarily due to addition of
capital equipment for the Mexico operations.
Amortization
Amortization of intangibles
increased by $9,399, or 8.4%, from $112,241 for the year ended September 30,
2005 to $121,640 for the year ended September 30, 2006. This increase was
the result of a full year of amortization in fiscal year 2006 in connections
with the non-compete agreement entered into with Mr. Thomas, our former chief
executive officer, in the first quarter of 2005.
Interest Expense
Interest expense increased
by $107,619, or 436.9%, from $24,630 for the year ended September 30, 2005 to
$132,249 for the year ended September 30, 2006. This increase was caused
by higher debt balances and higher interest rates than historically incurred,
primarily because of the settlement agreement associated with the Parsons
lawsuit. See “DESCRIPTION OF BUSINESS –
Legal Proceedings
” below.
Net Income (Loss) and
Earnings (Loss) per Share
Income (loss) before income
taxes as a percentage of revenues was 0.5% and (21.7%) for fiscal years 2006
and 2005, respectively. On a fully diluted basis, after-tax net income
(loss) of ($1,119,764) for fiscal year 2005 was ($0.15) per share, as compared
to net income of $27,377, which was $0.00, on a fully diluted basis per share
for the 2006 fiscal year.
Nine months ended June 30, 2007 compared to nine months ended June 30,
2006
Sales
Total sales increased $137,872, or 5.6%, from
$2,468,209 for the three months ended June 30, 2006 to $2,606,081 for the three
months ended June 30, 2007. On a year to
date basis, sales increased $208,498, or 3.1%, from $6,691,717 for the nine
months ended June 30, 2006 to $6,900,215 for the nine months ended June 30,
2007. Sales from our general aviation
products, which consist primarily of sales
9
to Cirrus, increased
$178,315, or 9.9% for the third quarter and increased $435,963, or 8.8% year to
date. Sales from our general aviation
products accounted for 76.2% and 78.1% of total revenue for the three and nine
months ended June 30, 2007, respectively, compared to 73.3% and 74.1% for the
three and nine months ended June 30, 2006, respectively. Sales from our recreational and LSA products
decreased $72,366 from $658,669 to $586,303, or 11.0% for the third quarter and
decreased $264,779 from $1,732,953 to $1,468,174, or 15.2% year to date.
Sales of our general aviation products consist largely
of sales to Cirrus where our products are standard equipment on the Cirrus SR20
and SR22 model aircraft. We delivered
504 and 519 units to Cirrus in first three quarters of fiscal years 2007 and
2006, respectively. We believe that
Cirrus has a backlog of aircraft orders, all of which are required to include
our parachute systems. We understand
that Cirrus expects to be able to fill the backlog of firm aircraft orders
during the next 12 months. We also
understand that Cirrus is expected to maintain fiscal year 2006 manufacturing
volumes for its aircraft throughout fiscal year 2007. As a result, we are forecasting flat growth
in fiscal year 2007 in our general aviation revenues. No assurance can be given that general
aviation revenues will remain as anticipated.
Until we become diverse in general aviation, future production volumes for
our parachute systems will be dictated by ultimate market demands for Cirrus’
products. Accordingly, we are, and will
likely be, dependent on Cirrus for a material portion of our revenues for
fiscal year 2007. Any negative impact on
Cirrus’ sales of Cirrus aircraft would have a significant negative impact on
our revenues.
Our recreational and LSA aircraft product line sales
decreased by 15.2% during the first three quarters of fiscal year 2007 compared
to the first three quarters of the prior fiscal year. LSA and recreational sales accounted for
21.3% of our revenues for first three quarters of fiscal year 2007 versus 25.9%
of our revenues for the first three quarters of the prior fiscal year. The LSA and recreational aircraft products
business relies on acceptance of the aircraft by the aviation public, customer
acceptance of our parachute concept and the existence of installation designs
for light sport and recreational aircraft.
We anticipate being able to expand our general
aviation and recreational product lines to include other certified and
non-certified aircraft as our recovery systems gain further market
acceptance. We are in on-going
discussions with domestic and foreign general aviation and recreational
aircraft companies that have expressed interest in utilizing certain of our
products. These companies produce both
certified and non-certified aircraft. No
assurance can be made as to the future benefits, if any, that we will derive
from these discussions. We did recently
announce a relationship with Diamond Aircraft, a manufacturer of a full line of
general aviation aircraft, to develop a parachute system for the 5 seat DA50
Super Star as well as the previously announced Diamond DJet. No assurance can be given that we will enter
into a formal supply agreement with Diamond Aircraft or, if entered into, that
such relationship would be commercially successful. Furthermore, we would not expect to see any
revenues from any such agreement until fiscal year 2009 at the earliest.
We have commenced the establishment of a repack center
which will have the capacity to repack the parachute systems primarily for
Cirrus-related units. Cirrus will be
notifying its owners on a systematic basis of the need to have the parachute
system repacked. We anticipate that we
will be the exclusive provider of repacking services on Cirrus aircraft.
Gross
Operating Margin
Gross operating margin as a percentage of revenues was
37.5% for the third quarter of fiscal year 2007 compared to 33.4% for the
comparative quarter of fiscal year 2006.
On a year to date basis, the gross operating margin was 36.6% and 36.4%
for fiscal years 2007 and 2006, respectively.
Our objective is to maintain or improve overall gross margins in the
future.
10
Selling
, General and Administrative
Selling, general and administrative costs as a
percentage of sales were 28.0% ($729,840) for the third quarter of fiscal year
2007 as compared to 23.4% ($578,574) for the third quarter of fiscal year
2006. On a year to date basis, these
costs were 28.5% ($1,965,981) and 28.6% ($1,912,046) for fiscal years 2007 and
2006, respectively. This net increase
for the first three quarters of $53,935 in selling, general and administrative
costs consisted of a decrease in general and administrative start-up costs for
our Mexico production facility of $266,251, off-set by an increase in insurance
costs associated with the indemnification agreement with Cirrus totaling
$166,286, an increase in Board of Directors fees totaling $53,995, and an
increase in new personnel totaling $102,206.
Prior to February 3, 2006, there were no product liability costs as we
did not maintain product liability insurance on any of our products. The prior year costs associated with the
Mexico operation included relocating operations to a new building, setting up
and production of test products and the testing of those products.
Research and Development
Research and development costs were 6.5% ($170,455)
and 4.8% ($118,916) of sales for the third quarter of fiscal years 2007 and
2006, respectively. On a year to date
basis, these costs were 5.8% ($402,470) and 5.5% ($366,560) of sales for fiscal
years 2007 and 2006, respectively. This
increase is due primarily to increased product development in connection with
new product lines. Increases in research
and development expenditures are planned for the future in the areas of new
product development and in the expansion of currently developed products for
additional applications.
We have undertaken research and development on
potential new products and services including enhancements to current
products. Such efforts may result in
future offerings and model upgrades to existing products. The development efforts are funded through
current operations and it is unclear what impact, if any, these will have on
our future sales or financial performance.
Acquisitions
As part of our overall growth strategy, it is
management’s intent to seek out, evaluate and execute strategic acquisitions to
grow the product base and integrate operations with the primary focus on cost
savings and product diversification.
Management cannot state at this point with any degree of certainty what
the results of any future acquisitions may be or the financial impact on our
operations.
Intangible Amortization
We record amortization expense related to the covenant
not to compete agreements entered into with SCI and Mr. Thomas over the
remaining life of the agreements.
Intangible amortization expense decreased by $28,197 for the third quarter
of fiscal year 2007 and decreased $75,191 year to date over the same periods in
the prior year due to the completion of the amortization on the covenant not to
compete agreement entered into with Mr. Thomas.
This covenant not to compete became fully amortized in October 2006.
Net
Income
(Loss) and Earnings (Loss) per
Share
Income (loss) before income taxes as a percentage of
revenues was 3.1% and 2.6% for the third quarter of fiscal year 2007 and 2006,
respectively.
Earnings per share were relatively consistent in the
fiscal periods. On a diluted earnings
per share basis, net income of $52,024 for the third quarter of fiscal year
2007 was 2.0% of sales or $0.01 per share, as compared to net income of
$40,122, which was 1.6% of sales or $0.01 per share for the prior fiscal year
quarter.
11
Liquidity and Capital Resources
As of June 30, 2007, we had cash and cash equivalents
of $1,657,802.
On June 22, 2006 and June 23, 2006, we
accepted subscriptions from five of our directors and executive officers
relating to the issuance of 322,956 shares of common stock and warrants to
acquire 16,401 shares of common stock for an aggregate purchase price of
$439,220. The warrants have a three-year term and an exercise price of $2.00
per share and have piggy-back registration rights. We paid no underwriting
discounts or commissions in connection with these sales.
During the third quarter of 2006, 15,000 stock options
were exercised resulting in net proceeds to us of $15,750. During the
second quarter of 2006, 30,000 stock options were exercised resulting in net
proceeds to us of $27,189. In addition, we retired 8,771 shares in the
second quarter of 2006, and the proceeds were used by the individual to
exercise an additional 15,000 stock options.
On August 15, 2007, we entered into a loan agreement with
Anchor Bank Saint Paul, N.A., pursuant to which we obtained a line of credit in
the aggregate principal amount of up to $820,000, subject to certain
limitations. In connection with the loan
agreement, we issued Anchor Bank a promissory note in the aggregate principal
amount of up to $820,000. The note bears
interest at a rate equal to the prime rate, and requires us to make monthly
interest-only payments on the outstanding balance, with a balloon payment of
outstanding principal and interest on April 30, 2008. Our obligations under the note are secured by
our assets. The proceeds of the loan are
to be used for general working capital.
As of June 30, 2007, we had cash and cash equivalents
of $1,657,802. We believe that existing
cash and cash equivalents and cash generated from operations, as well as
borrowing availability under our secured credit facility, will provide
sufficient cash flow to meet working capital, capital expenditure and operating
requirements during the next 12 months.
In closings completed on October 25, 2006, November
22, 2006 and January 10, 2007, we completed a private placement offering to
accredited investors of an aggregate of 508,710 units at a price per unit of
$5.44, each unit consisting of four shares of our common stock and a three-year
warrant to purchase an additional share of common stock at an exercise price of
$2.00 per share. Accordingly, we issued
an aggregate of 2,034,840 shares of common stock and warrants to purchase an
aggregate of 508,710 shares of common stock in the offering, in consideration
of total gross proceeds of $2,767,382, less commissions of approximately
$193,717 paid to The Oak Ridge Financial Services Group, Inc., which served as
a placement agent in the offering. We
further issued to Oak Ridge and its designated subagents three-year warrants to
purchase an aggregate of 178,048 shares of common stock at an exercise price of
$2.00 per share. We registered the
resale of the common stock and the common stock issuable upon exercise of the
warrants and placement agent’s warrants pursuant to a registration statement on
Form SB-2 which became effective on March 23, 2007.
On November 15, 2006, we paid the unpaid principal and
interest outstanding of $721,143 on the first note payable to Parsons and
Aerospace Marketing and paid $5,000 towards unpaid principal on the second note
payable to Parsons and Aerospace Marketing, leaving a principal balance payable
of $315,000. On June 17, 2007, we paid
$305,000 in satisfaction of the remaining balance.
On June 25, 2007, we issued 1,102,941 shares of common
stock and a warrant to purchase up to an additional 275,735 shares of common
stock to CIMSA Ingenieria de Sistemas, S.A., a Spanish company (“CIMSA”). The warrant has a three-year term and an
exercise price of $2.00 per share. The
warrant is subject to price adjustment and economic anti-dilution features
until December 22, 2007, as well as anti-dilution protection from stock splits
and similar events for the term of the warrant.
We received gross proceeds from the sale of common stock and the warrant
of $1,500,000. We have agreed
12
to register the resale of
the common stock (including the common stock issuable upon exercise of the
warrant). There was no placement agent
involved with this transaction.
We anticipate a need to make continuing capital
improvements of approximately $138,000 during the fiscal year ending September
30, 2007 to our current production facilities in both the US and Mexico and
continued equipment and tooling upgrades.
We do not presently have product liability insurance
on any products other than the Cirrus products and must fund the expenses of
our pending lawsuits. Furthermore, a
significant judgment against us in our existing litigation could have a
material impact. We have incurred approximately
$163,400 in legal fees for the first nine months of fiscal year 2007 and
$220,000 in legal fees for fiscal year 2006 attributable to all legal support
matters and the defense of our pending lawsuits.
In addition, requirements under the Sarbanes-Oxley Act
will require increased expenditures as we implement expanded compliance
infrastructure and oversight.
The Private Securities Litigation Reform Act of 1995
provides a “safe harbor” for forward-looking statements. Certain information included in this
prospectus contains statements that are forward-looking, such as statements
relating to anticipated Cirrus Design delivery orders and schedules, the repack
business, plans for research projects, development, anticipated delivery orders
and schedules for the Cessna 182 system,
the Cessna 172 system, the timing
and impact of regulations on Light Sport Aircraft sales, 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 us or on our behalf. These risks
and uncertainties include, but are not limited to, dependence on Cirrus,
development of Diamond and light jet products, market acceptance of the LSA
products, potential product liability claims and payment if such claims are
successful, federal transportation rules and regulation which may negatively
impact our ability to ship our products in a cost efficient manner, the
elimination of funding for new research and development projects, the decline
in registered and unregistered aircraft sales, dependence on discretionary
consumer spending, dependence on existing management, general economic
conditions, and changes in federal or state laws or regulations.
We expect to decrease inventory during the 2007 fiscal
year and beyond as a result of moving more production into Mexico and
improvements in inventory management. Inventory increased by
approximately $997,000 in fiscal year 2006, due primarily to the addition of
the Mexican facility and increasing the supply on hand of certain key components.
It is our intention to fund expenditures through current operations as well as
revenues generated by sales.
Off-Balance
Sheet Arrangements
During the first three quarters ended June 30, 2007,
we did not engage in any off-balance sheet arrangements as defined in Item
303(c) of Regulation S-B.
Critical
Accounting Policies and Estimates
Our Management Discussion
and Analysis or Plan of Operation is based upon our consolidated financial
statements, which have been prepared in accordance with generally accepted accounting
principles in the United States of America. The preparation of these
consolidated financial statements requires us to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the
consolidated financial statements, the reported amounts of revenues and
expenses during the reporting period, and related disclosures of contingent
assets and liabilities for the periods indicated. The notes to the
consolidated financial statements contained herein describe our significant
accounting
13
policies used in the preparation of the consolidated
financial statements. On an on-going basis, we evaluate our estimates,
including, but not limited to, those related to our allowance for doubtful
accounts, inventory valuation allowance, the lives and continued usefulness of
furniture, fixtures and leasehold improvements and contingencies. Due to
uncertainties, however, it is at least reasonably possible that management’s
estimates will change during the next year, which cannot be estimated. We
base our estimates on historical experience and on various other assumptions
that we believe to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results could
differ from these estimates under different assumptions or conditions.
14
DESCRIPTION OF BUSINESS
Introduction
Ballistic Recovery Systems,
Inc. (Ticker: “BRSI.OB”) is one of the leading aviation safety companies in the
United States. Founded in 1980 and based in South St. Paul, Minnesota, we
are engaged in the business of developing and commercializing whole-aircraft
emergency recovery parachute systems for use primarily with general aviation
and recreational aircraft. We have a
wholly owned subsidiary, BRS de Mexico S.A. de C.V.
The parachute systems are
designed to safely descend the entire aircraft and its occupants in the event
of an in-air emergency. The parachute system is designed for in-air
emergencies that include mid-air collisions, structure failure, engine failure,
pilot incapacitation, and unstable meteorological conditions, among other
things. We believe we are the largest manufacturer of whole aircraft recovery
systems in the world. Since our inception 26 years ago, we have delivered
over 27,000 systems that have been installed on general aviation aircraft
(including over 3,500 on Federal Aviation Administration, or FAA, certified
aircraft) and recreational aircraft throughout the world. To date, we have been credited with saving
the lives of 205 pilots and passengers.
We currently operate in
three market segments that comprise all of our current revenues:
·
General aviation aircraft as certified by the
FAA. The general aviation market is our largest consumer, comprising
approximately 75% of our revenue.
·
Light Sport Aircraft, or LSA, which are
smaller two-seat aircraft. The FAA monitors and regulates this segment
under different regulations and restrictions than the general aviation
aircraft.
·
Recreational aviation (commonly called
ultralight aircraft). The recreational aviation market is the oldest
market segment that we service. Our first products were developed for
this segment over 26 years ago.
In recent years, our growth
has come from our general aviation market, primarily from sales to
Cirrus. We see our future growth coming from the following areas:
·
Expansion of the general aviation market
beyond Cirrus to other general aviation manufacturers;
·
Continued growth in the LSA market;
·
Growth in the emerging VLJ market;
·
Development of the repack market for general
aviation aircraft; and
·
Utilize our manufacturing expertise and
excess capacity for non-aviation cut and sew production in our Mexico production
facility.
We maintain our corporate
headquarters and main manufacturing facility in South St. Paul, Minnesota, on
the grounds of Fleming Field. We also have a facility in Mexico that is
used for manufacturing parachutes for BRS products. We employ 181 people
between our operations in Minnesota and our parachute manufacturing facility in
Mexico.
15
Our
Business
Principal Products
Our principal products are
whole-aircraft emergency parachute recovery systems. Each product, when
utilized in an in-air emergency and at the appropriate altitude, may be
activated by the pilot releasing a parachute that is designed to open quickly,
slow the descent of the aircraft, and lower the aircraft and its occupants
safely to the ground to prevent or reduce injury and damage to the aircraft.
Possible parachute usage scenarios include: mid-air collision (loss of
integrity or control); severe weather upset (wind shear, turbulence); power
loss with poor visibility (night or instrument flight conditions); loss of control
(component failure or malfunction); engine out over hostile (unlandable)
terrain; structural failure (age-weakened parts); pilot medical trauma (heart
attack, allergic reaction, stroke); overstress (violent weather); and/or pilot
error.
General Aviation Market
Our general aviation product
line relates to products for inclusion on FAA certified aircraft through either
a Type Certificate, or TC, or a Supplemental Type Certificate, or STC. We entered the general aviation market in the
mid 1980’s when we developed an emergency parachute recovery system for the
Cessna 150/152 series of aircraft. In 1993, this system, known as the
GARD-150 (now called the “BRS-150”), received a STC from the FAA that allowed
owners of Cessna 150/152 model aircraft to install the system into their
aircraft. Media attention for this new product resulted in domestic and
international television and radio broadcasts as well as coverage in domestic
and international aviation and non-aviation print media. Although the BRS-150 did
not sell in significant volumes, we believe that it helped in the development
of our current products.
In fiscal year 2006, our
general aviation product lines accounted for approximately 74% of our
revenues. According to the General Aviation Manufacturers Association, or
GAMA, the general aviation market experienced 27% growth in
2005. Our primary general aviation product has been used on
the Cirrus SR20 and SR22 aircraft manufactured by Cirrus Design
Corporation. For fiscal year 2006, sales to Cirrus accounted for
approximately 70.7% of our revenues. One of our growth strategies
addresses customer concentration by pursuing more general aviation business
from other manufacturers.
Cirrus Design Corporation
Cirrus,
which is b
ased in Duluth,
Minnesota, is presently the world’s largest manufacturer of single engine
4-seat certified aircraft, according to GAMA reports. Both models of
Cirrus aircraft utilize our parachute system as
required
standard
equipment.
We entered into an agreement
with Cirrus Design Corporation, or Cirrus, in 1994 to develop and certify a
four-place all composite general aviation aircraft. The FAA certified the
aircraft, known as the Cirrus Design SR20, in October 1998. One thing
that made the SR20 unique was that it was the first FAA certified aircraft to
offer one of our recovery systems as required standard equipment. As
standard equipment, our parachute is included in the aircraft’s Type
Certificate, or TC, issued by the FAA (for more information on the TC, please
see the section entitled “Government Regulation” on pages 21-22. We began delivering systems for the SR20 in
fiscal year 1999. During fiscal year 2000, Cirrus began development and
certification efforts for their next generation aircraft called the SR22.
The SR22 is a heavier and faster version of the SR20 and utilizes much of the
same parachute technology developed for the SR20. The SR22 received a TC
in November 2000 and was certified with our parachute system as a standard
component of the aircraft. Deliveries of SR22 parachute systems by us
began in December 2000. Cirrus continues
to make enhancements and advancements to both the SR20 and SR22 and has new
aircraft designs currently under development. We intend to approach
Cirrus regarding the use of our
16
product in such new aircraft, and anticipates that
our products will continue to be offered on Cirrus aircraft as standard
equipment.
We currently operate under a
Purchase and Supply Agreement with Cirrus, dated as of September 1999 and
amended February 2006, pursuant to which we are the non-exclusive supplier of
the parachute recovery system to Cirrus. The current term of the
agreement expires in January 2009, subject to rolling automatic renewal terms
of 18 months unless either party terminates with 18 months advance
notice. The recent amendment to this agreement also provides that Cirrus
will maintain product liability insurance on the parachute system whose
components are directly or indirectly supplied by us. Additionally,
Cirrus has agreed to indemnify us for all related product liability claims
involving our parachute system (except for claims for economic losses or damage
related solely to the aircraft). The agreement also gives Cirrus limited
exclusivity for an increased gross weight (3,600 pound) system for a period of
one year after introduction.
Sales of Cirrus aircraft
have recently flourished, with 600 aircraft shipped in 2005, an increase of
approximately 8.5% over the 553 aircraft shipped by Cirrus in 2004. In
2004, Cirrus became the leading US based manufacturer of general aviation
aircraft, passing longtime industry leaders such as Cessna, Piper and
Mooney. According to GAMA, Cirrus is the market leader in high
performance, single-engine piston, four-place airplanes.
Other General Aviation Products
In addition to our
relationship with Cirrus, we develop and sell aftermarket FAA certified
parachute systems for the Cessna 172 and 182 aircraft. Our systems for
the Cessna aircraft are optional equipment, requiring us to obtain from the FAA
a Supplemental Type Certificate, or STC.
An STC allows the installation of the product without requiring the
presence of the product for operation of the aircraft (for more information on
the STC, please see the section entitled “
Government Regulation
”
on pages 21-22).
In fiscal year 2001, we
began development of a parachute system for the Cessna 172 model
aircraft. During fiscal year 2001, we received $200,000 in funding from a
third party investor, which took the form of equity and project specific funding,
to develop and test such a recovery system. The development and testing
was completed in fiscal year 2002 and we received FAA certification for the
BRS-172 recovery system in July 2002. We made our first customer delivery
in September 2002 with 19 total systems installed through the end of fiscal
year 2006.
Near the end of fiscal year
2004, we finalized development of a parachute recovery system for the Cessna
182 model aircraft, which is called the BRS-182. The system utilizes many
of the same components used in the recovery systems for the Cirrus aircraft
models and the Cessna 172. We received the Supplemental Type Certificate
or STC from the FAA in June 2004, allowing the product to be installed on
certified Cessna 182 series aircraft. The first customer delivery and
installation was completed in July 2004. A total of 54 Cessna units have
been sold to date, of which 24 were sold in the last two years.
These products are primarily
sold by our sales staff directly to Cessna aircraft owners. According to
GAMA, Cessna delivered 736 Cessna 182 and 172 units in fiscal year 2006
compared to 710 Cessna 182 and 172 units in fiscal year 2005.
We continue to explore
opportunities to have our products be standard certified equipment or a factory
installed option with several other general aviation manufacturers.
17
Light Sport Aircraft
Market/Recreational Market
In fiscal year 2006, our
recreational product lines accounted for approximately 26% of our
revenues. Recreational aviation products include products designed and
manufactured for use on unregistered aircraft (such as ultralights) and
aircraft registered with the FAA as experimental. Like our general
aviation products, these recreational aviation products are designed to prevent
or reduce human injury and damage to the aircraft in the event of an in-air
emergency.
We manufacture these
products and sell direct and through dealers and distributors who also market
and sell the aircraft and related products. We currently work with
approximately 30 dealers and distributors worldwide. Sales to international customers accounted
for approximately 47.5% of our recreational aviation product sales in 2006.
A portion of the
recreational market is the light sport aircraft market segment. LSA are smaller two-seat aircraft, and are
the result of federal regulations enacted in December 2004 relating to light
sport aircraft. These regulations are
less onerous than those relating to general aviation and made recreational
flying more affordable, as they allow pilots to obtain sport pilot
certification at significantly less expense, in terms of time and cost, and
generally simplify the certification process.
LSA aircraft resemble traditional two-seat general aviation aircraft, but
weigh less than 1,320 pounds, and aircraft kit prices start as low as
$20,000. The FAA has projected this market to be over 3,000 aircraft in
the next 2-3 years. We believe there is significant market potential for
LSA aircraft where our products would be offered as either standard equipment
or a factory option.
Management believes that
these lesser restrictions may have a positive effect on the LSA market in the
United States, and that we will have a significant market opportunity if we can
develop and manufacture compatible products. The LSA market currently has
57 approved airplane types and we are in development of designs and have orders
to develop parachute recovery systems for 13 of these aircraft types.
Many of the existing LSA aircraft were developed around existing European
designs, some of which, but not all, utilize our products. We have
developed solid relationships with US-based distributors and manufacturers of
LSA aircraft, such as Flight Star and Sport Aircraft Works. We have contracted with Flight Design CT of
Germany to have our products as standard equipment on every plane delivered in
the United States. We continue to
attempt to develop contacts in this market to further expand our LSA product
business. While we are optimistic that
the LSA market will continue to develop, no assurance can be given that our
products will be successfully marketed within the LSA market.
We delivered 87 LSA units in
fiscal year 2006.
Very Light Jet Market
The newest market segment,
and one in which the industry and we believe has great potential, is the VLJ
market. VLJs are being developed by several general aviation
manufacturers, including Cirrus, Piper and Diamond (as identified below).
A VLJ is a smaller version of a larger jet that, in general, seats up to five
persons, weighs less than 10,000 pounds (maximum take off weight) and will
retail for between $1,000,000 and $2,500,000. This market is designed to
be the transition from high performance piston and turbo-charged aircraft to a
jet which is easy to fly and more affordable than their costlier
counterparts. According to published reports, nearly 3,000 VLJ orders are
on the books of manufacturers, including a backlog of 123 single Diamond
D-Jets.
In November 2005, Cirrus
announced that it intended to design a new “personal jet,” and that it intended
to include a parachute on this model as standard equipment. We are in discussion with Cirrus about the
possibility of including our products on its proposed personal jet.
18
In July 2006, the Diamond
Aircraft Industries, or Diamond, a London, Ontario based manufacturer of
general aviation and light jet aircraft announced that a parachute would be an
option on the newly announced D-JET. We have not entered into a
definitive agreement with Diamond, but intend to do so. Our current
working arrangement with Diamond is that we will be the exclusive supplier of
any parachute system used on a Diamond D-JET aircraft, and that our system
would be offered as a factory option. We intend to be free to supply
other light jet manufacturers during the term of any agreement.
In July 2007, we entered
into an agreement with Epic Aircraft, a Bend, Oregon based aircraft
manufacturer, to install our parachutes on board Epic’s new Victory jet, a
single-engine, all composite VLJ which will carry 4-5 passengers.
All single-engine VLJ
manufacturers known to us have expressed some interest in including a whole
airplane emergency recovery parachute as either standard equipment or an
option. We intend to continue discussions with some or all of these
manufacturers, and believe the VLJ market provides a significant market
opportunity to us.
Repack Market
All of our parachute
recovery systems require repack, or refurbishment, for continued service.
The average refurbishment cycle on recreational aircraft is six years, and ten
years for general aviation aircraft. On FAA certified Cirrus aircraft,
our parachute assembly must be repacked at ten-year intervals in order to
maintain its airworthiness certificate. The repack entails:
a)
replacement of the extraction rocket;
b)
inspection of the parachute assembly
including replacement of certain time change items and other parts that have
reached the end of their service life; and
c)
repacking of the parachute.
If the product is not repacked in accordance with
the FAA regulations, any aircraft to which it is required equipment will not
retain its certification of airworthiness. We expect that the repack
business may become a substantial business line as all Cirrus aircraft are
required to have the parachute repacked in ten-year intervals. We believe that we are the only company
currently positioned to provide repack services.
Non-Aviation and Department of
Defense Market
We are actively seeking new
non-aviation product lines from a variety of safety-related firms to manufacture
in our Mexican facility of a “cut-and-sew” nature. These opportunities require
high quality, precise assembly processes in a customizable and quick-change
environment. Our Tijuana facility fulfills these requirements precisely
with our trained and highly skilled workforce familiar with sewing techniques
which can translate seamlessly to these diversified product lines. We are
currently finalizing plans with three such vendors for “build-to-print”
activities requiring high quality standards, yet with quick-reaction-time
ability to conform to end-user specific desires. We expect these
contracts will reach approximately 10% of total sales revenues within the next
two years.
We are actively seeking
opportunities to incorporate our parachute recovery systems aboard current and
future planned aerial combat systems (both unmanned and manned) for the United
States Department of Defense and similar foreign agencies. A number of inquires have been made within
the industry, and we are preparing proposals to compete for these. We
have also partnered with a domestic original equipment manufacturer, or OEM,
desiring to sell its newly developed single-engine piston aircraft as a
replacement basic trainer for the United States Air Force and United States
Navy whereby
19
each aircraft would have our parachute recovery
systems installed as standard equipment in lieu of individual ejection seats or
personnel parachutes.
Manufacturing
Parachute Manufacturing
Our products are primarily
assembled in our South St. Paul, Minnesota facility from components
manufactured by us or supplied by third parties. In September 2005, we
acquired the manufacturing facility of Paranetics Technology, Inc., located in
Tijuana, Mexico, for the purpose of manufacturing parachutes and related components
for our general aviation and recreational market segments. We currently
have two recreational product lines produced in our Mexico facility, and intend
to manufacture approximately 70% of our total parachute production in Mexico
commencing in fiscal year 2008.
We also outsource some
parachute component manufacturing in China. We estimate that a portion of
the parachute manufacturing (up to 30%) will be completed in China by the end
of fiscal year 2008. This outsourcing is expected to provide us with cost
reductions and a dual source for our parachute needs.
Other Components
We manufacture our own
ballistic devices and currently receive our rocket propellant from a single
source. During fiscal year 2007, we entered into a supply agreement with a second
manufacturer of rocket propellant. We believe there are alternate sources
for propellant in the event that either source becomes unavailable. Other
components are purchased from a variety of suppliers or internally produced.
We also attempt to hold
reasonable inventory of key components to provide time to secure alternate
suppliers should the need arise.
Patents
and Intellectual Property
It is our policy to actively
seek to obtain, where appropriate, the broadest protection possible for our
products, proprietary information and proprietary technology through a
combination of contractual arrangements and patents, both in the United States
and elsewhere in the world.
We also depend upon the
skills, knowledge and experience of our personnel, some of which may not be
patentable. To help protect our proprietary know-how which is not
patentable, and for inventions for which patents may be difficult to enforce,
we rely on trade secret protection and confidentiality agreements. To
this end, as appropriate, we require employees, consultants, and other
contractors to enter into confidentiality agreements which prohibit the
disclosure of confidential information and, where applicable, require
disclosure and assignment to us of the ideas, developments, discoveries and
inventions important to our business.
To date, we have not been
involved in any patent infringement or trade secret actions.
Patents
We currently hold two filed
patents: 1) a patent relating to a “Parachute Reefing Device,” also known
as the “slider,” and 2) a patent related to “thin film parachute fibers.”
The patent relating to the slider (United States Patent No. 4,863,119), a
device that delays the deployment of the parachute until the aircraft slows to
an appropriate speed, was issued in September 1989 on behalf of two of our
employees and expires in September 2008. The two employees assigned the
patent to us, for which we are required to make continuing payment of
maintenance fees until September 2008. The slider is currently utilized
in our general aviation line, as well as in our recreational aviation
products. Current development projects
20
also utilize the reefing device as an integral
design component. We do not believe that the expiration of this patent
will have a material adverse impact on us or our products.
The second patent, Patent
No. 6,056,241, was issued to us in May 2000 on behalf of one of our employees
for a “Thin Film Parachute with Continuous Lateral Reinforcement Fibers.” The
employee assigned the patent to us, for which we are required to make
continuing payment of maintenance fees until August 2018. We developed this
process as a result of a NASA Small Business Innovative Research grant program
that was completed during the fiscal year 1999. Military and civilian markets are
both being explored for potential applications of this technology, which.
This patent is not actively utilized in our technology.
We further anticipate
obtaining patent protection for components to one or more of our VLJ products
that are currently in development.
Trademark Protection
The U.S. Trademark Office
has acknowledged trademark of our service mark, principle register of “DEFINING
AVIATION SAFETY” application, and advises that the application has been
assigned on October 10, 2006, bearing Registration No. 3,152,604.
Government
Regulation
In the general aviation
market, some aircraft are FAA certified. As it relates to FAA certified
general aviation aircraft and the incorporation of our products into these
aircraft, there are two types of certifications that are available, a Type
Certificate, or TC, and a Supplemental Type Certificate, or STC. With
respect to the Cirrus SR20 and SR22, Cirrus obtained a TC, whereby Cirrus
obtained FAA certification of the Cirrus aircraft with the inclusion of our
parachute recovery system — effectively making our product required standard
equipment for the Cirrus aircraft.
The STC is a certification
that is obtained to constitute FAA approval of a modification to an already
certified aircraft. For example, we obtain an STC to include our
parachute recovery system onto an aircraft that has already obtained a Type
Certificate without our product. This STC enables the manufacturer or any
distributor of the aircraft to sell our product as an option. We have previously
obtained STCs for the Cessna 150/152, the Cessna 172, the Cessna 182, and more
recently, the Symphony 160.
Our LSA products are
manufactured in accordance to the Standard Specification for Airframe Emergency
Parachutes for Light Sport Aircraft, Designation No. F2316-03 of the American
Society of Testing and Materials (ASTM).
Under this process, we self-certify and test our LSA products under the
ASTM standard, and there is no separate certification process by the FAA. The FAA does retain the authority to audit
our certification process and testing.
With respect to our products
manufactured for use in foreign countries, we are subject to the regulations of
the respective foreign governments. The
FAA currently has in place bilateral agreements with a number of these foreign
governments permitting certifications completed by the FAA to satisfy the
regulatory compliance relating to such foreign government, provided that the
regulatory requirements are similar in such country. According to the European Aviation Safety
Agency (EASA) (Regulation (EC) No 1592/2002), in the absence of a bilateral
agreement with the European Community directly, the EASA or any of its member
states may continue to issue certificates on the basis of certifications issued
by the FAA in accordance with an existing bilateral agreement between the FAA
and such member state.
The EASA reviewed all the
existing agreements between its member states’ aviation agencies and the FAA.
The result of this comparison showed that all contain similar provisions
related to the
21
acceptance of
certifications. The EASA decided
therefore to apply the most flexible and favorable provisions so as not to
affect previously acquired rights. As a consequence, all certifications for
US-type certificated products are accepted without conditions, and all
certifications for non-US type certificated products are accepted under the
following conditions:
·
they
are not a “critical component”; or
·
they
have been produced under a licensing agreement; or
·
they
have received a specific EASA approval (minor change approval or STC)
In all other cases the EASA
shall examine and issue an approval in accordance with regulations, taking into
account the validation provisions of existing agreements.
Seasonality
Typically, we experience
seasonality in our recreational line. The second and third fiscal
quarters have the highest sales as this product line is marketed to
recreational pilots who tend to fly their aircraft during the warmer months and
equip their aircraft with a recovery system near the beginning of the flying
season. Our expansion in the general aviation market through the
production of systems for the Cirrus SR20 and SR22 has lessened the impact of
seasonality on us. This trend is expected to continue as we increase our
deliveries in the general aviation market over the next several years.
Dealer/Distributor
Network
Our recreational aviation
product sales are primarily through dealers and distributors who sell to the
end consumer. We believe that in the event that any individual dealers or
distributors cease to represent our recreational aviation products, alternative
dealers or distributors can be established. We do not have formal written
agreements with all our dealers and distributors and accordingly, such dealers
and distributors are not prohibited from selling products competitive with our
products.
Backlog
of Orders
As of June 30, 2007 and 2006, we had a backlog of
orders totaling approximately $5,432,350 and $8,875,772, respectively.
The backlogs included over $5,057,350 and $8,470,767 of orders for the Cirrus
aircraft for the respective periods. This increase in backlog is related
to the timing of the receipt of purchase orders from Cirrus with respect to our
fiscal year end and is unrelated to the volume of those orders received or
anticipated on-going volumes from Cirrus. The June 30, 2007 backlog is
expected to be filled within 12 months. Due to the backlog period
involved, however, it is possible that there could be cancellations of a portion
of the currently backlogged orders. We expect to
fund the build out and sale of the backlogged
orders through cash flow provided by the sale of those orders. We caution
investors who may utilize published bookings and backlog information as tools
to forecast our revenue during a given timeframe since certain purchase orders
may be subject to cancellation and/or delivery schedule revision.
Research
and Development
In fiscal year 2006, we
expended approximately $465,415 in research and development, compared to $357,702
expended in fiscal year 2005. Additionally, the BRS board recently
elected to fund an internal Research & Development program that will be
modeled after our recently completed NASA contract. Increases in research and development
expenditures are planned for the future in the areas of new product development
and in the expansion of currently developed products for additional
applications. We expect research and
development costs to exceed $900,000 for fiscal year 2007.
22
We have previously performed
research and development that has been funded by and on behalf of airplane
manufacturers, allowing us to expand our product line and expertise in
whole-aircraft recovery systems. Currently, we have no such contracts, but
it has been and will continue to be a goal of ours to enter into such
relationships and receive outside funding for our research and development
activities to supplement our own financial commitment in research and
development. There is no assurance we will enter into such contracts in
the future.
Competition
As referenced above, the
Cirrus SR20 and SR22 are FAA certified with a TC. These are the first
whole-aircraft recovery systems ever certified by the FAA as standard
equipment. We also hold STCs for the recovery systems for the Cessna
150/152, Cessna 172, Cessna 182 and Symphony 160 model aircraft. There
are no other manufacturers requiring STCs to install a recovery system in the
general aviation market. We are unaware of any other manufacturer
performing contract or self-funded research and development activities
attempting to obtain TCs or STCs for any other FAA certified aircraft. As
such, we believe that any potential competitor in the general aviation market
will have a substantial barrier to entry.
We believe we are the only
manufacturer of whole-craft emergency parachute systems in the general aviation
market and are the only US-based manufacturer in the domestic recreational
aviation market. Currently, we are aware of four foreign competitors in
the international recreational aviation market and the LSA market. One of the foreign competitors has entered
the US market as a standard component on a newly designed LSA airplane.
While data is not publicly available, we believe these competitors are smaller
than BRS.
Competition for the
recreation market is strong in the International market, where purchase
decisions are mainly based on price. We believe we currently have
approximately 80% of the domestic market share of the “sport” market, which consists
of the recreational and LSA markets, and approximately 40% of the International
sport market. We further believe that our acquisition and
implementation of the Mexico facility will enable us to lower the price of our
products, including those in the international market, and make us better able
to compete on a price basis.
Many other companies could
develop, manufacture and market a parachute recovery system competitive with
ours, although we believe that such development and approval could take one or
more years to complete due to the technical challenges associated with
performance and regulatory issues.
Insurance
and Product Liability
As a manufacturer of
products, we have been exposed to products liability litigation on both our
general aviation and recreational products. We historically have not
maintained products liability insurance. We do not intend to pursue
products liability insurance for the recreational market where the number of
incidents have been few and damages minimal. In the past five years, we
have had only two product liability claims relating to the recreational
markets. One of those claims has been settled by us for an immaterial
amount and the other claim is still pending.
Prior to February 2006, we
did not have product liability coverage for any of our products. We
recently obtained products liability coverage for our Cirrus products in our
general aviation market. Pursuant to the Cirrus Supply Agreement amended
in February 2006, Cirrus has agreed to maintain products liability insurance
coverage on the parachute system whose components are directly or indirectly
supplied by us. Additionally, Cirrus has agreed to indemnify us for
losses, for all related product liability claims involving the BRS parachute
system (except for claims for economic losses or damage solely incidental to
the aircraft). This coverage/indemnification is limited to claims arising
after February 2006
23
related to Cirrus aircraft, and will not affect
certain claims for products liability relating to Cirrus aircraft that arose
prior to February 2006. Please see “Legal Proceedings” below for a
discussion of such claims.
With respect to products
liability insurance for other general aviation (i.e., non-Cirrus) products, we
expect to secure such insurance coverage in fiscal year 2007 or early 2008.
Legal
Proceedings
Fisher/Sedgwick
In August 2003, we were served in two related
actions, Kathleen F. Fischer and Susan Sedgwick in U.S. District Court for the
Northern District of New York. These actions arise from the crash of a
Cirrus Design Corp. SR22 airplane in April 2002 near Parish, New
York. The Plaintiffs have brought claims for strict products liability,
negligence and breach of warranty against Cirrus Design, the airplane’s
manufacturer, the company, which manufactures the CAPS (Cirrus Airframe
Parachute System), a parachute system which is a required component of the
plane, and Wings Aloft, Inc., which provided training on the SR22 to the
decedents. In June and August 2006, this
claim was settled with such plaintiffs without any liability to us.
Aerospace Marketing/Parsons
On April 17, 2004,
Aerospace Marketing, Inc.
and Charles Parsons v. Ballistic Recovery Systems, Inc.
, U.S.
District Court, Middle District of Florida, File No. 04-CV-242, was commenced.
The action resulted from our notification to Charles F. Parson in April 2004 of
our intent to terminate our sales and marketing contract with Mr. Parsons
relating to the BRS-172 and BRS-150 products for lack of performance.
In 2005, a jury awarded damages to Parsons and
Aerospace Marketing in the combined amount of approximately $3.4 million for
breach of contract. BRS settled this matter directly with Parsons and Aerospace
on September 19, 2005 by agreeing to pay $1.9 million pursuant to terms described
in the settlement agreement. An initial payment of $700,000 plus interest
was made on September 19, 2005. The remainder of the settlement amount is
due over a term of 8 years, although we have the right to
pre-pay remaining amounts due at any time. On November 16,
2006, we prepaid $721,219 of such sum, leaving a balance of $315,000. On June 17, 2007, we paid $305,000 in full
satisfaction of the settlement amount.
McGrath
In April 2005,
Sue Jean McGrath,
individually and as successor in interest to Charles W. McGrath, deceased,
Charles W. McGrath III, Tanya Sue McGrath, Janny Sue McGrath, individually v.
Cirrus Design Corporation, Ballistic Recovery Systems, Inc., and Aerospace
Systems and Technologies, Inc.
, U.S. District Court, Northern
District of California, File No. C05-1542, was commenced. The plaintiffs
have alleged vicarious liability, strict product liability, negligence and
breach of warranty against the defendants arising from the crash of a Cirrus
Design Corp. SR22 airplane near Sugar Bowl, California. The case is
currently in the early stages of discovery. At this time we cannot state
with any degree of certainty what the outcome of the matter or the amount or
range of potential damages will be
, although Cirrus has agreed to indemnify the Company for damages
related to this claim.
Rayner
On September 16, 2005, an action was commenced against
us by Robert Treat Rayner, in the Circuit Court of the 5th Judicial Circuit in
and from Lake County Florida, File No. 04 CA 1749. The Complaint alleges
that plaintiff was injured when his ultralight aircraft crashed while being
towed by another ultralight. Plaintiff alleges that he deployed his BRS
system, but that it failed to deploy properly.
24
BRS is undertaking an
investigation of the claim and has responded to the suit. At this time,
we cannot state with any degree of certainty what the outcome of these matters
will be or the amount or range of potential loss, if any. BRS believes
that it has strong defenses to the suit and will vigorously defend against the
claims.
Environmental
Matters
Our operations and
facilities are subject to federal, state and local environmental laws and
regulations governing, among other matters, the emission, discharge,
generation, management, transportation and disposal of hazardous materials,
wastes and pollutants, the investigation and remediation of contaminated sites,
and permits required in connection with our operations. Although management
believes that our operations and facilities are in material compliance with
applicable environmental laws, management cannot provide assurance that future
changes in such laws, or the regulations or requirements thereunder, or in the
nature of our operations will not require us to make significant additional
expenditures to ensure compliance in the future. Further, we could incur
substantial costs, including cleanup costs, fines and sanctions, and third
party property damage or personal injury claims as a result of violations of or
liabilities under environmental laws, relevant common law, or the environmental
permits required for our operations.
Under some environmental
laws, a current or previous owner or operator of a contaminated site may be
held liable for the entire cost of investigation, removal or remediation of
hazardous materials at such property, whether or not the owner or operator knew
of, or was responsible for, the presence of such hazardous materials. Persons
who arrange for disposal or treatment of hazardous materials also may be liable
for the costs of investigation, removal or remediation of those substances at a
disposal or treatment site, regardless of whether the affected site is owned or
operated by them. Because we own and/or operate facilities that have a history
of industrial or commercial use and because we arrange for the disposal of
hazardous materials at many disposal sites, we may and do incur costs for
investigation, removal and remediation. We have not to date received any
inquiries or notices of potential liability with respect to offsite disposal facilities.
Although we have not incurred any material investigation or cleanup costs to
date and investigation and cleanup costs are not expected to be material in the
future, the discovery of additional contaminants or the imposition of
additional cleanup obligations at these or other sites, or the failure of any
other potentially liable party to meet its obligations, could result in
significant liability for us.
We believe that we are in
compliance with all current federal and state environmental laws.
Employees
As of June 30, 2007, we had
27 full-time employees at our South St. Paul facility. No employees are
represented by a labor union and we consider our relations with employees to be
good.
As of June 30, 2007, we had
154 full-time employees at our BRS de Mexico SA de CV facility in Tijuana,
Mexico. The employees are represented by a labor union and we consider
our relations with these employees to be good.
Property
We lease a stand-alone
13,000 square foot office and production facility located at Fleming Field
Airport in South St. Paul, Minnesota. The building is a World War II-era
training hangar, which we have renovated. This lease expires December 31,
2007. We also lease office space in a second building on Fleming
Field. This lease expires April 30, 2008. We maintain all of our
equipment in good working order and have secured adequate insurance for the
facilities and their contents.
25
We lease a stand-alone
25,000 square foot office (two floors) and production facility located at
Calle Uno Poniente No. 115-A, Tijuana, Baja California, Mexico for
parachute manufacturing. The building lease expires November 14,
2007. This facility is used to manufacture certain canopies and various
other parts used in our products. We maintain all of our equipment in
good working order and have secured adequate insurance for the facilities and
their contents.
We believe that the current
facilities are adequate for the current level of business activities, but are
searching for alternatives for expansion to meet the continued sales
increases. In the event that we require additional facilities, we believe
we could procure acceptable facilities. We do not own any real estate.
26
MANAGEMENT
Directors
and Executive Officers
The following table sets forth the name and position
of each of our directors and executive officers:
|
Name
|
|
Age
|
|
Positions
|
|
Larry E.
Williams
|
|
49
|
|
Director, President, Chief Executive Officer and
Chief Operating Officer
|
|
Robert L. Nelson
|
|
63
|
|
Chairman of the Board, Director and Secretary
|
|
Boris Popov
|
|
60
|
|
Director
|
|
Thomas H. Adams,
Jr.
|
|
70
|
|
Director
|
|
Darrel D.
Brandt.
|
|
64
|
|
Director
|
|
Edward L.
Underwood.
|
|
59
|
|
Director
|
|
Fernando Caralt
|
|
44
|
|
Director
|
|
Donald Hedquist
|
|
41
|
|
Chief Financial Officer
|
Larry Williams
serves as our Chief Executive Officer,
President, Chief Operating Officer and director. Mr. Williams has served as a director since
2006. Mr. Williams has served as the
President and Chief Operating Officer of our company since December 2004, and
has served as the Chief Executive Officer since May 2005. Prior to his employment with us, and since
2000, Mr. Williams was Vice President of Business Development at AmSafe
Aviation in Phoenix, Arizona, the world’s largest manufacturer of aviation
restraint systems. Prior to that and
since 1995, he was Group President at Rural/Metro Corporation (NASDAQ: RURL), a
Scottsdale, Arizona based services company that engages in mobile health
services, including emergency and non-emergency fire and ambulatory services. From 1985 to 1995, Mr. Williams was Executive
Director of the Emergency Response Training Academy, a firm specializing in
training of airport emergency response personnel.
Robert
L. Nelson
has served as a director since 1993. Mr. Nelson serves as our Chairman of the Board
and Secretary. Between October 14, 2004
and May 10, 2005, he also served as our Chief Executive Officer and between
October 14, 2004 and July 22, 2005, as Chief Financial Officer. Additionally, between October 14, 2004 and
through December 31, 2004, Mr. Nelson held the positions of interim President
and Chief Operating Officer as we searched for a candidate for such
positions. He is the president of Robert
L. Nelson and Associates, a consulting firm specializing in aviation. Mr. Nelson is an instrument-rated private
pilot. Through December 2000, Mr. Nelson
was on the executive board of the Twin Cities Salvation Army. In addition he is a member of the Woodbury
Economic Development Authority and an arbitrator for the NASD. Until March 1998, Mr. Nelson was president
and chief operations officer of Wipaire, Inc. an aviation float
manufacturer. Mr. Nelson’s past
experience in aviation includes positions with Cessna Aircraft Company,
Rockwell Aviation Corporation, Grumman American and Grumman Corporation and
past president and founder of the National Aircraft Finance Association. Mr. Nelson is the chairman of our audit
committee.
Boris
Popov
has served as a director since 1980. Mr. Popov is the founder of our company and
holds the title of Chairman Emeritus.
Mr. Popov is president of Northern Sun, Inc., a privately owned St.
Paul, Minnesota based Company that is engaged in aircraft equipment sales. He is also a private pilot. Mr. Popov is chairman of our compensation
committee and member of our strategic planning committee.
Thomas
H. Adams, Jr.
has served as a director since 1986. Mr. Adams retired during 1996 from his
position as a Northwest Airlines 747 captain flying Trans-Pacific routes. Mr.
Adams is a board member of the International Aerobatics Club and an active
experimental aerobatics pilot and past member of the national aerobatics
team. Mr. Adams is a member of our
compensation committee.
27
Darrel
D. Brandt
has served as a director since 1991. Mr. Brandt was our acting Chief Executive
Officer from December 1991 through November 1995. Mr. Brandt is an independent
real estate developer and private investor.
Mr. Brandt is a member of our audit committee and compensation
committee.
Edward L. Underwood
has served as a director since 2005. Mr. Underwood is a retired Executive Director
of Arcapita (formerly Crescent Capital Investment, Inc.), responsible for
post-acquisition management and monitoring for Arcapita’s portfolio companies.
Prior to joining Arcapita, Mr. Underwood served as Chief Financial Officer for
Burnham Service Company, a $200 million revenue trucking and logistics company.
Prior to Burnham, Mr. Underwood spent nine years with Investcorp, most recently
as part of the Post-Acquisition Management team where he was responsible for monitoring
the operations and performance of acquired companies. Mr. Underwood has a BS in
Industrial Engineering from the Georgia Institute of Technology and an MBA from
Cornell University. Mr. Underwood also
serves on the Boards of Cirrus Design, a significant shareholder and client of
ours, and LeeBoy and Watermark. Mr. Underwood is an instrument-rated private
pilot. Mr. Underwood is a member of our
audit committee and chairman of our strategic planning committee.
Fernando Caralt
has served as a director since June 25,
2007. Mr. Caralt has served as the
President, Chief Executive Officer and a director of CIMSA Ingenieria de
Sistemas, S.A., a global leader in the parachute industry based in Spain, since
1997. Mr. Caralt has served as a
director of INGENIA Ingenieria Aeronautica AIE, an association of aeronautical
companies in Spain, since 2004. He also has served as a director of TAF
Helicopters, S.A., a helicopter operator company based in Spain, since 2002.
Donald Hedquist
has served as our Chief Financial Officer since July 2005. From May 2005 to July 2005, Mr. Hedquist served as Controller. Prior to BRS, from June 2000 to April 2005, Hedquist served as Corporate Controller for Uponor North America Inc., a plumbing and heating manufacturing company located in Apple Valley, Minnesota. From September 1988 to June 2000, Hedquist served as Audit Manager for Lund, Koehler, Cox & Arkema, then located in Minnetonka, Minnesota. Mr. Hedquist received a bachelor’s degree in accounting from the University of North Dakota in1988.
Significant
Employees
John M. Gilmore
, 56, Vice President of Sales. Mr. Gilmore has been with us since December
9, 2003 and is an experienced sales executive, current aircraft owner and
flight instructor with over 3,000 hours of flight time. He also taught ground
school for Aviation Seminars. Mr. Gilmore was previously employed as vice
president of sales and marketing for Jetways, Inc. He is a successful sales and
marketing executive with over 15 years experience leading technology sales in
the computer industry.
Frank Hoffmann
, 36, Vice President of Engineering. Mr. Hoffman has been with us since January
2006 and serves as our Liaison to the German Aviation Authorities. From 2003 to the end of 2005, Mr. Hoffmann
served as a civil servant to the German Federal Agency for Defense Technology
and Procurement. During this time, he
positioned himself as the Flight Test Director for all Manned and Unmanned
Parachute Systems of the German Defense Sector at the Aeronautical Flight
Testing Center in Manching, Bavaria.
Furthermore, he was named German NATO speaker for all Precision Airdrop
Issues. Prior to that, from 1990 to 2003, Mr. Hoffmann served as a technical
officer for the F-4F “Phantom 2” with the German Air Force. Mr. Hoffman received a Masters Degree in
Aerospace Engineering from the University of the German Armed Forces in Munich
in 1995.
Gary Moore
, 51, Vice President of Government Sales and
International. Mr. Moore has been with
us since June 2006, and has over 30 years military and commercial aerospace
experience. From October 2005 to June
2006, Mr. Moore worked as an independent consultant for an international
non-profit agency (AFS-USA International Programs) as well as interpreter for
Hispanic clients in the Twin Cities area. From May 2002 to September 2005, Mr. Moore was
a Subcontracts Manager and
28
International
Business Development/Sales Manager with Lockheed Martin, managing and
negotiating international supplier contracts, among other
responsibilities. From November 2001 to
May 2002, Mr. Moore worked at University Hospitals and Clinics at The
University of Iowa in Iowa City, Iowa as a contract statistical analyst. Prior to that, from October 1998 to October
2001, Mr. Moore was a Marketing and Sales Manager for Rockwell Collins, where
he managed existing customer base and expanded market penetration of Rockwell
Collins’ avionic product lines in Latin America and the Asian Pacific. Mr. Moore also served on active-duty as a
Naval Flight Officer in the U.S. Navy early in his career. Mr. Moore received an undergraduate degree in
Biology from the University of Texas at Austin, an M.S. in Financial Management
from the Naval Postgraduate School in Monterey, California, and an MBA in
International Business/Marketing from George Washington University in
Washington, D.C.
EXECUTIVE
COMPENSATION
Summary Compensation Table
The following table sets forth the cash and non-cash
compensation for awarded to or earned by (i) each individual serving as our
chief executive officer during the fiscal year ended September 30, 2006 and
(ii) each other individual that served as an executive officer at the
conclusion of the fiscal year ended September 30, 2006 and who received in
excess of $100,000 in the form of salary and bonus during such fiscal year
(collectively, the “named executive officers”).
|
|
|
|
|
Annual Compensation
|
|
Long-Term
Compensation
|
|
All Other
Compensation
|
|
|
Principal Positions
|
|
Year
|
|
Salary
|
|
Bonus
|
|
Profit
Sharing
|
|
Restricted Stock
Awards ($)
|
|
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Larry E. Williams
|
|
2006
|
|
$
|
159,186
|
|
$
|
116,400
|
|
-0-
|
|
$
|
26,650
|
(1)
|
$
|
17,617
|
(2)
|
|
Chief Executive Officer
|
|
2005
|
|
112,404
|
|
49,375
|
|
-0-
|
|
39,375
|
(3)
|
23,071
|
(2)
|
|
and President
|
|
2004
|
|
-0-
|
|
-0-
|
|
-0-
|
|
-0-
|
|
-0-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Don Hedquist
|
|
2006
|
|
$
|
95,000
|
|
$
|
1,400
|
|
-0-
|
|
3,300
|
(4)
|
$
|
2,181
|
(2)
|
|
Chief Financial Officer
|
|
2005
|
|
31,326
|
|
1,300
|
|
-0-
|
|
1,463
|
(5)
|
966
|
(2)
|
|
|
|
2004
|
|
-0-
|
|
-0-
|
|
-0-
|
|
-0-
|
|
-0-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John M. Gilmore
|
|
2006
|
|
$
|
131,976
|
|
$
|
700
|
|
-0-
|
|
$
|
1,650
|
(6)
|
$
|
1,090
|
(2)
|
|
Vice President-Sales
|
|
2005
|
|
133,925
|
|
1,300
|
|
-0-
|
|
1,463
|
(7)
|
740
|
(2)
|
|
|
|
2004
|
|
83,704
|
|
3,266
|
|
$
|
4,425
|
|
-0-
|
|
-0-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Constitutes
the issuance of 17,767 shares of restricted common stock issued on January 16,
2007, based on Mr. William’s performance in fiscal year 2006; the fair market
value of the common stock on the date of grant was $1.50 per share.
(2)
Constituting
a cash payment as a gross up for taxes relating to such person’s stock bonus
relating to such Fiscal Year.
(3)
Constitutes
the issuance of 17,500 shares of restricted common stock issued on September
30, 2005, based on Mr. William’s performance in fiscal year 2005; the fair
market value of the common stock on the date of grant was $2.25 per share.
(4)
Constitutes
the issuance of 2,200 shares of restricted common stock issued on January 16,
2007, based on Mr. Hedquist’s performance in fiscal year 2006; the fair market
value of the common stock on the date of grant was $1.50 per share.
(5)
Constitutes the issuance
of 650 shares of restricted common stock issued on September 30, 2005, based on
Mr. Hedquist’s performance in fiscal year 2005; the fair market value of the
common stock on the date of grant was $2.25 per share.
29
(6)
Constitutes
the issuance of 1,100 shares of restricted common stock issued on January 16,
2007, based on Mr. Gilmore’s performance in fiscal year 2006; the fair market
value of the common stock on the date of grant was $1.50 per share.
(7)
Constitutes the issuance
of 650 shares of restricted common stock issued on September 30, 2005, based on
Mr. Gilmore’s performance in fiscal year 2005; the fair market value of the
common stock on the date of grant was $2.25 per share.
Options/SAR Grants
No stock options were granted to our named executive officers in fiscal
year 2006.
Aggregated
Options/SARS Exercises and Fiscal Year-End Option/SAR Values
None
of our named executive officers exercised options during fiscal year 2006, and
as of September 30, 2006, none of our named executive officers held outstanding
options.
Director Compensation
Each of our non-employee directors currently receives
$4,500 per board meeting attended, with the Chairman of our board receiving
$9,000 per board meeting attended. Until
March 16, 2006, members of our board committees received an additional $1,000
per meeting, but this amount was increased to $1,500 per meeting on such date. The chair of each committee receives an
additional $500 per meeting. Audit committee members were not separately
compensated for their quarterly review of financial statements.
On March 16, 2006, the board also approved an annual
grant of 6,000 shares of common stock to non-employee directors for their
participation at board meetings relating to that fiscal year. On June 15, 2006, the non-employee directors
were each granted 6,000 shares of common stock; the fair market value of the
common stock was $1.51 per share at the time of grant. On March 15, 2007, the board approved the
issuance of 6,000 shares of common stock to the non-employee directors at such
time for participation in board meetings through our 2008 annual meeting.
Additionally, to the extent our directors are
shareholders, they participate in declared dividends along with other holders
of our common stock.
Employment Agreement with our Chief Executive Officer
Larry Williams became our President and Chief
Operating Officer on December 6, 2004, and our Chief Executive Officer on May
6, 2005. Mr. Williams entered into an employment agreement with us dated May 6,
2005 identifying the terms of his services as Chief Executive Officer,
President and Chief Operating Officer.
On January 4, 2007, we entered into a two-year employment agreement with
Mr. Williams superseding the terms of the prior agreement. Under the new employment agreement, Mr.
Williams is entitled to receive a base salary of $194,000 effective as of
October 1, 2006. Mr. Williams is also
eligible for a potential annual bonus of up to 100% of his base salary. Up to 25% of the potential annual bonus, or
$48,500, is discretionary and would be paid in cash as determined by our
Compensation Committee within 90 days of fiscal year end.
The remaining 75% of the potential annual bonus, up
to $145,500, is non-discretionary (the “Maximum Non-Discretionary Bonus”), and
based upon two components: a net sales component and a net income
component. With respect to the sales
component, Mr. Williams could earn up to 35% of the Maximum Non-Discretionary
Bonus if our actual sales equals our budgeted sales for the fiscal year. To the extent our actual sales exceeds our
budgeted sales for such fiscal year, the percentage payable is increased up to
a maximum of 15% of the Maximum Non-Discretionary Bonus. To the extent our actual sales are less than
our budgeted sales, the sales component of the non-discretionary bonus will be
30
proportionately reduced. No sales
component of the non-discretionary bonus will be paid to the extent that actual
sales is less than 80% of budgeted sales.
With respect to the income component of the
non-discretionary bonus, Mr. Williams could earn up to 35% of the Maximum
Non-Discretionary Bonus if our actual net income equals our budgeted net income
for the fiscal year. To the extent our
actual net income exceeds our budgeted net income for such fiscal year, the
percentage payable is increased up to a maximum of 15% of the Maximum
Non-Discretionary Bonus. To the extent,
our actual net income is less than our budgeted net income, the income
component of the non-discretionary bonus will be proportionately reduced. No income component of the non-discretionary
bonus will be paid to the extent that actual net income is less than 80% of
budgeted net income.
Any non-discretionary bonus is to be paid within 10
days of the filing of our Annual Report on Form 10-KSB. Upon our mutual agreement with Mr. Williams,
up to 50% of any non-discretionary bonus may be paid in our restricted common
stock.
The employment agreement further provides that to the
extent Mr. Williams is terminated without Cause, he is entitled to a severance
payment of 18 months of his base salary, paid out over such period in
accordance with our payroll schedule. “Cause,”
as defined in the agreement, includes acts of
dishonesty, fraud,
material and deliberate injury or attempted injury relating to our business or
company, conviction of a felony or a continued failure to satisfactorily
perform job duties. In the event of a
Change of Control pursuant to which
Mr. Williams is terminated without Cause, Mr. Williams is entitled to 24
months of his base salary paid out over such time in accordance with our normal
payroll. “Change of Control” is defined
in the agreement to include: (i)
t
he acquisition by any
person of beneficial ownership of twenty-five (25%) percent or more of our
outstanding shares of common stock; (ii)
a
merger, reorganization
or consolidation whereby our shareholders immediately prior to such event do
not hold more than fifty (50%) percent of the voting stock of the surviving
entity after completion of the event; or (iii) our liquidation or dissolution
or the sale of all or substantially all of our assets.
The employment agreement includes standard
confidentiality provisions and an 18-month non-compete provision. In the event of a termination of employment
without Cause following a Change of Control, the non-compete provisions shall
continue for as long as severance payments are made (i.e., 24 months).
Furthermore, the employment agreement provides that
Mr. Williams will be nominated by our board of directors each year to serve as
a director so long as he is Chief Executive Officer. In the event Mr. Williams resigns or is
terminated, the agreement provides that Mr. Williams will also resign from the
board.
31
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth certain information with respect to beneficial
ownership of our common stock as of September 14, 2007, by: (a) each person or
entity known by us to own beneficially more than five percent of our common
stock; (b) each director and nominee for election as a director of our company;
(c) each of our executive officers named in the Summary Compensation Table; and
(d) all of our directors and
executive officers as a group.
Beneficial ownership is determined in accordance with rules of the
Securities and Exchange Commission and includes generally voting power and/or
investment power with respect to securities. The address of each director and
executive officer named below is the same as that of the company (300 Airport
Road, South St. Paul, MN 55075) unless
otherwise stated.
|
Name and Address
of Beneficial Owner
|
|
Amount and Nature of Beneficial
Ownership (1)
|
|
Percent of
Class
|
|
|
|
|
|
|
|
|
|
Darrel D. Brandt
|
|
1,699,077
|
(2)
|
15.0
|
|
|
|
|
|
|
|
|
|
Boris Popov
|
|
459,700
|
(3)
|
4.1
|
|
|
|
|
|
|
|
|
|
Thomas H. Adams,
Jr.
|
|
209,516
|
(3)
|
1.9
|
|
|
|
|
|
|
|
|
|
Robert L. Nelson
|
|
83,480
|
(4)
|
*
|
|
|
|
|
|
|
|
|
|
Edward L.
Underwood
|
|
47,046
|
(5)
|
*
|
|
|
|
|
|
|
|
|
|
Fernando Caralt
|
|
1,378,676
|
(6)
|
11.9
|
|
|
|
|
|
|
|
|
|
Larry E.
Williams
|
|
78,745
|
(7)
|
*
|
|
|
|
|
|
|
|
|
|
John M. Gilmore
|
|
1,750
|
|
*
|
|
|
|
|
|
|
|
|
|
Don Hedquist
|
|
5,350
|
(8)
|
*
|
|
|
|
|
|
|
|
|
|
Cirrus Design
Corporation
4515 Taylor Circle
Duluth, MN 55811
|
|
1,150,000
|
|
10.2
|
|
|
|
|
|
|
|
|
|
CIMSA Ingenieria
de Sistemas, S.A.
P.I. “El Ramassasr” - C/Valles, s/n
Barcelona, Spain
|
|
1,378,676
|
(9)
|
11.9
|
|
|
|
|
|
|
|
|
|
All executive
officers and directors as a group (9 persons)
|
|
3,963,340
|
(10)
|
34.0
|
|
*
Less
than 1%
(1)
Unless
otherwise indicated, all persons have sole voting power and sole investment
power with respect to the shares indicated.
Includes shares that may be acquired by exercise of options currently
exercisable (including options becoming exercisable within 60 days of February
9, 2007).
(2)
Includes
15,000 shares issuable upon exercise of vested options. Beneficial ownership based upon a Form 4
filed on August 7, 2007.
(3)
Includes
15,000 shares issuable upon exercise of vested options.
(4)
Includes
warrants to purchase an aggregate of 6,296 shares of common stock at an
exercise price of $2.00.
(5)
Includes
warrants to purchase an aggregate of 5,009 shares of common stock at an
exercise price of $2.00. Does not
include shares beneficially owned by Cirrus Design Corporation. Mr. Underwood is an executive director of an
entity that controls Cirrus Design Corporation.
(6)
Represents (i) 1,102,941 shares of common stock held by
CIMSA Ingenieria de Sistemas, S.A. and (ii) warrants to purchase an aggregate
of 275,735 of common stock at an exercise price of $2.00 held by
32
CIMSA Ingenieria de
Sistemas, S.A., of which Mr. Caralt is the President, Chief Executive Officer,
and a Director. Mr. Caralt disclaims
beneficial ownership of the securities held by CIMSA.
(7)
Includes
warrants to purchase an aggregate of 4,596 shares of common stock at an
exercise price of $2.00.
(8)
Includes
warrants to purchase 500 shares of common stock at an exercise price of $2.00.
(9)
Includes
warrants to purchase an aggregate of 275,735 shares of common stock.
(10)
Includes
45,000 shares issuable upon exercise of vested options, 292,136 shares issuance
upon exercise of outstanding warrants, and 21,067 shares of restricted stock.
33
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On November 19, 2004, we entered into a Consulting
Agreement with Boris Popov pursuant to which Mr. Popov would provide us certain
consulting services relating to new product/development. Pursuant to this agreement, the term of which
was six months, Mr. Popov was required to provide a minimum of 64 hours of
service per month for $3,200 per month and be paid an additional $50 per hour
for each hour over the 64 hour minimum.
On March 16, 2005, we and Mr. Popov extended this agreement for an
additional 12 months. On March 14, 2006,
we and Mr. Popov extended the term of the agreement for an additional 24
months.
We
paid Mr. Popov $25,573 in fiscal year 2006 and $21,162 in fiscal year 2005
pursuant to such agreement. The fees paid pursuant to our consulting agreement
with Mr. Popov were in addition to, and independent of, any fees or
compensation owed or paid to him in his capacity as a non-employee director.
In June 2006, we accepted
subscriptions from Edward Underwood, a director, and Robert Nelson, our
Chairman, Secretary and a director, Larry Williams, our Chief Executive
Officer, President, Chief Operating Officer and a director, and Donald
Hedquist, our Chief Financial Officer, for the purchase of an aggregate of
16,401 units at a price unit of $5.44, each unit consisting of 4 shares of
common stock and a three-year warrant to purchase a share of common stock at an
exercise price of $2.00. Accordingly, in
consideration of proceeds of $89,220 to us, we issued such individuals an
aggregate of 65,603 shares of common stock and three-year warrants to acquire
16,401 shares of common stock at an exercise price of $2.00 per share. We paid no underwriting discounts or
commissions in connection with these sales.
We further agreed to register the resale of the common stock (including
shares issued upon exercise of the warrants).
Also in June 2006, we
issued 257,353 shares of common stock to Mr. Darrel Brandt, a director, at a
purchase price of $1.36 per share for an aggregate purchase price of
$350,000. In consideration for such
investment, we further agreed to amend the terms of that certain Buy-Sell
Agreement dated May 6, 1993 by and between the Company, the Darrel D. Brandt Profit
Sharing Plan and Mr. Brandt to eliminate an option in our favor to purchase
1,000,000 shares of our common stock from Mr. Brandt at a 25% discount to any
proposed sale price Mr. Brandt could obtain from a third party. We provided Mr. Brandt with piggy-back
registration rights with respect to the issued shares. We did not pay any underwriting discounts or
commission in connection with this sale.
On June 25, 2007, we completed a private placement
offering to CIMSA Ingenieria de Sistemas, S.A., a Spanish company, of 1,102,941
shares of our common stock and a three-year warrant to acquire up to 275,735
shares of our common stock at $2.00 per share.
The warrant is subject to price adjustment and economic anti-dilution
features until December 22, 2007, as well as anti-dilution protection from stock
splits and similar events for the term of the warrant. We received gross proceeds of $1,500,000 in
the offering. We did not engage a
placement agent or broker in connection with the transaction. We have agreed to register the resale of the
common stock, including the common stock issuable upon exercise of the warrants
issued in the offering. Pursuant to the
securities purchase agreement with CIMSA, we named Fernando Caralt, the President,
Chief Executive Officer and a director
of CIMSA, to our board of
directors. Additionally, we agreed to
negotiate and execute three agreements with CIMSA by August 31, 2007: (a) a
manufacturing agreement pursuant to which CIMSA would subcontract certain
manufacturing agreements to us over a three-year period; (b) a development
agreement pursuant to which we would subcontract with CIMSA for certain
development and design services over a three-year period; and (c) a one-year
consulting agreement with Fernando Caralt to provide certain consulting
services to the Company for cash compensation not to exceed $50,000. Since March 2007, we have generated revenues
of approximately $77,500 from CIMSA. We
did not do business with CIMSA prior to March 2007.
34
MARKET FOR COMMON EQUITY AND
RELATED MATTERS
Market Information
Our common stock is quoted
on the Over-the-Counter Bulletin Board, or “OTC Bulletin Board” under the
trading symbol “BRSI”. The following
table lists the high and low bid information for our common stock as quoted on
the OTC Bulletin Board for the past two fiscal years ended September 30, 2005
and 2006, respectively, and through our 2007 third quarter ended June 30, 2007:
|
|
|
Price Range
|
|
|
Quarter Ended
|
|
High
|
|
Low
|
|
|
December 31,
2004
|
|
$
|
3.70
|
|
$
|
2.05
|
|
|
March 31, 2005
|
|
4.90
|
|
2.95
|
|
|
June 30, 2005
|
|
4.34
|
|
2.51
|
|
|
September 30,
2005
|
|
3.00
|
|
2.15
|
|
|
|
|
|
|
|
|
|
December 31,
2005
|
|
$
|
2.28
|
|
$
|
1.50
|
|
|
March 31, 2006
|
|
1.90
|
|
1.40
|
|
|
June 30, 2006
|
|
2.40
|
|
1.39
|
|
|
September 30,
2006
|
|
2.45
|
|
1.45
|
|
|
|
|
|
|
|
|
|
December 31,
2006
|
|
$
|
1.59
|
|
$
|
1.30
|
|
|
March 31, 2007
|
|
$
|
2.00
|
|
$
|
1.35
|
|
|
June 30, 2007
|
|
$
|
1.95
|
|
$
|
1.45
|
|
The above quotations from
the OTC Bulletin Board reflect inter-dealer prices, without retail mark-up,
mark-down or commission, and may not represent actual transactions.
Holders
The number of record holders
of our common stock as of September 20, 2007, was 362 based on information
received from our transfer agent. This
amount excludes an indeterminate number of shareholders whose shares are held
in “street” or “nominee” name.
Dividends
During fiscal year 2005, we declared a dividend in
the amount of $0.08 per share, payable November 22, 2004 to all of our common
shareholders of record on November 8, 2004, for an aggregate of $547,543. We
also declared a dividend in the amount of $0.085 per share, payable April 15,
2005 to all common shareholders of record on April 1, 2005, for an aggregate of
$648,914.
Under the terms of the settlement agreement with
Parsons and Aerospace Marketing, we were not allowed to declare or pay
dividends in excess of 10% of net profit for any one fiscal year. This restriction was eliminated with the
November 15, 2006 payment to Parsons and Aerospace Marketing (See Note 9 to the
Consolidated Financial Statements for the fiscal year ended September 30,
2006). Future dividends will be
determined at the discretion of our board of directors. We do not expect that any dividends will be
paid during the fiscal year ending September 30, 2007.
35
Equity Compensation Plan
Information
The following table sets
forth, as of September 30, 2006, the (i) number of securities to be issued upon
the exercise of outstanding options, warrants and rights issued our equity
compensation plans, (ii) the weighted average exercise price of such options,
warrants and rights, and (iii) the number of securities remaining available for
future issuance under our equity compensation plans:
|
|
|
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
(a)
|
|
Weighted-average price of
outstanding options,
warrants and rights
(b)
|
|
Number of securities
remaining available for
future issuance under
equity compensation plan
(excluding (a))
(c)
|
|
|
Equity
compensation plans approved by security holders (1)
|
|
0
|
|
N/A
|
|
600,000
|
|
|
Equity
compensation plans not approved by security holders (2)
|
|
90,000
|
|
$
|
1.22
|
|
0
|
|
|
Total
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Represents
shares of common stock authorized for issuance under the 2004 Stock Option
Plan.
(2)
Represents
stock options granted to employees and directors at then current market prices.
USE OF PROCEEDS
We
will not receive any proceeds from the sale of the common stock by the selling
shareholders pursuant to this prospectus.
We would receive gross proceeds in the amount of $551,470 assuming the
exercise of all the warrants with respect to which the underlying shares are
being offered hereby. To the extent any
of the warrants are exercised, we intend to use the proceeds for general
working capital.
36
SELLING SHAREHOLDERS
The
following table lists the total number of shares of our common stock
beneficially owned by the selling shareholders as of September 14, 2007, and
after this offering. Except for our
strategic relationship with CIMSA Ingenieria de Sistemas, S.A., as described in
this prospectus under “Certain Relationships and Related Transactions”
beginning on page 34 of this prospectus, none of the selling shareholders has
had any position, office or other material relationship with us within the past
three years. Except as indicated in the
table, each selling shareholder is offering all of the shares of common stock
owned by it or, if applicable, issuable to it upon the exercise of the warrant
described herein and registered by the registration statement of which this
prospectus is a part. We will not
receive any proceeds from the sale of the common stock by the selling shareholders.
|
Name
|
|
Shares
beneficially
owned
before
offering
|
|
Number of
outstanding
shares
offered by
selling
shareholder
|
|
Number of
shares offered
by selling
shareholder
issuable upon
exercise of
certain
warrants
|
|
Aggregate
number of
shares
offered by
selling
shareholder
|
|
Number of
shares
beneficially
owned after
offering
|
|
Percentage
beneficial
ownership
after
offering
|
|
|
CIMSA Ingenieria
de Sistemas, S.A.(1)
|
|
1,378,676
|
|
1,102,941
|
|
275,735
|
(2)
|
1,378,676
|
|
-0-
|
|
-0-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mon Gestio, S.A.
(3)
|
|
369,353
|
|
112,000
|
|
-0-
|
|
112,000
|
|
257,353
|
|
2.0
|
%
|
(1)
The board of directors of CIMSA Ingenieria de Sistemas, S.A., has
voting and dispositive control over the shares held by such selling
stockholder.
(2)
Consists of a three-year warrant to purchase up to 275,735 shares of
common stock at an exercise price of $2.00 per share. The warrant
is subject to price adjustment and economic anti-dilution features until
December 22, 2007, as well as anti-dilution protection from stock splits and
similar events for the term of the warrant.
(3)
Jordi Martret Redrado, as Managing Director of Mon Gestio, S.A., has
voting and dispositive control over the shares held by such selling
stockholder.
PLAN OF DISTRIBUTION
We
are registering the shares of common stock offered by this prospectus on behalf
of the selling shareholders. As used in
this prospectus, “selling shareholders” includes donees, pledges, transferees
and other successors in interest selling shares received from the selling
shareholders after the date of this prospectus, whether as a gift, pledge,
partnership distribution or other form of transfer. All costs, expenses and fees in connection
with the registration of the shares of common stock offered hereby will be
borne by us. Brokerage commissions and
similar selling expenses, if any, attributable to the sale of shares of common
stock will be borne by the selling shareholders.
Sales
of shares of common stock offered hereby may be effected by the selling
shareholders from time to time in one or more types of transactions (which may
include block transactions):
·
ordinary brokerage transactions and
transactions in which the broker-dealer solicits purchasers;
·
block trades in which the broker-dealer will
attempt to sell the shares as agent, but may position and resell a portion of
the block as principal to facilitate the transaction;
37
·
purchases by a broker-dealer as principal and
resale by the broker-dealer for its account;
·
an exchange distribution in accordance with
the rules of the applicable exchange;
·
privately negotiated transactions;
·
short sales (notwithstanding that short sales
made by the selling shareholders prior to the effectiveness of the registration
statement may be a violation of Section 5 of the Securities Act if the shares
are effectively sold prior to the effectiveness of the registration statement);
·
through the writing or settlement of options
or other hedging transactions, whether through an options exchange or
otherwise;
·
broker-dealers may agree with the selling
shareholders to sell a specified number of such shares at a stipulated price
per share;
·
a combination of any such methods of sale;
and
·
any other method permitted pursuant to
applicable law.
The
selling shareholders may effect sales of shares of common stock offered hereby
at fixed prices, at prevailing market prices at the time of sale, at prices
related to the prevailing market price, at varying prices determined at the
time of sale, or at privately negotiated prices. Any of these transactions may or may not involve
brokers or dealers. Any such
broker-dealers may receive compensation in the form of discounts, concessions,
or commissions from the selling shareholders and/or the purchaser(s) of shares
of common stock for whom those broker-dealers may act as agents or to whom they
sell as principal, or both (which compensation as to a particular broker-dealer
might be in excess of customary commissions).
Each selling shareholder has advised us that it has not entered into any
agreements, understandings or arrangements with any underwriters or
broker-dealers regarding the sale of its securities, nor is there any
underwriter or coordinating broker acting in connection with the proposed sale
of shares of common stock by the selling shareholder. In the event a selling shareholder engages a
broker-dealer or other person to sell the shares offered hereby, the names of
such agents and the compensation arrangements will be disclosed in a prospectus
supplement, which must be filed prior to any such sales.
The
selling shareholders may, from time to time, pledge or grant a security
interest in some or all of the shares of common stock owned by them and, if
they default in the performance of their secured obligations, the pledgees or
secured parties may offer and sell the shares of common stock, from time to
time, under this prospectus, or under an amendment to this prospectus or other
applicable provision of the Securities Act amending the selling shareholders
list to include the pledgee, transferee or other successors in interest as
selling shareholders under this prospectus. The selling shareholders also may
transfer the shares of common stock in other circumstances, in which case the
transferees, pledgees or other successors in interest will be the selling
beneficial owners for purposes of this prospectus.
In
connection with the sale of our common stock or interests therein, the selling
shareholders may enter into hedging transactions with broker-dealers or other
financial institutions, which may in turn engage in short sales of the common
stock in the course of hedging the positions they assume. The selling shareholders may also sell shares
of our common stock short and deliver these securities to close out their short
positions, or loan or pledge the common stock to broker-dealers that in turn
may sell these securities. The selling
shareholders may also enter into option or other transactions with
broker-dealers or other financial institutions or the creation of one or more
derivative securities, which require the delivery
38
to
such broker-dealer or other financial institution of shares offered by this
prospectus, which shares such broker-dealer or other financial institution may
resell pursuant to this prospectus (as supplemented or amended to reflect such
transaction).
The
aggregate proceeds to the selling shareholders from the sale of the common
stock offered by them will be the purchase price of the common stock less
discounts or commissions, if any. The
selling shareholders reserve the right to accept and, together with their
agents from time to time, to reject, in whole or in part, any proposed purchase
of common stock to be made directly or through agents. We will not receive any
of the proceeds from this offering. Upon
any exercise of the warrants by payment of cash, however, we will receive the
exercise price of the warrants.
The
selling shareholders may also resell all or a portion of the shares in open
market transactions in reliance upon Rule 144 under the Securities Act,
provided that they meet the criteria and conform to the requirements of that
rule.
A selling shareholder
that is a broker-dealer is deemed to be an “underwriter” within the meaning of
Section 2(11) of the Securities Act in connection with the sale of shares
offered hereby. Any selling shareholder
and any broker-dealers that act in connection with the sale of the shares
offered hereby might be deemed to be an “underwriter” within the meaning of
Section 2(11) of the Securities Act, and any commissions received by such
broker-dealers and any profit on the resale of the securities sold by them
while acting as principals might be deemed to be underwriting discounts or
commissions under the Securities Act.
To
the extent required, the shares of our common stock to be sold, the name of the
selling shareholders, the respective purchase prices and public offering
prices, the names of any agents, dealer or underwriter, any applicable
commissions or discounts with respect to a particular offer will be set forth
in an accompanying prospectus supplement or, if appropriate, a post-effective
amendment to the registration statement that includes this prospectus.
In
order to comply with the securities laws of some states, if applicable, the
common stock may be sold in these jurisdictions only through registered or licensed
brokers or dealers. In addition, in some
states the common stock may not be sold unless it has been registered or
qualified for sale or an exemption from registration or qualification
requirements is available and is complied with.
We
have advised the selling shareholders that the anti-manipulation rules of
Regulation M under the Exchange Act may apply to sales of shares in the market
and to the activities of the selling shareholders and their affiliates. In addition, we will make copies of this prospectus
(as it may be supplemented or amended from time to time) available to the
selling shareholders for the purpose of satisfying the prospectus delivery
requirements of the Securities Act. The
selling shareholdesr may indemnify any broker-dealer that participates in
transactions involving the sale of the shares against certain liabilities,
including liabilities arising under the Securities Act.
We
have agreed to indemnify the selling shareholders against liabilities,
including liabilities under the Securities Act and state securities laws,
relating to the registration of the shares offered by this prospectus.
Shares Eligible For Future Sale
Upon
completion of this offering and assuming the issuance of all of the shares
covered by this prospectus that are issuable upon the exercise of warrants,
there will be 11,580,502
shares of our
common stock issued and outstanding. The
shares purchased in this offering will be freely tradable without registration
or other restriction under the Securities Act, except for any shares purchased
by an “affiliate” of our Company (as defined under the Securities Act).
39
Our
currently outstanding shares that were issued in reliance upon the “private
placement” exemptions under the Securities Act are deemed “restricted securities”
within the meaning of Rule 144 under the Securities Act. Restricted securities may not be sold unless
they are registered under the Securities Act or are sold pursuant to an
applicable exemption from registration, including an exemption under Rule 144.
In
general, under Rule 144, any person (or persons whose shares are aggregated)
including persons deemed to be affiliates, whose restricted securities have
been fully paid for and held for at least one year from the later of the date
of issuance by us or acquisition from an affiliate, may sell such securities in
broker’s transactions or directly to market makers, provided that the number of
shares sold in any three-month period may not exceed the greater of one percent
of the then-outstanding shares of our common stock or the average weekly
trading volume of our shares of common stock in the over-the-counter market
during the four calendar weeks preceding the sale. Sales under Rule 144 are also subject to
certain notice requirements and the availability of current public information
about our Company. After two years have
elapsed from the later of the issuance of restricted securities by us or their
acquisition from an affiliate, such securities may be sold without limitation
by persons who are not affiliates under the rule.
We
are unable to predict with certainty the effect which sales of the shares of
common stock offered by this prospectus might have upon our ability to raise
additional capital. Nevertheless, it is
possible that the resale of shares offered hereby could adversely affect the
trading price of our common stock.
DESCRIPTION OF CAPITAL STOCK
We currently have authorized capital of 50,000,000
shares, of which 15,000,000 are designated as common stock, par value $.01 per
share, and 35,000,000 are undesignated.
As of September 14, 2007, we have outstanding 11,304,767 shares of
common stock. Additionally, there are
outstanding warrants to purchase an aggregate of 978,894 shares of our common
stock and options to purchase an aggregate of 45,000 shares of our common
stock.
The holders of common
stock are entitled to one vote for each share held of record on all matters
submitted to a vote of the shareholders and do not have cumulative voting
rights. Upon liquidation, dissolution or
winding up of the Company, holders of common stock will be entitled to share
ratably in all of our assets that are legally available for distribution, after
payment of all debts and other liabilities and the liquidation preference of
any outstanding shares of preferred stock.
The holders of the common stock have no preemptive, subscription,
redemption or conversion rights.
The
board of directors has the authority, without any further vote or action by the
shareholders, to designate and issue preferred shares in such classes or series
as it deems appropriate and to establish the rights, preferences, and
privileges for such shares.
DISCLOSURE OF COMMISSION
POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Pursuant
to our articles of incorporation and bylaws, we may indemnify an officer or
director who is made a party to any proceeding, because of his position as
such, to the fullest extent authorized by the Minnesota Business Corporation
Act, as the same exists or may hereafter be amended. In certain cases, we may advance expenses
incurred in defending any such proceeding.
To
the extent that indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling our company
pursuant to the foregoing provisions, we have been informed that, in the
opinion of the Securities and Exchange Commission, such indemnification is
40
against
public policy as expressed in the Securities Act and is therefore
unenforceable. If a claim for
indemnification against such liabilities (other than the payment by us of
expenses incurred or paid by a director, officer or controlling person of our
company in the successful defense of any action, suit or proceeding) is
asserted by any of our directors, officers or controlling persons in connection
with the securities being registered, we will, unless in the opinion of our
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by us is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of that issue.
ABOUT THIS PROSPECTUS
This prospectus is not an
offer or solicitation in respect to these securities in any jurisdiction in
which such offer or solicitation would be unlawful. This prospectus is part of a registration
statement that we filed with the SEC.
The registration statement that contains this prospectus (including the
exhibits to the registration statement) contains additional information about
our company and the securities offered under this prospectus. That registration statement can be read at
the SEC’s website or offices indicated under the section of this prospectus
entitled “Where You Can Find More Information.”
We have not authorized anyone else to provide you with different
information or additional information.
You should not assume that the information in this prospectus, or any
supplement or amendment to this prospectus, is accurate at any date other than
the date indicated on the cover page of such documents.
WHERE YOU CAN FIND MORE
INFORMATION
Federal
securities law requires us to file information with the SEC concerning our
business and operations. Accordingly, we file annual, quarterly, and special
reports and other information with the SEC. You can inspect and copy this
information at the Public Reference Facility maintained by the SEC at 100 F
Street, N.E., Washington, D.C. 20549. You can receive additional information
about the operation of the SEC’s Public Reference Facilities by calling the SEC
at 1-800-SEC-0330. The SEC also maintains a web site at http://www.sec.gov that
contains reports and other information regarding companies that, like us, file
information electronically with the SEC.
Upon written request delivered to
Ballistic Recovery
Systems, Inc., Attn: Larry E. Williams,
CEO, 300 Airport Road, South Saint Paul, Minnesota 55075
, we will send to any
securityholder a copy of our annual report, complete with audited financial
statements, at no charge to the securityholder.
VALIDITY OF COMMON STOCK
Legal
matters in connection with the validity of the shares offered by this
prospectus will be passed upon by Maslon Edelman Borman & Brand, LLP, of
Minneapolis, Minnesota.
41
Ballistic Recovery Systems, Inc. and Subsidiary
Notes to Consolidated
Financial Statements
September 30, 2006
and 2005
1.
Nature of Business
Ballistic Recovery
Systems, Inc. (the “Company”) designs, manufactures and distributes rocket
deployed whole-aircraft emergency parachute systems for use on general aviation
and recreational aviation aircraft. The emergency parachute systems are
intended for use in the event of an in-air emergency and are designed to bring
down the entire aircraft and its occupants under the parachute canopy. In the general aviation market, the Company
is currently producing and selling emergency recovery systems for four
four-place general aviation aircraft, known as the Cirrus Design SR20 (SR20)
and SR22, and the Cessna 172 and 182. The products for Cirrus Design Corporation
(Cirrus Design) were developed in a joint effort between the Company and Cirrus
Design.
In the
recreational aviation market, the Company sells products to several hundred
different aircraft designs that are categorized as ultralights and experimental
aircraft.
The Company’s
products are sold both domestically and internationally.
2.
Summary of
Significant Accounting Policies
Principles
of Consolidation
In September 2005,
the Company formed its wholly-owned subsidiary, BRS de Mexico S.A. de C.V. The consolidated financial statements include
the wholly-owned subsidiary. All
significant intercompany transactions and balances have been eliminated in
consolidation.
Foreign
Currency Translations and Transactions
The Company
accounts for its foreign asset and liability transactions in U.S. dollars. Therefore, there is not any material
accumulated other comprehensive income or loss.
Results of operations are translated using the average exchange rates
throughout the year. Transaction gains
or losses are recorded as incurred.
Accounting
Principles
The consolidated
financial statements and accompanying notes are prepared in accordance with
accounting principles generally accepted in the United States of America.
Use of Estimates
The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect certain reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of expenses during the reporting period. Actual results could
differ from those estimates.
Cash Concentrations
Bank
balances exceeded federally insured levels during 2006 and 2005 and exceeded
federally insured levels as of September 30, 2006. Generally, these balances may be redeemed
upon demand and therefore bear minimal risk.
F-
8
Cash and Cash Equivalents
Short-term
investments with an original maturity of three months or less are considered to
be cash equivalents and are stated at their fair value.
Accounts Receivable, credit risk and allowance for doubtful accounts
The
Company sells its products to domestic and foreign companies. The Company reviews customers’ credit history
before extending unsecured credit and established an allowance for doubtful
accounts based upon factors surrounding the credit risk of specific customers
and other information. The Company does
not accrue interest on past due accounts receivable. Unless specific arrangements have been made,
accounts receivable over 30 days are considered past due. The Company writes
off accounts receivable when they are deemed uncollectible. Accounts receivable are shown net of an
allowance for doubtful accounts of $22,924 and $10,000 at September 30, 2006
and 2005, respectively. The Company’s
contract research and development projects are billed to its customers on an
uncollateralized credit basis. 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, which cannot be
estimated.
Customer Concentration
The
Company had sales to one major customer, Cirrus Design, which represented 70.7%
of the Company’s total sales for fiscal year 2006 and 74.0% of the Company’s
total sales for fiscal year 2005. This
customer also accounted for 63% (or $339,000) and 90% (or $413,000) of accounts
receivable at September 30, 2006 and 2005, respectively. The Company supplies parachute systems to
Cirrus Design from the Company’s general aviation product line.
In
its recreational aviation product line, the Company primarily distributes its
products through dealers and distributors who in turn sell the products to the
end consumer. The Company believes that
in the event that any individual dealers or distributors cease to represent the
Company’s products, alternative dealers or distributors can be established.
Valuation of Inventories
The
Company’s inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out
(“FIFO”) method.
Provisions
to reduce inventories to the lower of cost or market are made based on a review
of excess and obsolete inventories through an examination of historical
component consumption, current market demands and shifting production methods. Significant assumptions, with respect to
market trends and customer product acceptance are utilized to formulate the
provision methods. Sudden or continuing
downward changes in the Company’s product markets may cause the Company to
record additional inventory revaluation charges in future periods. No write-off provision was made to
inventories for the years ended September 30, 2006 and 2005.
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.
F-
9
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 Statement of Financial Accounting Standards No.
(SFAS) 109. Temporary differences relate
primarily to: stock based compensation; allowances for doubtful accounts;
inventory valuation allowances; depreciation; valuation of warrants issued to a
customer; net operating loss; and accrued expenses not currently deductible.
Furniture, Fixtures and Leasehold Improvements
Furniture,
fixtures and leasehold improvements are stated at cost. Depreciation is
computed using the straight-line method over the estimated useful lives of the
related assets, ranging from three to seven years for equipment and ten years
for the airplane. When assets are retired or otherwise disposed of, the cost
and related accumulated depreciation are removed from the accounts and the
resulting gain or loss is recognized in income for the period. The cost of maintenance and repairs is
expensed as incurred; significant renewals and betterments are capitalized.
Deduction is made for retirements resulting from renewals or betterments. Leasehold improvements are amortized using
the straight-line method over the shorter of the lease term, or the estimated
useful life of the assets.
Goodwill
The
Company applies SFAS No. 142
, Goodwill and Other
Intangible Assets
related to the carrying amount of goodwill and
other intangible assets. Goodwill will
be tested for impairment annually in the fourth quarter or more frequently if
changes in circumstances or the occurrence of events suggest an impairment
exists. The Company has concluded that
no impairment of goodwill or other intangible assets exists as of September 30,
2006.
Intangibles
Patents
are recorded at cost and are being amortized on a straight-line method over 17
years. The covenants not to compete are
recorded at cost and are being amortized using the straight-line method over
the terms of the agreement which range from two to fifteen years. The weighted average life of the covenants
not to compete is 2.5 years at September 30, 2006.
Components
of intangible assets are as follows:
|
|
|
September 30, 2006
|
|
September 30, 2005
|
|
|
|
|
Gross
Carrying
|
|
Accumulated
|
|
Gross
Carrying
|
|
Accumulated
|
|
|
|
|
Amount
|
|
Amortization
|
|
Amount
|
|
Amortization
|
|
|
Intangible
assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
$
|
12,414
|
|
$
|
11,425
|
|
$
|
11,664
|
|
$
|
10,739
|
|
|
Covenants not to compete
|
|
$
|
605,011
|
|
$
|
569,789
|
|
$
|
605,011
|
|
$
|
448,149
|
|
Amortization expense of
intangible assets was $122,326 and $112,927 for the years ended
September 30, 2006 and 2005, respectively.
Amortization expense is estimated to approximate $19,241, $8,854, $8,116
and $0 for the years ending September 30, 2007, 2008, 2009, and 2010,
respectively.
F-
10
Revenue Recognition
The Company recognizes revenue in accordance with
Securities and Exchange Commission, Staff Accounting Bulletin No. 104, “Revenue
Recognition”. The Company recognizes
revenue on product sales upon shipment to customers.
Comprehensive Income
SFAS No. 130 establishes standards for the reporting
and disclosure of comprehensive income and its components, which will be
presented in association with a company’s consolidated financial
statements. Comprehensive income is
defined as the change in a business enterprise’s equity during a period arising
from transactions, events or circumstances relating to non-owner sources, such
as foreign currency translation adjustments and unrealized gains or losses on
available-for-sale securities. It
includes all changes in equity during a period except those resulting from
investments by or distributions to owners.
For the years ended September 30, 2006 and 2005, net income (loss) and
comprehensive income (loss) were equivalent.
Fair Value of Financial
Instruments
SFAS No. 107, “Disclosures About Fair Value of
Financial Instruments” requires disclosure of the estimated fair value of
financial instruments as follows:
Short-term Assets and
Liabilities
:
The fair values of cash and cash equivalents, accounts
receivable, accounts payable, accrued liabilities, and short-term debt
approximate their carrying values due to the short-term nature of these
financial instruments.
Long-term Debt and
Covenants Not to Compete
:
The fair value of long-term debt and covenants not to compete
approximate their carrying value because the terms are equivalent to borrowing
rates currently available to the Company for debt with similar terms and maturities.
Segment Reporting
A business segment is a distinguishable component of
an enterprise that is engaged in providing an individual product or service or
a group of related products or services and that is subject to risks and
returns that are different from those of other business segments. The Company’s
segments have similar economic characteristics and are similar in the nature of
the products sold, type of customers, methods used to distribute the Company’s
products and regulatory environment. Management
believes that the Company meets the criteria for aggregating its operating
segments into a single reporting segment.
Stock-Based Compensation
SFAS
No. 123,
Accounting for Stock-Based
Compensation
(“SFAS 123”), provides for the use of a fair value
based method of accounting for employee stock compensation. However, SFAS 123 also allows an entity to
continue to measure compensation cost for stock options granted to employees
using the intrinsic value method of accounting prescribed by Accounting Principles
Board Opinion No. 25,
Accounting for Stock
Issued to Employees
(“APB 25”) and related interpretations, which
only requires charges to compensation expense for the excess, if any, of the
fair value of the underlying stock at the date a stock option is granted (or at
an appropriate subsequent measurement date) over the
F-
11
amount
the employee must pay to acquire the stock
,
if such amounts differ materially from historical amounts. The Company has elected to continue to
account for employee stock options using the intrinsic value method under APB
25. By making that election, it is
required by SFAS 123 and SFAS 148, “Accounting for Stock-Based Compensation —
Transition and Disclosure” to provide pro forma disclosures of net income
(loss) and earnings (loss) per share as if a fair value based method of
accounting had been applied.
Had
compensation costs been determined in accordance with the fair value method
prescribed by SFAS No. 123 for all options issued to employees and
amortized over the vesting period, the Company’s net income (loss) applicable
to common shares and earnings (loss) per common share (basic and diluted) for
plan options would have been decreased to the pro forma amounts indicated
below.
|
|
|
Fiscal Year ended
September 30,
|
|
|
|
|
2006
|
|
2005
|
|
|
Net
Income (loss):
|
|
|
|
|
|
|
As reported
|
|
$
|
27,377
|
|
$
|
(1,119,764
|
)
|
|
Pro forma
|
|
$
|
27,377
|
|
$
|
(1,119,764
|
)
|
|
|
|
|
|
|
|
|
Basic earnings
(loss) per common share:
|
|
|
|
|
|
|
As reported
|
|
$
|
0.00
|
|
$
|
(0.15
|
)
|
|
Pro forma
|
|
$
|
0.00
|
|
$
|
(0.15
|
)
|
|
|
|
|
|
|
|
|
Diluted earnings
(loss) per common share:
|
|
|
|
|
|
|
As reported
|
|
$
|
0.00
|
|
$
|
(0.15
|
)
|
|
Pro forma
|
|
$
|
0.00
|
|
$
|
(0.15
|
)
|
|
|
|
|
|
|
|
|
Stock based
compensation:
|
|
|
|
|
|
|
As reported
|
|
—
|
|
$
|
69,206
|
|
|
Pro forma
|
|
—
|
|
—
|
|
No
options were granted or vested during fiscal years 2006 and 2005.
F-
12
Earnings (loss) per Common Share
Basic
earnings (loss) per common share is computed by dividing net income (loss) by
the weighted average number of common shares outstanding during the
period. Diluted earnings (loss) per
common share is computed by dividing net income (loss) by the weighted average
number of common shares outstanding plus all additional common stock that would
have been outstanding if potentially dilutive common stock related to stock
options and warrants had been issued.
Weighted average shares outstanding-diluted includes 32,071 and 0 shares
of dilutive securities for the years ended September 30, 2006 and 2005,
respectively. The stock based
compensation in fiscal 2005 related to a modification of stock options and in
fiscal 2004 related to non-employee warrants.
Following
is a reconciliation of basic and diluted earnings (loss) per common share for
fiscal years ended September 30, 2006 and 2005, respectively:
|
|
|
Fiscal Year ended
September 30,
|
|
|
|
|
2006
|
|
2005
|
|
|
Earnings (loss)
per common share — basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
27,377
|
|
$
|
(1,119,764
|
)
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
7,810,186
|
|
7,320,328
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share — basic
|
|
$
|
0.00
|
|
$
|
(0.15
|
)
|
|
|
|
|
|
|
|
|
Earnings (loss)
per common share — diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
27,377
|
|
$
|
(1,119,764
|
)
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
7,810,186
|
|
7,320,328
|
|
|
Common stock equivalents
|
|
32,071
|
|
0
|
|
|
|
|
|
|
|
|
|
Weighted average shares and potential diluted shares
outstanding
|
|
7,842,257
|
|
7,320,328
|
|
|
|
|
|
|
|
|
|
Earnings (loss)
per common share — diluted
|
|
$
|
0.00
|
|
$
|
(0.15
|
)
|
The
Company uses the treasury method for calculating the dilutive effect of the
stock options and warrants (using the average market price).
Warrants
for 16,401 were excluded from the computation of diluted earnings per share for
the year ended September 30, 2006 since their effect was anti-dilutive for the
year.
In
the year ended September 30, 2005, 150,000 options were excluded from the
computation of diluted loss per share since their effect was anti-dilutive with
the current year loss.
F-
13
The
Company issued additional common shares after September 30, 2006 (see Note 14)
that will impact the number of shares used to calculate future earnings per
common share.
Recently Issued Accounting Pronouncements
In
November 2004, the Financial Accounting Standards Board (FASB) issued SFAS No.
151 “Inventory Costs,” (SFAS No. 151) which amends the guidance in ARB No. 43
(ARB 43), Chapter 4 “Inventory Pricing,” to clarify the accounting for abnormal
amounts of idle facility expense, freight, handling costs, and wasted material
(spoilage). Paragraph 5 of ARB 43,
Chapter 4, previously stated that under some circumstances, items such as idle
facility expense, excessive spoilage, double freight, and rehandling costs may
be so abnormal as to require treatment as current period charges. SFAS No. 151 requires that those items be
recognized as current-period charges regardless of whether they meet the
criterion of “so abnormal.” In addition,
SFAS No. 151 requires that allocation of fixed production overheads to the
costs of conversion be based on the normal capacity of the production
facilities. SFAS No. 151 shall be
effective for inventory costs incurred during fiscal years beginning after June
15, 2005. Earlier application is
permitted for inventory costs incurred during fiscal years beginning after the
date SFAS No. 151 was issued. SFAS No.
151 shall be applied prospectively. The
adoption of SFAS No. 151 was not material to the consolidated financial
statements.
In
December 2004, FASB issued SFAS No. 153 “Exchanges of Nonmonetary Assets” (SFAS
No. 153) which amends APB Opinion No. 29, “Accounting for Nonmonetary
Transactions.” APB No. 29 is based on the principle that exchanges of
nonmonetary assets should be measured based on the fair value of the assets
exchanged. The guidance in that Opinion,
however, included certain exceptions to that principle. SFAS No. 153 amends APB No. 29 to eliminate
the exception for nonmonetary exchanges of similar productive assets and
replaces it with a general exception for exchanges of nonmonetary assets that
do not have commercial substance. A
nonmonetary exchange has commercial substance if the future cash flows of the
entity are expected to change significantly as a result of the exchange. SFAS No. 153 will be effective for
nonmonetary asset exchanges occurring in fiscal periods beginning after June
15, 2005. Earlier application is
permitted for nonmonetary asset exchanges occurring in fiscal periods beginning
after the date SFAS No. 153 was issued.
SFAS No. 153 shall be applied prospectively. The adoption of SFAS No. 153 was not material
to the consolidated financial statements.
In
December 2004, FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment,”
(SFAS No. 123R) that focuses primarily on accounting for transactions in which
an entity obtains employee services in shared-based payment transactions. This statement replaces SFAS No. 123, “Accounting
for Stock-Based Compensation,” and supersedes APB Opinion No. 25, “Accounting
for Stock issued to Employees.”
Beginning October 1, 2006, we will be required to expense the fair value
of employee stock options and similar awards.
As a public company we are allowed to select from two alternative
transition methods, each having different reporting implications. The impact of SFAS No. 123R for unvested
stock options outstanding at September 30, 2006 on the results of operations
for the fiscal year ending September 30, 2007 is zero as all options are vested
as of September 30, 2006.
In
June 2005, FASB issued SFAS No. 154, “Accounting Changes and Error Corrections”,
a replacement of APB Opinion No. 20 and FASB Statement No. 3. The statement applies to all voluntary
changes in accounting principle, and changes the requirements for accounting
for and reporting of a change in accounting principle. SFAS No. 154 requires retrospective
application to prior periods’ consolidated financial statements of a voluntary
change in accounting principle unless it is impracticable. SFAS No. 154 is effective for accounting
changes and corrections of errors made in fiscal years beginning after December
15, 2005. Earlier application is
permitted
F-
14
for
accounting changes and corrections of errors made occurring in fiscal years
beginning after June 1, 2005. The
statement does not change the transition provisions of any existing accounting
pronouncements, including those that are in a transition phase as of the effective
date of this statement. The Company does
not expect the adoption of SFAS No. 154 to have a material effect on its
consolidated financial statements.
In
June 2006, the FASB has published FASB Interpretation (FIN) No. 48 (FIN No.
48), Accounting for Uncertainty in Income Taxes, to address the
noncomparability in reporting tax assets and liabilities resulting from a lack
of specific guidance in FASB SFAS No. 109, Accounting for Income Taxes, on the
uncertainty in income taxes recognized in an enterprise’s financial statements.
Specifically, FIN No. 48 prescribes (a) a consistent recognition threshold and
(b) a measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return,
and provides related guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition. The provisions of FIN No. 48 are effective
for fiscal years beginning after December 15, 2006. The Company is currently evaluating the
impact the adoptions of FIN No. 48 will have on its consolidated financial
statements.
In
September 2006, the FASB has published FASB SFAS No. 157, Fair Value
Measurements, to eliminate the diversity in practice that exists due to the
different definitions of fair value and the limited guidance for applying those
definitions in GAAP that are dispersed among the many accounting pronouncements
that require fair value measurements. SFAS No. 157 retains the exchange price
notion in earlier definitions of fair value, but clarifies that the exchange
price is the price in an orderly transaction between market participants to
sell an asset or liability in the principal or most advantageous market for the
asset or liability. Moreover, the SFAS states that the transaction is hypothetical
at the measurement date, considered from the perspective of the market
participant who holds the asset or liability. Consequently, fair value is
defined as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at
the measurement date (an exit price), as opposed to the price that would be
paid to acquire the asset or received to assume the liability at the
measurement date (an entry price). SFAS
No. 157 also stipulates that, as a market-based measurement, fair value
measurement should be determined based on the assumptions that market
participants would use in pricing the asset or liability, and establishes a
fair value hierarchy that distinguishes between (a) market participant
assumptions developed based on market data obtained from sources independent of
the reporting entity (observable inputs) and (b) the reporting entity’s own
assumptions about market participant assumptions developed based on the best
information available in the circumstances (unobservable inputs). Finally, SFAS
No. 157 expands disclosures about the use of fair value to measure assets and
liabilities in interim and annual periods subsequent to initial recognition.
Entities are encouraged to combine the fair value information disclosed under
SFAS No. 157 with the fair value information disclosed under other accounting
pronouncements, including SFAS No. 107, Disclosures about Fair Value of
Financial Instruments, where practicable. The guidance in this Statement
applies for derivatives and other financial instruments measured at fair value
under SFAS No. 133 , Accounting for Derivative Instruments and Hedging
Activities, at initial recognition and in all subsequent periods. The provisions of SFAS No. 157 are effective
for fiscals years beginning after November 15, 2007. The Company believes the impact of SFAS No.
157 will not have a material effect of its consolidated financial statements.
In
September 2006, the FASB has published FASB SFAS No. 158, Employers’ Accounting
for Defined Benefit Pension and Other Postretirement Plans, to require an
employer to fully recognize the obligations associated with single-employer
defined benefit pension, retiree healthcare, and other postretirement plans in
their financial statements. Previous standards
F-
15
required
an employer to disclose the complete funded status of its plan only in the
notes to the financial statements. Moreover, because those standards allowed an
employer to delay recognition of certain changes in plan assets and obligations
that affected the costs of providing benefits, employers reported an asset or
liability that almost always differed from the plan’s funded status. Under SFAS
No. 158, a defined benefit postretirement plan sponsor that is a public or
private company or a nongovernmental not-for-profit organization must (a)
recognize in its statement of financial position an asset for a plan’s
overfunded status or a liability for the plan’s underfunded status, (b) measure
the plan’s assets and its obligations that determine its funded status as of
the end of the employer’s fiscal year (with limited exceptions), and (c)
recognize, as a component of other comprehensive income, the changes in the
funded status of the plan that arise during the year but are not recognized as
components of net periodic benefit cost pursuant to SFAS No. 87, Employers’
Accounting for Pensions, or SFAS No. 106, Employers’ Accounting for
Postretirement Benefits Other Than Pensions. SFAS No. 158 also requires an
employer to disclose in the notes to financial statements additional
information on how delayed recognition of certain changes in the funded status
of a defined benefit postretirement plan affects net periodic benefit cost for
the next fiscal year. The Company
believes the impact of SFAS No. 158 will not have a material effect on its
consolidated financial statements.
In
September 2006, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin 108, “Considering the Effects on Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements,” (“SAB 108”). SAB 108 requires registrants to quantify
errors using both the income statement method (i.e. iron curtain method) and
the rollover method and requires adjustment if either method indicates a
material error. If a correction in the current year relating to prior year
errors is material to the current year, then the prior year financial
information needs to be corrected. A correction to the prior year results that
are not material to those years, would not require a “restatement process”
where prior financials would be amended. SAB 108 is effective for fiscal
years ending after November 15, 2006. The Company does not anticipate that
SAB 108 will have a material effect on its consolidated financial
statements.
Research and Development Costs
Research
and development costs are charged to expense as incurred.
Advertising Expenses
Non-direct
response advertising expenses are recognized in the period incurred. Non-direct response advertising expenses
totaled $18,649 in 2006 and $40,805 in 2005.
Legal Costs
The
Company expenses its legal costs as incurred except settlements which are
expensed when a claim is probable and estimatable.
Shipping and Handling Costs
The
Company records amounts being charged to customers for shipping and handling as
sales and costs incurred in cost of sales.
F-
16
3.
Cirrus Design Purchase and Supply
Agreement
The
Company currently operates under a Purchase and Supply Agreement with Cirrus,
dated as of September 1999 and amended February 2006 (the “Cirrus Supply
Agreement”). Under the Cirrus Supply
Agreement, BRS is the non-exclusive supplier of the parachute recovery system
to Cirrus.
The
current term of the Cirrus Supply Agreement expires in July 2007, but the
Agreement is subject to rolling automatic renewal terms of 18 months, unless
terminated by either party upon 18 months advance notice. The recent amendment to the Agreement also
provides that Cirrus will maintain product liability insurance on the parachute
system whose components are directly or indirectly supplied by BRS. Additionally, Cirrus has agreed to indemnify
BRS for all related product liability claims involving the BRS parachute system
(except for claims for economic losses or damage related solely to the
aircraft). The Cirrus Supply Agreement
also gives Cirrus limited exclusivity for an increased gross weight (3,600
pound) system for a period of one year after introduction.
4.
Warrants Issued to Cirrus Under
Purchase and Supply Agreement
On
September 17, 1999, the Company entered into a Purchase and Supply
Agreement with Cirrus, the manufacturer of the SR20 and SR22 aircraft that
utilize the Company’s parachute system as standard equipment. Under the Agreement, Cirrus was issued four
warrants to acquire an aggregate of up to 1.4 million shares of unregistered
Company common stock. In order to
execute the warrants, Cirrus was required to meet certain purchase levels of
the Company’s emergency parachute systems for the SR20, SR22 and derivative
aircraft over the subsequent five years.
Cirrus met their minimum purchase commitment for the first warrant
period, but did not exercise the warrant to purchase 250,000 shares of common
stock which expired on February 28, 2003. Cirrus met their minimum
purchase commitment for warrant periods two and three, and exercised warrants
to purchase an aggregate of 500,000 shares of common stock on February 29,
2004, for an aggregate exercise price of $562,500. Cirrus met their minimum purchase commitment
for warrant period four in 2004 and exercised a warrant for 650,000 shares of
common stock on February 23, 2005 for an aggregate exercise price of
$812,500. Cirrus currently owns 14.22%,
of the outstanding shares of BRS common stock.
5.
Covenants 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
called for monthly payments of $4,036 through October 2005. Payments under this agreement were unsecured.
On
August 16, 2004, the Company extended the non-compete period by five additional
years in exchange for the exercise of stock options held by SCI’s president
under a stock subscription agreement backed by a promissory note. The note had a principal sum of $12,500
together with aggregate interest on the unpaid principal balance of
$2,500. Payments under the note began
July 1, 2005 and continued monthly with a final maturity date of October 1,
2005. The present value of the Company’s
obligation under this agreement was recorded as an intangible asset and is
F-
17
being
amortized over a range of two to 15 years as shown in the accompanying
consolidated financial statements.
On
October 14, 2004, the Company and Mr. Mark Thomas entered into a Resignation,
Consulting, Non-Competition and General Release Agreement (the “Resignation
Agreement”) in connection with Mr. Thomas’ resignation as Chief Executive
Officer, Chief Financial Officer, President, and as a director of the
Company. Pursuant to the terms of the
Resignation Agreement, Mr. Thomas resigned such offices effective October 14,
2004.
Mr.
Thomas agreed, for a two-year period, not to 1) call on or solicit Company
customers, 2) directly or indirectly, become employed by, consult with, manage,
own or operate any business engaged in the design, manufacturing, marketing or
distribution of (i) emergency parachute recovery systems for recreational,
general and commercial aviation aircraft and unmanned aircraft or (ii) general
aviation aircraft. Mr. Thomas also
agreed not to divulge any trade secrets or confidential information regarding
the Company. In exchange for such
Resignation Agreement, the Company agreed to pay Mr. Thomas an aggregate of
$230,000; $60,000 of which was paid 15 days after execution of the Agreement
and $170,000 of which would be paid over a 24 month period $(7,083 per month)
during the compliance of Mr. Thomas’ non-competition /non-disclosure
requirements. The present value of the
Company’s obligation under this agreement was recorded as an intangible asset
and is being amortized over two years as shown in the accompanying consolidated
financial statements.
Future
payments under these agreements are as follows:
|
Fiscal
Year
|
|
Future
Dollars
|
|
Present
Dollars
|
|
|
2007
|
|
$
|
7,083
|
|
$
|
7,069
|
|
|
|
|
$
|
7,083
|
|
$
|
7,069
|
|
6.
Other Financial Information
Inventories
The
components of inventory consist of the following at September 30:
|
|
|
2006
|
|
2005
|
|
|
Raw materials
|
|
$
|
2,100,501
|
|
$
|
1,162,175
|
|
|
Work in process
|
|
340,434
|
|
252,225
|
|
|
Finished goods
|
|
17,068
|
|
46,519
|
|
|
Total inventories
|
|
$
|
2,458,003
|
|
$
|
1,460,919
|
|
Furniture,
Fixtures and Leasehold Improvements
Furniture,
fixtures and leasehold improvements consisted of the following categories at
September 30:
|
|
|
2006
|
|
2005
|
|
|
Office furniture
and equipment
|
|
$
|
345,535
|
|
$
|
293,930
|
|
|
Manufacturing
equipment
|
|
463,367
|
|
383,078
|
|
|
Airplane
|
|
283,183
|
|
265,467
|
|
|
Total fixed assets
|
|
$
|
1,092,085
|
|
$
|
942,475
|
|
F-
18
Depreciation
Expense
Depreciation
expense totaled $149,624 in 2006 and $101,790 in 2005.
Long-Term
Prepaid Expenses
Long-term
prepaid expenses consist of the following at September 30:
|
|
|
2006
|
|
2005
|
|
|
Stock offering
costs
|
|
$
|
72,664
|
|
$
|
0
|
|
|
Other
|
|
37,261
|
|
28,269
|
|
|
Total long-term prepaid
expenses
|
|
$
|
109,925
|
|
$
|
28,269
|
|
The
stock offering costs will be netted against the proceeds received from the
common stock proceeds the Company received after September 30, 2006. See Note 14.
Long-Lived
Assets
In
accordance with SFAS No. 144, Accounting For The Impairment Of Long-Lived
Assets And For Long-Lived Assets To Be Disposed Of, the Company reviews its
long-lived assets and intangibles related to those assets periodically to
determine potential impairment by comparing the carrying value of the
long-lived assets outstanding with estimated future cash flows expected to
result from the use of the assets, including cash flows from disposition. Should the sum of the expected future cash
flows be less than the carrying value, the Company would recognize an
impairment loss. An impairment loss
would be measured by comparing the amount by which the carrying value exceeds
the fair value of the long-lived assets and intangibles. To date, management has determined that no
impairment of long-lived assets exists.
Other
Accrued Liabilities
Other
accrued liabilities consisted of the following categories at September 30:
|
|
|
2006
|
|
2005
|
|
|
Bonus and Profit
Sharing Plan Accrual
|
|
$
|
215,971
|
|
$
|
44,530
|
|
|
Contingency
Accrual
|
|
—
|
|
80,000
|
|
|
Other
Miscellaneous Accruals
|
|
28,959
|
|
59,340
|
|
|
|
|
$
|
244,930
|
|
$
|
183,870
|
|
Export
Sales
The
Company’s international sales are made through independent representatives in
various foreign countries. International
sales as a percentage of total sales were 12.4% in 2006 and 9.6% in 2005.
Major
Suppliers
During
the years ended September 30, 2006 and 2005, the Company purchased its
parachutes from a certain key vendor. The Company manufactures its own
ballistic devices, but the propellant for the ballistic devices is purchased
from a single source. The Company
routinely searches for new suppliers and feels alternate sources can be found
should any of these suppliers be unable to meet the Company’s needs.
F-
19
Related
Parties
Active Agreement
Effective
as of November 19, 2004, the Company entered into a Consulting Agreement with
Mr. Boris Popov, a director of the Company, pursuant to which Mr. Popov would
provide certain consulting services relating to the Company’s new product
development. Pursuant to this agreement,
the term of which is six months, Mr. Popov is required to provide a minimum of
64 hours of service per month for $3,200 per month and shall be paid an
additional $50 per hour for each hour over the 64 hour minimum. On March 16, 2005 the Company extended this
agreement for 12 additional months.
Consulting expenses for Mr. Popov were $25,573 and $21,162 for the years
ended September 30, 2006 and 2005, respectively.
Expired Agreements
Effective
as of November 19, 2004, the Company entered into a Consulting Agreement with
Mr. Thomas H. Adams, Jr., a director of the Company, pursuant to which Mr.
Adams would provide certain consulting and advisory services to the Company
relating to after market business development of the Company’s products. Pursuant to this agreement, the term of which
was six months, Mr. Adams was required to provide a minimum of 50 hours of
services per month for $2,500 and shall be paid an additional $50 per hour for
each hour over the 50 hour minimum. On
March 16, 2005 the Company extended this agreement for three months. Consulting expenses for Mr. Adams were $0 and
$10,323 for the years ended September 30, 2006 and 2005, respectively. This agreement has expired.
Also
effective as of November 19, 2004, the Company entered into an Interim Services
Agreement with Robert L. Nelson, the Company’s Chairman of the Board, Chief
Executive Officer, President and Chief Financial Officer, in connection with
his consulting services as interim Chief Executive Officer, Chief Financial
Officer and President while the Company pursued a candidate to fill those
positions on a permanent basis. The term
of this agreement was three months, with an automatic renewal of three months
unless otherwise agreed to in writing.
Mr. Nelson received $11,000 per month as a fee for his services during
this Agreement. Effective March 16,
2005, Mr. Nelson’s payment under this agreement was continued at $4,000 per
month and this agreement was extended an additional two months. Consulting expenses for Mr. Nelson were $0 and
$49,000 for the years ended September 30, 2006 and 2005, respectively. This agreement has expired.
For
all such agreements, the fees paid were and will be in addition to and
independent of any fees or compensation owed to such directors in their
capacity as non-employee directors.
Profit
Sharing Plan
The
Company adopted a pre-tax salary reduction plan, under the provisions of
Section 401(k) of the Internal Revenue Code, in fiscal year 2000, which covers
its full-time employees over age 21.
Company match contributions made for the years ended September 30, 2006
and 2005, respectively, were $12,431 and $11,336. The Company can also make discretionary
profit sharing contributions. Company
contributions made at the discretion of management and the board of directors
for the years ended September 30, 2006 and 2005, respectively, were $0 and $0.
F-
20
Product
Warranties
The
Company offers its customers up to a one-year warranty on its products. The warranty covers only manufacturing
defects, which will be replaced or repaired by the Company at no charge to the
customer. To date, the Company has not
had any material claims against its products.
The Company has not recorded an accrual for possible warranty claims and
believes that the product warranties as offered will not have a material effect
on the Company’s financial position, results of operations or cash flows.
7.
Geographical Information
The
Company has operations in South St. Paul, Minnesota and Tijuana, Mexico. Information about the Company’s operations by
geographical location are as follows for the year ended September 30,
2006. The Company did not have
operations in Mexico until late September 2005, therefore there is no
geographical information to disclose for 2005.
|
|
|
United
States
|
|
Mexico
|
|
Consolidated
|
|
|
As of September
30, 2006 or for the year ended:
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
4,687,830
|
|
$
|
727,426
|
|
$
|
5,415,256
|
|
|
Long-lived assets
|
|
$
|
890,705
|
|
$
|
201,380
|
|
$
|
1,092,085
|
|
|
Inventories
|
|
$
|
1,931,957
|
|
$
|
526,046
|
|
$
|
2,458,003
|
|
8.
Line-of Credit Borrowings
The
Company has a $400,000 line-of-credit with a bank on an annual renewal basis
and is collateralized by all of the Company’s assets. The current line-of-credit expires February
6, 2007. The line calls for a variable
interest rate of 9.75% at September 30, 2006 (average rate for the year ended
September 30, 2006 was 8.36%). At
September 30, 2006 and 2005, there were outstanding balances of $302,265 and
$204,715, respectively, under the line of credit.
9.
Long-Term Debt
In
2005, a jury awarded damages to Parsons and Aerospace Marketing in the combined
amount of approximately $3.4 million for breach of contract. BRS settled this
matter directly with Parsons and Aerospace on September 19, 2005 by agreeing to
pay $1.9 million. An initial payment of
$700,000 plus interest was made on September 19, 2005. The remainder of $1.2 million was to be paid
by the Company over a term of 8 years, although the Company had the right to
pre-pay remaining amounts due at any time.
On November 15, 2006, the Company paid the entire unpaid principal and
interest outstanding on the first note detailed below and paid $5,000 towards
unpaid principal on the second note detailed below with money raised through
equity financing on October 25, 2006 (see Note 14). As such, the first note payable detailed
below was classified at September 30, 2006 as long-term pursuant to SFAS No. 6 “Classification
of Short-Term Obligations Expected to be Refinanced”.
The
components of long-term debt consisted of the following at September 30:
F-
21
|
|
|
2006
|
|
2005
|
|
|
Note payable —
Parsons, principal and interest payments due in monthly installments of
$17,885 including interest at 8.25%, through September 2010, collateralized
by substantially all assets of the Company
|
|
$
|
729,091
|
|
$
|
880,000
|
|
|
Note payable —
Parsons, interest only payments at 8.25% through September 2010, then
principal and interest payments due in monthly installments of $10,065
including interest at 8.25%, from October 2010 through September 2013,
collateralized by substantially all assets of the Company
|
|
320,000
|
|
320,000
|
|
|
Total long-term
debt
|
|
1,049,091
|
|
1,200,000
|
|
|
Less: debt
refinanced with equity offering
|
|
729,091
|
|
—
|
|
|
Less: current
portion
|
|
—
|
|
153,951
|
|
|
Long-term debt, net of
current portion
|
|
$
|
320,000
|
|
$
|
1,046,049
|
|
Future
minimum payments required at September 30, 2006 are as follows:
|
Fiscal Year
|
|
Amount
|
|
|
2007
|
|
$
|
—
|
|
|
2008
|
|
—
|
|
|
2009
|
|
—
|
|
|
2010
|
|
—
|
|
|
2011
|
|
98,027
|
|
|
2012 and thereafter
|
|
221,973
|
|
|
|
|
$
|
320,000
|
|
Future
minimum payments that would have been required at September 30, 2006 if the
Company had not refinanced the first note payable through the sale of common
shares in October 2006 and November 2006 assuming all covenant violations would
have been waived are as follows:
|
Fiscal Year
|
|
Amount
|
|
|
2007
|
|
$
|
160,446
|
|
|
2008
|
|
174,195
|
|
|
2009
|
|
189,122
|
|
|
2010
|
|
205,328
|
|
|
2011
|
|
98,027
|
|
|
2012 and
thereafter
|
|
221,973
|
|
|
|
|
$
|
1,049,091
|
|
10.
Income Taxes
At
September 30, 2006 and 2005, the Company had $2,000,000 and $2,050,000 in net
operating loss carryforwards which will expire in 2025. The provision for income taxes consisted of
the following components for the years ended September 30:
F-
22
|
|
|
2006
|
|
2005
|
|
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
(56,984
|
)
|
$
|
(242,300
|
)
|
|
State
|
|
0
|
|
(26,000
|
)
|
|
Deferred
|
|
75,184
|
|
(1,204,700
|
)
|
|
Tax benefit of
stock option and warrant exercises, credited to additional paid-in capital
|
|
0
|
|
830,000
|
|
|
|
|
$
|
18,200
|
|
$
|
(643,000
|
)
|
The
tax benefit of $830,000 in 2005 noted above, relates to compensation expense
for tax purposes in excess of amounts recognized for financial reporting
purposes.
Components
of net deferred income taxes are as follows at September 30:
|
|
|
2006
|
|
2005
|
|
|
Deferred income tax
assets:
|
|
|
|
|
|
|
Amortization
|
|
$
|
12,000
|
|
$
|
24,700
|
|
|
Allowance for doubtful
accounts
|
|
9,000
|
|
4,000
|
|
|
Vacation accruals
|
|
12,000
|
|
24,200
|
|
|
Asset valuation
reserves
|
|
39,600
|
|
39,600
|
|
|
Net Operating Losses
|
|
707,516
|
|
729,700
|
|
|
Legal Settlement
Accruals
|
|
420,000
|
|
510,000
|
|
|
Income Tax Credits
|
|
115,000
|
|
115,000
|
|
|
Other accruals
|
|
51,900
|
|
—
|
|
|
Inventory Section 263
adjustment
|
|
36,200
|
|
36,200
|
|
|
|
|
1,403,216
|
|
1,483,400
|
|
|
Deferred income tax
liabilities — depreciation
|
|
(21,000
|
)
|
(26,000
|
)
|
|
Net deferred income tax assets
|
|
$
|
1,382,216
|
|
$
|
1,457,400
|
|
The
net deferred income taxes are reflected in the consolidated balance sheet at
September 30, 2006 and 2005 as follows:
|
|
|
2006
|
|
2005
|
|
|
Deferred tax
asset — current portion
|
|
$
|
160,700
|
|
$
|
160,700
|
|
|
Deferred tax
asset — non-current portion
|
|
1,221,516
|
|
1,296,700
|
|
|
Total
|
|
$
|
1,382,216
|
|
$
|
1,457,400
|
|
Reconciliation
between the statutory rate and the effective tax rate for the years ended
September 30, is as follows:
|
|
|
2006
|
|
2005
|
|
|
Federal
statutory tax rate
|
|
34.0
|
%
|
(34.0
|
)%
|
|
State taxes, net
of federal benefit
|
|
6.3
|
|
(6.3
|
)
|
|
Other
|
|
(0.4
|
)
|
3.8
|
|
|
Effective tax rate
|
|
39.9
|
%
|
(36.5
|
)%
|
11.
Shareholders’ Equity
Common Stock
On June 22, 2006 and June 23, 2006, the Company accepted subscriptions
from certain directors and executive officers of the Company relating to the
issuance of 322,956 shares of common stock and
F-
23
warrants to acquire 16,401 shares of common stock for an aggregate
purchase price of $439,220. The warrants
have a three-year term and an exercise price of $2.00 per share and have
piggy-back registration rights. The
Company paid no underwriting discounts or commissions in connection with these
sales. The price per share was
determined by the placement agent that assisted with the equity offering that
closed on October and November 2006 (see Note 14). The common shares issued were restricted and
unregistered shares. The price per
common share was $1.36 per share and the market price was approximately $1.50
per share. The discount to market was
due to the significant amount of shares issued and the fact the shares were
restricted and unregistered. The
discount was not in exchange for board services or any other services rendered
or to be rendered.
On June 15, 2006 , the Company issued 6,000 shares of common stock to
each of its five Board Members for a total of 30,000 shares, as partial
compensation for the next five board meetings through the Company’s 2007 Annual
Meeting of Shareholders. The shares were
valued at $1.51 (fair value at the date of issuance) and are expensed as
services are provided.
During the third quarter of 2006, 15,000 stock options were exercised
resulting in net proceeds to the Company of $15,750. During the second quarter of 2006, 30,000
stock options were exercised resulting in net proceeds to the Company of
$27,189. In addition, the Company
retired 8,771 shares in the second quarter of 2006, and the proceeds were used
by the individual to exercise an additional 15,000 stock options.
During the year ended September 30, 2005, the Company issued 31,150
registered shares of common stock at $2.25 per share (the stock trading price
on the date of issuance) for services rendered valued at $70,087.
Stock Options
In March 2004, the shareholders at their annual meeting approved the
2004 Stock Option Plan (the 2004 Plan), which provides for the granting of up
to 600,000 options to officers, directors, employees and consultants for the
purchase of stock. No grants were made
under this plan in fiscal years 2006 and 2005.
Stock option activity for the years ended September 30, 2006 and 2005
is as follows:
|
|
|
Number of
Shares
|
|
Option Price
Range per
Share
|
|
|
Balance at September
30, 2004
|
|
310,000
|
|
$0.44 to $1.38
|
|
|
|
|
|
|
|
|
|
Granted during fiscal
year 2005
|
|
—
|
|
—
|
|
|
Options exercised
|
|
(160,000
|
)
|
$0.44 to $1.38
|
|
|
Expirations
|
|
—
|
|
—
|
|
|
|
|
|
|
|
|
|
Balance at September
30, 2005
|
|
150,000
|
|
$0.91 to $1.38
|
|
|
|
|
|
|
|
|
|
Granted during fiscal
year 2006
|
|
—
|
|
—
|
|
|
Options exercised
|
|
(60,000
|
)
|
$0.91 to $1.05
|
|
|
Expirations
|
|
—
|
|
—
|
|
|
|
|
|
|
|
|
|
Balance at September
30, 2006
|
|
90,000
|
|
$1.05 to $1.38
|
|
|
|
|
|
|
|
|
|
Weighted average fair
value of options granted during fiscal year 2006
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair
value of options granted during fiscal year 2005
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2006:
|
|
|
|
|
|
|
Options vested and
exercisable
|
|
90,000
|
|
|
|
|
Shares available for
options
|
|
600,000
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2005:
|
|
|
|
|
|
|
Options vested and
exercisable
|
|
150,000
|
|
|
|
|
Shares available for options
|
|
600,000
|
|
|
|
F-
24
The following tables summarize information about stock options
outstanding and exercisable as of September 30, 2006:
|
Options Outstanding and Exercisable
|
|
|
Exercise Price
|
|
Number
Outstanding
|
|
Weighted-
Average
Remaining
Contractual
Life
|
|
Weighted-
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
$1.05
|
|
45,000
|
|
1.46
|
|
$
|
1.05
|
|
|
$1.38
|
|
45,000
|
|
0.46
|
|
$
|
1.38
|
|
|
|
|
|
|
|
|
|
|
|
$1.05 to $1.38
|
|
90,000
|
|
0.96
|
|
$
|
1.22
|
|
Stock Warrants
On June 22, 2006 and June 23, 2006, the Company accepted subscriptions
from certain directors and executive officers of the Company relating to the
issuance of 322,956 shares of common stock and warrants to acquire 16,401
shares of common stock for an aggregate purchase price of $439,220. The warrants have a three-year term and an
exercise price of $2.00 per share and have piggy-back registration rights. The Company paid no underwriting discounts or
commissions in connection with these sales.
On February 23, 2005 Cirrus Design exercised its warrant to purchase
650,000 shares of common stock pursuant to the Purchase and Supply Agreement
dated September 17, 1999. The exercise
price related to this warrant was $1.25 per share for total consideration of
$812,500.
12.
Acquisitions
In September 2005, the Company completed the purchase through its subsidiary,
BRS de Mexico S.A. de C.V., of certain assets of Paranetics Technology, Inc.
(Paranetics) for the purpose of manufacturing parachutes and related
components.
The acquisition of assets from Paranetics was pursuant to an Asset
Purchase Agreements with a purchase price for the net assets of $204,695. The Company financed the purchase with
proceeds
F-
25
from borrowings under the line of credit with their bank.
SFAS No. 141 “Business Combinations” requires that all business
combinations after June 30, 2001 be accounted for under the purchase method of
accounting. The acquisition of assets
was accounted for under the purchase method of accounting and, accordingly, the
purchase price was allocated to property acquired based on the estimated fair
value as of the acquisition date. The
excess of the purchase price and expenses relating to the acquisition over the
fair value of the assets received resulted in goodwill of $103,774.
13.
Commitments and Contingencies
Leases
The Company leases its production facility on an airport in South St.
Paul, Minnesota. Total rental expense for this operating lease during 2006 and
2005 was $42,831 and $43,138, respectively.
The Company bought out the remaining portion of its five-year sublease
with its landlord in September 2002.
This buyout resulted in short-term prepaid lease expense of $24,851 at
September 30, 2006 and 2005, and long-term prepaid lease expense of $3,418 and
$28,269, respectively, as reflected in the accompanying consolidated financial
statements. This buyout allowed the
Company to become a direct lessee with the City of South St. Paul. This lease expires December 31, 2007.
The Company leases a second facility on the same airport for office
space. Total rental expense for this
operating lease during 2006 and 2005 was $14,808 and $0, respectively. This lease expires April 30, 2008.
The Company leases office and production space in Tijuana, Mexico.
Total rental expense for this operating lease during 2006 and 2005 was $88,332
and $0, respectively. This lease expires November 14, 2007.
The Company had leased a facility on the same airport for use in
research and development. Total rental
expense for this operating lease during 2006 and 2005 was $27,603 and $31,758,
respectively. This lease was terminated
on July 31, 2006.
Future minimum lease payments required on non-cancelable operating
leases at September 30, 2006 are as follows:
|
Fiscal Year
|
|
Amount
|
|
|
2007
|
|
$
|
162,036
|
|
|
2008
|
|
45,271
|
|
|
|
|
|
|
|
Total
|
|
$
|
207,307
|
|
Legal Proceedings
(a) In August 2003, the Company was served in two related actions,
Kathleen F. Fischer and Susan Sedgwick in U.S. District Court for the Northern
District of New York. These actions
arise from the crash of a Cirrus Design Corp. SR22 airplane in April 2002
near Parish, New York. The Plaintiffs have brought claims for strict
products liability, negligence and breach of warranty against Cirrus Design,
the airplane’s manufacturer, the Company, which manufactures the CAPS (Cirrus
Airframe Parachute System), a parachute system which is a required component of
the plane, and Wings Aloft, Inc., which provided training on the SR22 to the
decedents.
F-
26
In June and August 2006, the Company settled with such plaintiffs
without any liability to the Company.
(b) On April 17, 2004, an action was commenced against the Company by
Aerospace Marketing, Inc. and Charles Parsons v. Ballistic Recovery Systems,
Inc., U.S. District Court, Middle District of Florida, File No. 04-CV-242. The action resulted from the Company’s
notification to Charles F. Parson in April 2004 of its intent to terminate the
sales and marketing contract between the Company and Mr. Parsons relating to
the BRS-172 and BRS-150 products for lack of performance.
In 2005, a jury awarded damages to Parsons and Aerospace Marketing in
the combined amount of approximately $3.4 million for breach of contract. BRS
settled this matter directly with Parsons and Aerospace on September 19, 2005
by agreeing to pay $1.9 million pursuant to terms described in the settlement
agreement. An initial payment of $700,000 plus interest was made on
September 19, 2005. The remainder of the settlement amount was to be paid
by BRS over a term of 8 years, although BRS had the right to
pre-pay remaining amounts due at any time. On November 16, 2006, the Company prepaid
$721,219 of such sum. The current
balance is $315,000, which requires interest only payments through September
2010, and principal and interest payments from October 2010 through September
2013.
(c) In April 2005, an action was commenced against the Company by Sue
Jean McGrath, individually and as successor in interest to Charles W. McGrath,
deceased, Charles W. McGrath III, Tanya Sue McGrath, Janny Sue McGrath,
individually v. Cirrus Design Corporation, Ballistic Recovery Systems, Inc.,
and Aerospace Systems and Technologies, Inc., U.S. District Court, Northern
District of California, File No. C05-1542.
The plaintiffs have alleged vicarious liability, strict product
liability, negligence and breach of warranty against the defendants arising
from the crash of a Cirrus Design Corp. SR22 airplane near Sugar Bowl,
California. The case is currently in the
early stages of discovery. At this time
the Company cannot state with any degree of certainty what the outcome of the
matter or the amount or range of potential damages will be.
(d) On September 16, 2005, an action was commenced against the Company
by Robert Treat Rayner, in the Circuit Court of the 5th Judicial Circuit in and
from Lake County Florida, File No. 04 CA 1749.
The Complaint alleges that plaintiff was injured when his ultralight
aircraft crashed while being towed by another ultralight. Plaintiff alleges that he deployed his BRS
system, but that it failed to deploy properly.
BRS is undertaking an investigation of the claim and has responded to
the suit. At this time, the Company
cannot state with any degree of certainty what the outcome of these matters
will be or the amount or range of potential loss, if any. BRS believes that it has strong defenses to
the suit and will vigorously defend against the claims.
14.
Subsequent Events
On October 25, 2006, the Company, as part of its private placement
offering of $3 million of equity securities, accepted subscription agreements
from 23 accredited investors for the sale of 975,736 shares of the Company’s
common stock, par value $.01 per share (the “Common Stock”), and warrants (the “Warrants”)
to purchase 243,934 shares of Common Stock.
The Warrants have a three-year term and an exercise price of $2.00 per
share. The Company received gross
proceeds from the sale of Common Stock and Warrants of $1,327,001, less
commissions in the aggregate amount of $92,890 and less a retainer and expenses
of in the aggregate amount of $20,000 paid to a placement agent assisting in
the placement. Additionally, the Company
will be required to issue a three-year warrant to purchase 17,075 shares of
Common Stock at an exercise price of $2.00 per share to the placement agent
(the “Agent’s Warrant”). The Company has
agreed to register the resale of the Common Stock and the Common Stock issuable
upon exercise of the Warrants and Agent’s Warrant. The disclosure about the foregoing agreements
and instruments, and the related private placement does not constitute an offer
to sell or a solicitation of an offer to buy any securities of the Company,
F-
27
and is made as required under applicable laws for filing annual reports
with the United States Securities and Exchange Commission, and as permitted
under Rule 135c under the Securities Act.
On November 15, 2006, the Company paid the unpaid principal and
interest outstanding of $721,143 on the first note payable to Parsons and
Aerospace Marketing and paid $5,000 towards unpaid principal on the second note
payable to Parsons and Aerospace Marketing, leaving a principal balance payable
of $315,000 (See Note 9).
On November 22, 2006, the Company accepted subscription agreements from
26 accredited investors for the sale of 864,704 shares of the Company’s common
stock, par value $.01 per share (the “Common Stock”), and warrants (the “Warrants”)
to purchase 216,176 shares of Common Stock.
The Warrants have a three-year term and an exercise price of $2.00 per
share. The Company received gross
proceeds from the sale of Common Stock and Warrants of $1,175,997, less commissions
in the aggregate amount of $82,320 to a placement agent assisting in the
placement. Additionally, the Company
will be required to issue a three-year warrant to purchase 15,132 shares of
Common Stock at an exercise price of $2.00 per share to the placement agent
(the “Agent’s Warrant”). The Company has
agreed to register the resale of the Common Stock and the Common Stock issuable
upon exercise of the Warrants and Agent’s Warrant. The disclosure about the foregoing agreements
and instruments, and the related private placement does not constitute an offer
to sell or a solicitation of an offer to buy any securities of the Company, and
is made as required under applicable laws for filing annual reports with the
United States Securities and Exchange Commission, and as permitted under Rule
135c under the Securities Act.
As noted above, the Company has agreed to register for resale the
Common Stock and Common Stock issuable upon exercise of the Warrants and Agent’s
Warrants. The private placement offering
requires the Company to file a registration statement after the closing of the
private placement offering within 45 days.
The estimated closing of the private placement offering is January 5,
2007. In addition, if the registration
statement is not declared effective by he Securities and Exchange Commission
within 120 days after filing the registration statement, the Company is require
to pay a penalty of Units equal to an additional 1% of the warrants issued for
each month that the registration statement is not declared effective. The Company has adopted EITF 05-4, The Effect
of Liquidated Damages Clause on a Freestanding Financial Instrument Subject to
Issue No. 00-19, View C to account for its registration rights agreements. The
Company has entered into registration rights agreements in association with the
issuance of common stock and warrants. View C of EITF 05-4 takes the position
that the registration rights should be accounted for separately from the
financial instrument as the payoff of the financial instruments is not
dependent on the payoff of the registration rights agreement, and according to
DIG K-1, registration rights agreements and the financial instruments do not
meet the combining criteria as they relate to different risks. The Company believes
the probability of the registration statement not being declared effective by
the SEC within the prescribed timeframe is remote as defined under SFAS No.
5. Therefore, the Company has a
contingent liability for the potential penalty units. The Financial Accounting Standards Board
(Board) has postponed further discussion on EITF 05-4. Since the Board has not
reached a consensus, the Company’s accounting for the registration rights may
change when the Board reaches a consensus.
F-
28
15.
Supplemental Cash Flow
Information
|
Cash paid for:
|
|
2006
|
|
2005
|
|
|
Interest
|
|
$
|
127,816
|
|
$
|
21,380
|
|
|
Income taxes paid
(refunded)
|
|
(287,428
|
)
|
144,846
|
|
|
|
|
|
|
|
|
|
|
Summary of non-cash activity:
·
The
Company issued 6,000 shares of common stock to each of its five Board Members
for a total of 30,000 shares ($45,300), as partial compensation for the next
five board meetings on June 15, 2006.
·
The
Company recognized a deferred tax benefit of $830,000 for stock option and
warrant exercises, credited to additional paid-in capital during fiscal year
2005.
·
The
Company entered into a covenant not to compete agreement for $225,573 in
exchange for a covenant not to compete payable during fiscal year 2005.
·
The
Company applied a covenant not to compete payable in the amount of $4,036 and
$8,464 to a note receivable from shareholder during fiscal year 2006 and 2005.
F-
29
BALLISTIC RECOVERY SYSTEMS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007 and 2006
(UNAUDITED)
A.
Summary of Significant Accounting
Policies
Principles of Consolidation
In September 2005, the Company formed its
wholly-owned subsidiary, BRS de Mexico S.A. de C.V. The consolidated financial statements include
the wholly-owned subsidiary. All
significant intercompany transactions and balances have been eliminated in
consolidation.
Basis of Presentation
The accompanying unaudited consolidated financial
statements have been prepared in accordance with accounting principles
generally accepted in the United States for interim financial statements and
the instructions to Form 10-QSB and Item 310(b) of Regulation S-B. They do not include all of the information
and footnotes required by accounting principles generally accepted in the
United States for complete financial statements.
Operating results for the three- and nine
months ended June 30, 2007 are not necessarily indicative of the results that may
be expected for the fiscal year ending September 30, 2007. These consolidated financial statements
should be read in conjunction with the consolidated financial statements and
footnotes thereto included in the Company’s Annual Report on Form 10-KSB for
the year ended September 30, 2006, previously filed with the Securities and
Exchange Commission.
In the opinion of management, such statements
reflect all adjustments (which include only normal recurring adjustments)
necessary for a fair presentation of the financial position, results of
operations, and cash flows for the periods presented.
Foreign Currency Translations and Transactions
The Company accounts for its foreign asset
and liability transactions in U.S. dollars.
Therefore, there is not any material accumulated other comprehensive
income or loss. Results of operations
are translated using the average exchange rates throughout the year. Transaction gains or losses are recorded as
incurred.
Use of Estimates
The preparation of consolidated financial
statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions
that affect certain reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements
and the reported amounts of expenses during the reporting period. Actual
results could differ from those estimates.
Cash Concentrations
Bank balances exceeded federally insured
levels during the third quarter of fiscal year 2007 and 2006. Generally, these balances may be redeemed
upon demand and therefore bear minimal risk.
F-
34
Cash and Cash Equivalents
Short-term investments with an original
maturity of three months or less are considered to be cash equivalents and are
stated at their fair value.
Accounts Receivable, Credit Risk and Allowance for
Doubtful Accounts
The Company sells its products to domestic
and foreign customers. The Company
reviews customers’ credit history before extending unsecured credit and
established an allowance for doubtful accounts based upon factors surrounding
the credit risk of specific customers and other information. The Company does not accrue interest on past
due accounts receivable. Unless specific
arrangements have been made, accounts receivable over 30 days are considered
past due. The Company writes off accounts receivable when they are deemed
uncollectible. There were no accounts
written off during the three- and nine months ended June 30, 2007 and
2006. Accounts receivable are shown net
of an allowance for doubtful accounts of $22,924 both at June 30, 2007 and
September 30, 2006. 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, which cannot be estimated.
Customer Concentration
The Company had sales to one major customer,
Cirrus Design Corporation (Cirrus), which represented 71.2% and 75.1% of the
Company’s total sales for the three- and nine months ended June 30, 2007, as
compared to 66.8% and 70.0% for the same prior year periods. This customer also accounted for 64% (or
$748,176) and 63% (or $339,000) of accounts receivable at June 30, 2007 and
September 30, 2006, respectively. The
Company supplies parachute systems to Cirrus from the Company’s general
aviation product line. The Company’s
dependence on Cirrus typically is highest during the first two quarters of the
fiscal year due to the seasonality of the Company’s recreational product line.
In its recreational aviation product line,
the Company primarily distributes its products through dealers and distributors
who in turn sell the products to the end consumer. The Company believes that in the event that
any individual dealers or distributors cease to represent the Company’s
products, alternative dealers or distributors can be established.
Valuation of Inventories
Inventories are stated at the lower of cost
or market. Cost is determined by the
first-in, first-out (“FIFO”) method. We
maintain a standard costing system for our inventories and adjust our
inventories to a FIFO valuation.
Provisions to reduce inventories to the lower
of cost or market are made based on a review of excess and obsolete inventories
through an examination of historical component consumption, current market
demands and shifting production methods.
Significant assumptions with respect to market trends and customer
product acceptance are utilized to formulate our provision methods. Sudden or continuing downward changes in the
Company’s product markets may cause us to record additional inventory
revaluation charges in future periods.
No write-off provision was made to our inventories for the three- and
nine months ended June 30, 2007 or 2006.
F-
35
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
refundable and are recorded as customer deposits. The deposits are recognized as revenue when
the product is shipped. The Company’s
major customer, Cirrus, does not make order deposits.
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 Statement of
Financial Accounting Standards No. (SFAS) 109.
Temporary differences relate primarily to: stock based compensation;
allowances for doubtful accounts; inventory valuation allowances; depreciation;
valuation of warrants issued to a customer; net operating loss; and accrued
expenses not currently deductible.
Furniture, Fixtures and Leasehold Improvements
Furniture, fixtures and leasehold
improvements are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the related assets,
ranging from three to seven years for equipment and ten years for the airplane.
When assets are retired or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts and the resulting gain
or loss is recognized in income for the period.
The cost of maintenance and repairs is expensed as incurred; significant
renewals and betterments are capitalized. Deduction is made for retirements
resulting from renewals or betterments.
Leasehold improvements are amortized using the straight-line method over
the shorter of the lease term, or the estimated useful life of the assets.
Goodwill
The Company applies SFAS No. 142, Goodwill
and Other Intangible Assets related to the carrying amount of goodwill and
other intangible assets. Goodwill will
be tested for impairment annually in the fourth quarter or more frequently if
changes in circumstances or the occurrence of events suggest an impairment
exists. The Company has concluded that
no impairment of goodwill or other intangible assets exists as of June 30, 2007
and 2006.
Intangibles
Patents are recorded at cost and are being
amortized on a straight-line method over 17 years. The covenants not to compete are recorded at
cost and are being amortized using the straight-line method over the terms of
the agreement which range from two to fifteen years. The weighted average life of the covenants
not to compete is 2.17 years at June 30, 2007.
Components of intangible assets are as follows:
|
|
|
June 30, 2007
|
|
September 30, 2006
|
|
|
|
|
Gross Carrying
|
|
Accumulated
|
|
Gross Carrying
|
|
Accumulated
|
|
|
|
|
Amount
|
|
Amortization
|
|
Amount
|
|
Amortization
|
|
|
Intangible
assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
$
|
12,414
|
|
$
|
11,717
|
|
$
|
12,414
|
|
$
|
11,425
|
|
|
Covenants not to
compete
|
|
$
|
605,011
|
|
$
|
585,828
|
|
$
|
605,011
|
|
$
|
569,789
|
|
F-
36
Amortization expense of intangible assets was
$2,213 and $16,039 for the three- and nine months ended June 30, 2007, compared
to $30,410 and $91,230 for the three- and nine months ended June 30, 2006. Amortization expense is estimated to
approximate $19,241, $8,854, $8,116 and $0 for the years ending
September 30, 2007, 2008, 2009, and 2010, respectively.
Revenue Recognition
The Company recognizes revenue in accordance
with Securities and Exchange Commission, Staff Accounting Bulletin No. 104, “Revenue
Recognition”. The Company recognizes
revenue on product sales upon shipment to customers.
Comprehensive Income
SFAS No. 130 establishes standards for the
reporting and disclosure of comprehensive income and its components, which will
be presented in association with a company’s consolidated financial
statements. Comprehensive income is
defined as the change in a business enterprise’s equity during a period arising
from transactions, events or circumstances relating to non-owner sources, such
as foreign currency translation adjustments and unrealized gains or losses on
available-for-sale securities. It
includes all changes in equity during a period except those resulting from
investments by or distributions to owners.
For the three- and nine months ended June 30, 2007 and 2006, net income
(loss) and comprehensive income (loss) were equivalent.
Fair Value of Financial Instruments
SFAS No. 107, “Disclosures About Fair Value
of Financial Instruments” requires disclosure of the estimated fair value of
financial instruments as follows:
Short-term Assets and Liabilities:
The fair values of cash and cash equivalents,
accounts receivable, accounts payable, accrued liabilities, and short-term debt
approximate their carrying values due to the short-term nature of these
financial instruments.
Long-term Debt and Covenants Not to Compete:
The fair value of long-term debt and
covenants not to compete approximate their carrying value because the terms are
equivalent to borrowing rates currently available to the Company for debt with
similar terms and maturities.
Segment Reporting
A business segment is a distinguishable
component of an enterprise that is engaged in providing an individual product
or service or a group of related products or services and that is subject to
risks and returns that are different from those of other business segments. The
Company’s segments have similar economic characteristics and are similar in the
nature of the products sold, type of customers, methods used to distribute the
Company’s products and regulatory environment.
Management believes that the Company meets the criteria for aggregating
its operating segments into a single reporting segment.
F-
37
Stock-Based Compensation
The Company has various types of stock-based
compensation plans. These plans are administered by the compensation committee
of the Board of Directors, which selects persons to receive awards and
determines the number of options subject to each award and the terms,
conditions, performance measures and other provisions of the award. The Company’s general policy is to grant
stock options with an exercise price at fair value at the date of grant.
Effective October 1, 2006, the Company adopted
SFAS No. 123R, Share-Based Payment (SFAS 123R), which requires companies to
measure and recognize compensation expense for all stock-based payments at fair
value. SFAS 123R is being applied on the modified prospective basis.
Under the modified prospective approach, SFAS
123R applies to new awards and to awards that were outstanding on October 1,
2006 that are subsequently modified, repurchased, cancelled or vest. Under the
modified prospective approach, compensation cost recognized includes
compensation cost for all share-based payments granted prior to, but not yet
vested on October 1, 2006, based on the grant-date fair value estimated in
accordance with the provisions of SFAS 123R, and compensation cost for all
shared-based payments granted subsequent to October 1, 2006, based on the
grant-date fair value estimated in accordance with the provisions of SFAS 123R.
Prior periods were not restated to reflect the impact of adopting the new
standard.
There was no impact of adopting SFAS 123R for
the three- and nine months ended June 30, 2007 as all options outstanding at
September 30, 2006 were fully vested and no options were issued during the
three and nine months ended June 30, 2007.
Options and warrants issued to non-employees are recorded at fair value,
as required by Emerging Issues Task Force (EITF) 96-18, “Accounting for Equity
Instruments That are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services,” using the Black-Scholes pricing
model. For the three and nine months ended June 30, 2007 and 2006, the
Company did not issue any stock-based awards to non-employees.
F-
38
Had compensation costs been determined in
accordance with the fair value method prescribed by SFAS No. 123 for all
options issued to employees and amortized over the vesting period, the Company’s
net income (loss) applicable to common shares and net income (loss) per common
share (basic and diluted) for plan options would not have changed as indicated
below.
|
|
|
Three
Months
Ended
June 30,
|
|
Nine
Months
Ended
June 30,
|
|
|
|
|
2006
|
|
2006
|
|
|
|
|
|
|
|
|
|
Net income (loss):
|
|
|
|
|
|
|
As reported
|
|
$
|
40,122
|
|
$
|
(21,225
|
)
|
|
Pro forma
|
|
40,122
|
|
(21,225
|
)
|
|
|
|
|
|
|
|
|
Basic net income (loss) per common share:
|
|
|
|
|
|
|
As reported
|
|
$
|
0.01
|
|
$
|
(0.00
|
)
|
|
Pro forma
|
|
$
|
0.01
|
|
$
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per common share:
|
|
|
|
|
|
|
As reported
|
|
$
|
0.01
|
|
$
|
(0.00
|
)
|
|
Pro forma
|
|
$
|
0.01
|
|
$
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
Stock based compensation:
|
|
|
|
|
|
|
As reported
|
|
$
|
0
|
|
$
|
0
|
|
|
Pro forma
|
|
$
|
0
|
|
$
|
0
|
|
No employee options were granted or vested
during the nine months ended June 30, 2007 and 2006. Had options been granted, the fair value of
each option granted would have been estimated on the date of the grant using
the Black-Scholes option pricing model.
Earnings (Loss) Per Common Share
Basic earnings (loss) per common share are
computed by dividing net income (loss) by the weighted average number of common
shares outstanding during the period.
Diluted earnings (loss) per common share is computed by dividing net
income (loss) by the weighted average number of common shares outstanding plus
all additional common stock that would have been outstanding if potentially
dilutive common stock related to stock options and warrants had been
issued. Weighted average shares
outstanding-diluted includes 45,000 shares of dilutive securities for the nine
months ended June 30, 2007.
F-
39
Following is a reconciliation of basic and
diluted earnings per common share for the three- and nine months ended June 30,
2007 and 2006, respectively:
|
|
|
Three Months Ended
June 30,
|
|
Nine Months Ended
June 30,
|
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
Earnings (loss)
per common share -— basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(loss)
|
|
$
|
52,024
|
|
$
|
40,122
|
|
$
|
79,575
|
|
$
|
(21,225
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
shares outstanding
|
|
10,247,262
|
|
7,744,400
|
|
9,848,535
|
|
7,717,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(loss) per common share — basic
|
|
$
|
0.01
|
|
$
|
0.01
|
|
$
|
0.01
|
|
$
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss)
per common share — diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(loss)
|
|
$
|
52,024
|
|
$
|
40,122
|
|
$
|
79,575
|
|
$
|
(21,225
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
shares outstanding
|
|
10,247,262
|
|
7,744,400
|
|
9,848,535
|
|
7,717,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
equivalents
|
|
18,725
|
|
25,677
|
|
15,606
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
shares and potential diluted shares outstanding
|
|
10,265,987
|
|
7,770,077
|
|
9,864,141
|
|
7,717,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per
common share — diluted
|
|
$
|
0.01
|
|
$
|
0.01
|
|
$
|
0.01
|
|
$
|
(0.00
|
)
|
The Company uses the treasury method for
calculating the dilutive effect of the stock options and warrants using the
average market price during the fiscal year.
All outstanding options (45,000 shares) were
included in the computation of common share equivalents for the three and nine
months ended June 30, 2007.
All outstanding options (90,000 shares) were
included in the computation of common share equivalents for the three months
ended June 30, 2006 because their respective exercise prices were less than the
average market price of the common stock.
The 16,401 warrants were excluded from the three month computation. All outstanding options (90,000 shares) and
warrants (16,401 shares) were excluded in the computation of common share
equivalents for the nine months ended June 30, 2006 since there was a loss for
the period.
Recently Issued Accounting Pronouncements
In June 2006, the FASB has published FASB
Interpretation (FIN) No. 48 (FIN No. 48), Accounting for Uncertainty in Income
Taxes, to address the noncomparability in reporting tax assets and liabilities
resulting from a lack of specific guidance in FASB SFAS No. 109, Accounting for
Income Taxes, on the uncertainty in income taxes recognized in an enterprise’s
financial statements. Specifically, FIN No. 48 prescribes (a) a consistent
recognition threshold and (b) a measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected
F-
40
to be taken in a tax return, and provides
related guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. The provisions of FIN No. 48 are effective
for fiscal years beginning after December 15, 2006. The Company is currently evaluating the
impact the adoption of FIN No. 48 will have (based on continuing guidance
published by the FASB) on its consolidated financial statements.
In September 2006, the FASB has published
FASB SFAS No. 157, Fair Value Measurements, to eliminate the diversity in
practice that exists due to the different definitions of fair value and the
limited guidance for applying those definitions in GAAP that are dispersed among
the many accounting pronouncements that require fair value measurements. The provisions of SFAS No. 157 are effective
for fiscals years beginning after November 15, 2007. The Company believes the impact of SFAS No.
157 will not have a material effect on its consolidated financial statements.
In September 2006, the FASB has published
FASB SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans, to require an employer to fully recognize the obligations
associated with single-employer defined benefit pension, retiree healthcare,
and other postretirement plans in their financial statements. SFAS No. 158 also requires an employer to
disclose in the notes to financial statements additional information on how
delayed recognition of certain changes in the funded status of a defined
benefit postretirement plan affects net periodic benefit cost for the next
fiscal year. The Company believes the
impact of SFAS No. 158 will not have a material effect on its consolidated financial
statements.
In September 2006, the Securities and
Exchange Commission (SEC) issued Staff Accounting Bulletin 108, “Considering
the Effects on Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements,” (“SAB 108”). SAB 108 is effective for fiscal periods
ending after November 15, 2006. The Company does not anticipate that
SAB 108 will have a material effect on its consolidated financial
statements.
In February 2007, the FASB issued FASB SFAS
No. 159, The Fair Value Option for Financial Assets and Financial Liabilities,
to expand the use of fair value measurement by permitting entities to choose to
measure many financial instruments and certain other items at fair value that
are not currently required to be measured at fair value. SFAS 159 is effective beginning the first
fiscal year that begins after November 15, 2007. The Company is currently evaluating the
impact of adopting SFAS 159 on its consolidated financial statements.
Research and Development Costs
Research and development costs are charged to
expense as incurred.
Advertising Expenses
Non-direct response advertising expenses are
recognized in the period incurred.
Non-direct response advertising expenses totaled $8,896 and $14,210 for
the three- and nine months ended June 30, 2007 and $5,326 and $10,343 for the
three- and nine months ended June 30, 2006, respectively.
F-
41
Legal Costs
The Company expenses its legal costs as
incurred except settlements which are expensed when a claim is probable and
estimatable.
Shipping and Handling Costs
The Company records amounts being charged to
customers for shipping and handling as sales and costs incurred in cost of
sales.
B.
Covenants 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 This note has been paid in full.
On August 16, 2004, the Company extended the
non-compete period by five additional years in exchange for the exercise of
stock options held by SCI’s president under a stock subscription agreement
backed by a promissory note. The note has
a principal sum of $12,500 together with aggregate interest on the unpaid
principal balance of $2,500. Payments
under the note began July 1, 2005 and continued monthly with a final maturity
date of October 1, 2005. The present
value of the Company’s obligation under this agreement was recorded as an
intangible asset and is being amortized over a total of fifteen years as shown
in the accompanying financial statements.
On October 14, 2004, the Company and Mr. Mark
Thomas entered into a Resignation, Consulting, Non-Competition and General
Release Agreement (the “Resignation Agreement”) in connection with Mr. Thomas’
resignation as Chief Executive Officer, Chief Financial Officer, President, and
as a director of the Company. Pursuant
to the terms of the Resignation Agreement, Mr. Thomas resigned such offices
effective October 14, 2004.
The present value of the Company’s obligation
under the non-compete agreement was recorded as an intangible asset and was
amortized over two years as shown in the accompanying financial
statements. This obligation was paid in
full in October 2006.
C.
Other Financial Information
Inventories
The components of inventory consist of the
following at June 30, 2007 and September 30, 2006:
|
|
|
06/30/2007
|
|
09/30/2006
|
|
|
Raw materials
|
|
$
|
2,059,221
|
|
$
|
2,100,501
|
|
|
Work in process
|
|
518,711
|
|
340,434
|
|
|
Finished goods
|
|
60,229
|
|
17,068
|
|
|
Total inventories
|
|
$
|
2,638,161
|
|
$
|
2,458,003
|
|
F-
42
Furniture, Fixtures and Leasehold Improvements
Furniture, fixtures and leasehold improvements
consisted of the following categories at June 30, 2007 and September 30, 2006:
|
|
|
06/30/2007
|
|
09/30/2006
|
|
|
Office furniture
and equipment
|
|
$
|
398,627
|
|
$
|
345,535
|
|
|
Manufacturing
equipment
|
|
568,646
|
|
463,367
|
|
|
Airplane
|
|
283,183
|
|
283,183
|
|
|
Total furniture,
fixtures and leasehold improvements
|
|
$
|
1,250,456
|
|
$
|
1,092,085
|
|
Depreciation Expense
Depreciation expense totaled $39,365 and
$113,074 for the three- and nine months ended June 30, 2007, and $37,284 and
$110,115 for the three- and nine months ended June 30, 2006, respectively.
Other Accrued Liabilities
Other accrued liabilities consisted of the
following categories at June 30, 2007 and September 30, 2006:
|
|
|
06/30/2007
|
|
09/30/2006
|
|
|
Bonus and profit
sharing plan accrual
|
|
$
|
131,114
|
|
$
|
215,971
|
|
|
Other
miscellaneous accruals
|
|
69,346
|
|
28,959
|
|
|
Total other accrued
liabilities
|
|
$
|
200,460
|
|
$
|
244,930
|
|
Related Parties – Consulting Agreements with
Directors
Effective as of November 19, 2004, the
Company entered into a Consulting Agreement with Mr. Boris Popov, a director of
the Company, pursuant to which Mr. Popov would provide certain consulting
services relating to the Company’s new product development. Pursuant to this agreement, the initial term
of which was six months, Mr. Popov is required to provide a minimum of 64 hours
of service per month for $3,200 per month and shall be paid an additional $50
per hour for each hour over the 64 hour minimum. On March 16, 2006 the Company extended this
agreement for 24 additional months, through May 2008. Consulting expenses for Mr. Popov were an
aggregate of $27,333 for the first three quarters of fiscal year 2007 and
$25,573 for the year ended September 30, 2006.
Pursuant to the Securities Purchase Agreement
dated June 22, 2007 with CIMSA Ingenieria de Sistemas, S.A., a Spanish company
(“CIMSA”), the Company agreed to enter into a one-year consulting agreement
with Fernando Caralt, a director of the Company, whereby Mr. Caralt would
provide certain consulting services to the Company for $50,000. As of the date of this report, the Company
and Mr. Caralt have not entered into that agreement.
Product Warranties
The Company offers its customers up to a
one-year warranty on its products. The
warranty covers only manufacturing defects, which will be replaced or repaired
by the Company at no charge to the customer.
The Company has not recorded an accrual for possible warranty claims and
believes that
F-
43
the product warranties as offered will not
have a material effect on the Company’s financial position, results of
operations, or cash flows. Prior
historical product warranties have been immaterial.
D.
Geographical Information
The Company has operations in South St. Paul,
Minnesota and Tijuana, Mexico.
Information about the Company’s operations by geographical location are
as follows for the quarter ended June 30, 2007 and the year ended September 30,
2006:
|
|
|
Minnesota
|
|
Mexico
|
|
Consolidated
|
|
|
As of June 30,
2007:
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
7,294,504
|
|
$
|
667,754
|
|
$
|
7,962,258
|
|
|
Long-lived assets
|
|
$
|
958,298
|
|
$
|
292,158
|
|
$
|
1,250,456
|
|
|
Inventories
|
|
$
|
2,345,715
|
|
$
|
292,446
|
|
$
|
2,638,161
|
|
|
|
|
Minnesota
|
|
Mexico
|
|
Consolidated
|
|
|
As of September
30, 2006:
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
4,687,830
|
|
$
|
727,426
|
|
$
|
5,415,256
|
|
|
Long-lived assets
|
|
$
|
890,705
|
|
$
|
201,380
|
|
$
|
1,092,085
|
|
|
Inventories
|
|
$
|
1,931,957
|
|
$
|
526,046
|
|
$
|
2,458,003
|
|
E.
Line-of-Credit Borrowings
The Company had a $400,000 line-of-credit
with a bank which expired on February 6, 2007.
The line called for a variable interest rate of 9.75% at December 31,
2006 and September 30, 2006. At
September 30, 2006, there was an outstanding balance of $302,265 under the line
of credit.
F.
Long-Term Debt
The components of long-term debt consist of
the following at June 30, 2007 and September 30, 2006:
|
|
|
06/30/2007
|
|
09/30/2006
|
|
|
Note payable –
Parsons, paid in full with proceeds received from common stock offerings in
October and November 2006. (Paid November 15, 2006).
|
|
$
|
—
|
|
$
|
729,091
|
|
|
Note payable –
Parsons, paid in full on June 17, 2007
|
|
—
|
|
320,000
|
|
|
Total long-term
debt
|
|
—
|
|
1,049,091
|
|
|
Less: debt
refinanced through equity offering
|
|
—
|
|
729,091
|
|
|
Less: current
portion
|
|
—
|
|
—
|
|
|
Long-term debt, net of
current portion
|
|
$
|
—
|
|
$
|
320,000
|
|
G.
Shareholders’ Equity
Common Stock and Stock Warrants
On June 22, 2006 and June 23, 2006, the
Company accepted subscriptions from certain directors and executive officers of
the Company relating to the issuance of an aggregate of 322,956 shares of
common stock and warrants to acquire 16,401 shares of common stock for an
aggregate purchase price of $439,220.
The warrants have a three-year term and an exercise price of $2.00 per
share and
F-
44
have piggy-back registration rights. The Company paid no underwriting discounts or
commissions in connection with these sales.
The price per share was the same as the offering price as in the equity
offering that closed on October and November 2006. The common shares issued were restricted and
unregistered shares. The price per
common share was $1.36 per share and the market price was approximately $1.50
per share. The discount to market was
due to the significant amount of shares issued and the fact the shares were
restricted and unregistered. The
discount was not in exchange for board services or any other services rendered
or to be rendered.
On October 25, 2006, the Company, as part of
its private placement offering of $3 million of equity securities, accepted
subscription agreements from 23 accredited investors for the sale of 975,736
shares of the Company’s Common Stock, par value $.01 per share ( “Common Stock”),
and warrants (the “Warrants”) to purchase 243,934 shares of Common Stock. The Warrants have a three-year term and an
exercise price of $2.00 per share. The Company
received gross proceeds from the sale of Common Stock and Warrants of
$1,327,001, less commissions in the aggregate amount of $92,890 and less a
retainer and expenses of in the aggregate amount of $20,000 paid to a placement
agent assisting in the placement.
Additionally, the Company issued a three-year warrant to purchase 85,377
shares of Common Stock at an exercise price of $2.00 per share to the placement
agent (“Agent’s Warrants”). The Company
has agreed to register the resale of Common Stock and Common Stock issuable
upon exercise of the Warrants and Agent’s Warrants.
On November 22, 2006, the Company accepted
subscription agreements from 26 accredited investors for the sale of 864,704
shares of Common Stock, and Warrants to purchase 216,176 shares of Common
Stock. The Warrants have a three-year
term and an exercise price of $2.00 per share.
The Company received gross proceeds from the sale of Common Stock and
Warrants of $1,175,997, less commissions in the aggregate amount of $82,320 to
a placement agent assisting in the placement.
Additionally, the Company issued a three-year Agent’s Warrant s to
purchase 75,661 shares of Common Stock at an exercise price of $2.00 per share
to the placement agent. The Company has
agreed to register the resale of Common Stock and Common Stock issuable upon
exercise of the Warrants and Agent’s Warrants.
On January 10, 2007, the Company accepted
subscriptions agreements from 11 accredited investors for the sale of 194,400
shares of Common Stock and Warrants to purchase 48,600 shares of Common
Stock. The Warrants have a three-year
term and an exercise price of $2.00 per share.
The Company received gross proceeds from the sale of common stock and
warrants of $264,384, less commissions in the aggregate amount of $18,507 paid
to a placement agent assisting in the placement. Additionally, the Company issued a three-year
Agent’s Warrant to purchase 17,010 shares of Common Stock at an exercise price
of $2.00 per share to the placement agent.
The Company has agreed to register the resale of the Common Stock and
the Common Stock issuable upon exercise of the Warrants and Agent’s Warrants.
As noted above, the Company registered for
resale Common Stock and Common Stock issuable upon exercise of the Warrants and
Agent’s Warrants. The private placement
offering required the Company to file a registration statement after the
closing of the private placement offering within 45 days. The final closing of the private placement
offering was on January 10, 2007 and the registration statement was initially
filed with the Securities and Exchange Commission on February 22, 2007. The Company filed an amendment to the
registration statement on March 21, 2007 and it was declared effective by the
Securities and Exchange Commission on March 23, 2007.
On March 15, 2007, the Company agreed to
issue 6,000 shares of common stock to each of its five independent Board
Members for a total of 30,000 shares, as partial compensation for services at
the next five board meetings through the Company’s 2008 Annual Meeting of
Stockholders. The shares
F-
45
were valued at $1.85 per share (fair value at
the date of award) and are expensed as services are provided. These shares were issued on May 16, 2007.
On June 25, 2007, the Company issued
1,102,941 shares of Common Stock and a warrant to purchase an additional
275,735 shares of Common Stock to CIMSA.
The warrant has a three-year term and an exercise price of $2.00 per
share. The Company received gross
proceeds from the sale of Common Stock and Warrant of $1,500,000. The Company has agreed to register the resale
of the Common Stock and the Common Stock issuable upon exercise of the
warrant. There was no placement agent
involved with this transaction. In
addition, on June 25, 2007, the Board of Directors of the Company, pursuant to
the CIMSA Securities Purchase Agreement, increased the Board size from six
directors to seven and appointed Fernando Caralt to serve on the Board of
Directors. Mr. Caralt is currently President
of CIMSA, which has utilized the Company’s manufacturing services during fiscal
2007. No determination has been made by
the Board of Directors with respect to any Board Committee appointments for Mr.
Caralt.
Stock Options
In March 2004, Company shareholders at their
annual meeting approved the 2004 Stock Option Plan (the “2004 Plan”), which
provides for the granting of up to 600,000 options to officers, directors,
employees and consultants for the purchase of stock. Under the 2004 Plan,
stock options must be granted at an exercise price not less than the fair
market value of the Company’s common stock on the grant date. Vesting
requirements of all awards under this plan are time based and vary by
individual grant. The options expire on the date determined by the Board of
Directors but may not extend more than ten years from the grant date.
Unexercised options are canceled 90 days after termination, and unvested awards
are canceled on the date of termination of employment and become available
under the Stock Option Plan for future grants.
The weighted average remaining contractual
term of options exercisable at June 30, 2007, was 0.75 year.
The following table summarizes information
about stock options outstanding at June 30, 2007:
|
|
|
Options
|
|
Weighted
Average
Exercise
Price
|
|
Range of
Option
Exercise
Price
|
|
|
Options
Outstanding – September 30, 2004
|
|
310,000
|
|
$
|
1.09
|
|
$0.44 - $1.38
|
|
|
Granted
|
|
—
|
|
—
|
|
—
|
|
|
Canceled or expired
|
|
—
|
|
—
|
|
—
|
|
|
Exercised
|
|
160,000
|
|
$
|
1.07
|
|
$0.44 - $1.38
|
|
|
Options
Outstanding – September 30, 2005
|
|
150,000
|
|
$
|
1.11
|
|
$0.91 - $1.38
|
|
|
Granted
|
|
—
|
|
—
|
|
—
|
|
|
Canceled or expired
|
|
—
|
|
—
|
|
—
|
|
|
Exercised
|
|
60,000
|
|
$
|
0.945
|
|
$0.91 - $1.38
|
|
|
Options
Outstanding – September 30, 2006
|
|
90,000
|
|
$
|
1.22
|
|
$1.05 - $1.38
|
|
|
Granted
|
|
—
|
|
—
|
|
—
|
|
|
Canceled or expired
|
|
34,500
|
|
$
|
1.38
|
|
$1.38
|
|
|
Exercised
|
|
10,500
|
|
$
|
1.38
|
|
$1.38
|
|
|
Options
Outstanding –June 30, 2007
|
|
45,000
|
|
|
|
$1.05
|
|
|
Options Exercisable –
June 30, 2007
|
|
45,000
|
|
|
|
$1.05
|
|
F-
46
The aggregate intrinsic value of options
outstanding and exercisable is $31,500 and $43,650 at June 30, 2007 and 2006,
respectively.
As of June 30, 2007, there was $0 of total
unrecognized compensation costs related to the outstanding stock options.
H.
Commitments and Contingencies
Legal Proceedings
a)
In August 2003, the Company was served
in two related actions, Kathleen F. Fischer and Susan Sedgwick in U.S. District
Court for the Northern District of New York.
These actions arose from the crash of a Cirrus Design Corp. SR22
airplane in April 2002 near Parish, New York. The Plaintiffs have
brought claims for strict products liability, negligence and breach of warranty
against Cirrus Design, the airplane’s manufacturer, the Company, which
manufactures the CAPS (Cirrus Airframe Parachute System), a parachute system
which is a required component of the plane, and Wings Aloft, Inc., which
provided training on the SR22 to the decedents.
In June and August 2006, the Company settled with such plaintiffs
without any liability to the Company.
(b)
On April 17, 2004, an action was commenced against the Company by
Aerospace Marketing, Inc. and Charles Parsons v. Ballistic Recovery Systems,
Inc., U.S. District Court, Middle District of Florida, File No. 04-CV-242. The action resulted from the Company’s
notification to Charles F. Parson in April 2004 of its intent to terminate the
sales and marketing contract between the Company and Mr. Parsons relating to
the BRS-172 and BRS-150 products for lack of performance.
In 2005, a jury awarded damages to Parsons
and Aerospace Marketing in the combined amount of approximately $3.4 million
for breach of contract. BRS settled this matter directly with Parsons and
Aerospace on September 19, 2005 by agreeing to pay $1.9 million pursuant to
terms described in the settlement agreement. An initial payment of
$700,000 plus interest was made on September 19, 2005. The remainder of
the settlement amount was to be paid by BRS over a term of 8 years, although
BRS had the right to pre-pay remaining amounts due at any time. On November 16, 2006, the Company prepaid
$721,219 of such sum. The remaining
balance of $315,000 was paid in full on June 17, 2007.
(c)
In April 2005, an action was commenced against the Company by Sue Jean
McGrath, individually and as successor in interest to Charles W. McGrath,
deceased, Charles W. McGrath III, Tanya Sue McGrath, Janny Sue McGrath,
individually v. Cirrus Design Corporation, Ballistic Recovery Systems, Inc.,
and Aerospace Systems and Technologies, Inc., U.S. District Court, Northern
District of California, File No. C05-1542.
The plaintiffs have alleged vicarious liability, strict product
liability, negligence and breach of warranty against the defendants arising
from the crash of a Cirrus Design Corp. SR22 airplane near Sugar Bowl,
California. The case is currently in
discovery. At this time the Company
cannot state with any degree of certainty what the outcome of the matter or the
amount or range of potential damages will be, although Cirrus has agreed to
indemnify the Company for damages related to this claim.
(d)
On September 16, 2005, an action was commenced against the Company by
Robert Treat Rayner, in the Circuit Court of the 5th Judicial Circuit in and
from Lake County Florida, File No. 04 CA 1749.
The Complaint alleges that plaintiff was injured when his ultralight
aircraft crashed while being towed by another ultralight. Plaintiff alleges that he deployed his BRS
system, but that it failed to deploy properly.
The case is currently in discovery.
At this time, the Company cannot state with any degree of certainty what
the outcome of this matter will be or the amount or range
F-
47
of potential loss, if any. BRS believes that it has strong defenses to
the suit and will vigorously defend against the claims.
I.
Dividend
Payment
The Board of Directors examines the liquidity
and capital requirements of the Company at each board meeting. The Board of Directors has the authority to
declare a special dividend. No dividend
was declared or paid in the three and nine months ended June 30 2007.
J.
Warrants
Stock warrant activity is as follows for the
nine months ended June 30, 2007:
|
|
|
Outstanding
|
|
Exercise Price
|
|
|
Outstanding at
September 30, 2006
|
|
16,401
|
|
$
|
2.00
|
|
|
Granted
|
|
962,493
|
|
2.00
|
|
|
Exercised or
forfeited
|
|
—
|
|
—
|
|
|
Outstanding at June 30,
2007
|
|
978,894
|
|
$
|
2.00
|
|
Warrants outstanding and exercisable as of
June 30, 2007, are as follows:
|
|
|
Weighted-Average
|
|
|
Warrants
|
|
Remaining
contractual
life
|
|
Exercise
prices
|
|
|
978,894
|
|
2.32
|
|
$
|
2.00
|
|
|
|
|
|
|
|
|
|
Stock warrants issued during the nine months
ended June 30, 2007 were awarded for:
|
|
|
2007
|
|
|
Common
stock
|
|
962,493
|
|
F-
48