**UNITED STATES SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-KSB/A**

 

**Amendment No. 1**

 

**ý****                                ****Annual Report pursuant to Section 13 or 15(d) of the SecuritiesExchange Act of 1934 for the fiscal year ended September 30, 2004**

 

**o****                                ****Transition Report pursuant to Section 13 or 15(d) of theSecurities Exchange Act of 1934 for the transition period from       to      **

 

**Commission File Number  0-15318**

 

**BALLISTIC RECOVERYSYSTEMS, INC.**

(Exact name of issuer asspecified in its charter)

 
| **Minnesota**                                                   | ** ** | **41-1372079**                     |
|-----------------------------------------------------------------|------------|------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |       | (IRS Employer  Identification No.) |
|                                                            |       |                               |
| **300 Airport Road, South St.  Paul, Minnesota**                | ** ** | **55075-3541**                     |
| (Address of Principal  Executive Offices)                       |       | (Zip Code)                         |

 

**(651) 457-7491**

(Issuer’s telephone number)

 

Securities registered pursuant to Section 12(b) ofthe Exchange Act:

**None**

 

Securities registered pursuant to Section 12(g) ofthe Exchange Act:

**Common Stock, par value $0.01 per share**

 

Check whether the issuer: (1) filed all reportsrequired to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the past 12 months (or for such shorter period thatthe issuer was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.       Yes ý     No o

 

Check if there is no disclosure of delinquent filerspursuant to Item 405 of Regulation S-B is not contained herein, and nodisclosure will be contained, to the best of registrant’s knowledge, indefinitive proxy or information statements incorporated by reference in Part IIIof this Form 10-KSB or any amendment to this Form 10-KSB.        ý

 

The issuer’s revenues for the fiscal year ended September 30,2004 were $6,558,551.

 

As of May 9, 2005 there were 7,634,284outstanding shares of common stock, par value $0.01 per share.

 

The aggregate market value of the voting common stockof the issuer held by non-affiliates of the issuer on May 9, 2005 based onthe closing price of the common stock as quoted by the NASD Over-the-CounterBulletin Board on such date was $11,138,970.

 

Transitional Small Business Disclosure Format: Yes o   No ý

 

 

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TABLE OF CONTENTS

 
| **PART I**   | ** **                                                                                                         | ** ** |
|-------------------|--------------------------------------------------------------------------------------------------------------------|------------|
| Item  1           | Description  of Business                                                                                           |       |
| Item  2           | Description  of Property                                                                                           |       |
| Item  3           | Legal  Proceedings                                                                                                 |       |
| Item 4            | Submission of Matters to a Vote of Security  Holders                                                               |       |
| **PART II**  | ** **                                                                                                         | ** ** |
| Item 5            | Market for Common Equity and Related Stockholder  Matters and Small Business Issuer Purchases of Equity Securities |       |
| Item 6            | Management’s Discussion and Analysis or Plan of  Operation                                                    |       |
| Item 7            | Financial Statements                                                                                               |       |
| Item 8            | Changes in and Disagreements with Accountants on  Accounting and Financial Disclosure                              |       |
| Item 8A           | Controls and Procedures                                                                                            |       |
| **PART III** |                                                                                                               |       |
| Item 13           | Exhibits and Reports on Form 8-K                                                                              |       |
| Item 14           | Principal Accountant Fees and Services                                                                             |       |
|              | Index to Financial  Statements                                                                                     |       |
|              | Certifications                                                                                                     |       |

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portionsof the Company’s Definitive Proxy Statement to be used in connection with theelection of directors at the 2005 annual shareholders meeting (the “ProxyStatement”) are incorporated by reference into Part III, Items 9-12 asfollows:

 

 
| ** ** | **Part of Form 10KSB**                                                                                            | ** ** | **Portion of 2005 Proxy Statement**                            |
|------------|-----------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------|
|       |                                                                                                                        |       |                                                           |
| Item 9     | Directors, Executive  Officers, Promoters and Control Persons; Compliance with  Section 16(a) of the Exchange Act |       | PROPOSAL 1. ELECTION OF  DIRECTORS and OWNERSHIP OF SECURITIES |
|       |                                                                                                                        |       |                                                           |
| Item 10    | Executive Compensation                                                                                                      |       | EXECUTIVE COMPENSATION                                         |
|       |                                                                                                                        |       |                                                           |
| Item 11    | Security Ownership of  Certain Beneficial Owners and Management                                                             |       | OWNERSHIP OF SECURITIES                                        |
|       |                                                                                                                        |       |                                                           |
| Item 12    | Certain Relationships  and Related Transactions                                                                             |       | CERTAIN RELATIONSHIPS  AND RELATED TRANSACTIONS                |

 

 

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EXPLANATORY NOTE

 

ThisAmendment No. 1 to the Company’s Form 10-KSB/A for the year ended September 30,2004, which amends the Company’s Form 10-KSB originally filed on December 16,2004, is being filed in response to comments received from the Securities andExchange Commission in connection with its review of the Company’s filing withthe Securities and Exchange Commission.

 

TheCompany has restated its valuation of certain warrants issued to Cirrus DesignCorporation that became exercisable during the year ended September 30,2004.  The restatement was to decreasesales, gross profit, income from operations and income before income taxes by$369,831, decrease the income tax expense by $146,700 and decrease net incomeby $223,131 for the year ended September 30, 2004.  The restatement increased total assets,deferred tax asset - current and shareholders’ equity by $146,700 as of September 30,2004.  In addition, the basic earningsper common share and diluted earnings per common share decreased by $.03 and$.04 for the year ended September 30, 2004, respectively.

 

Theabove referenced amendments are accurately reflected in Items 1, 6 and 7herein.  Except for such changes, thisAmendment No. 1 does not update any other disclosures contained in theoriginal form 10-KSB filed on December 16, 2004 to reflect developmentssince the original date of such original filing.

 

REFERENCES

 

References to “BRS”, the “Company,” the “Registrant,” “we,”“us,” or “our” or in this Annual Report on Form 10-KSB refers to BallisticRecovery Systems, Inc., a Minnesota corporation.

 

FORWARD-LOOKING STATEMENTS

 

This Annual Report on Form 10-KSBcontains statements that are not historical but are forward-looking in nature,including statements regarding the expectations, beliefs, intentions orstrategies regarding the future.  Inparticular, the “Management’s Discussion and Analysis of Financial Conditionand Results of Operations” section in Item 6 of this annual report includeforward-looking statements that reflect our current views with respect tofuture events and financial performance. 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 resultsmay differ materially from our expressed expectations because of risks anduncertainties inherent in future events, and should not unduly rely on theseforward looking statements.

 

**PART I**

 

**ITEM1****.  DESCRIPTION OF BUSINESS**

 

**Business Development**

 

The Company was incorporatedin 1980 under the laws of the State of Minnesota.

 

Weare engaged in the business of developing and commercializing whole-aircraftrecovery parachute systems for use with general aviation and recreationalaircraft. The emergency parachute systems are designed to bring down the entireaircraft and its occupants in the event of an in-air emergency.  The parachute system is designed for in-airemergencies that include but are not limited to midair collisions, structurefailure, engine out at night, engine out over unlandable terrain, pilotincapacitation, and unintentional flight into instrument meteorologicalconditions.  The Company believes it isthe only United

 

 

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Statesmanufacturer of whole aircraft recovery systems.  In addition, the Company has designed andsold systems for use with various military and civilian unmanned aircraft.  Since its inception, the Company hasdelivered over 19,000 systems that have been installed on general aviation andrecreational aircraft throughout the world, and the Company has documented 176lives saved through the use of its systems in actual in-air emergencies.

 

TheCompany was founded to provide recreational aircraft parachute systems for usein ultralight and experimental aircraft. That portion of the business continues to be a consistent source ofrevenues for the Company and accounted for 23% and 25% of the Company’s revenues infiscal year 2004and 2003, respectively.

 

TheCompany’s general aviation product lines accounted for 76% and 75% of theCompany’s revenues in fiscal year 2004 and 2003, respectively.  Since 1999, the Company’s primary general aviationproduct has been for the Cirrus SR20 (SR20) and SR22 aircraft manufactured byCirrus Design Corporation (“Cirrus Design”). Sales to Cirrus Design account for74% and 74% of Company revenues for fiscal 2004 and 2003, respectively.  Cirrus Design, based in Duluth, Minnesota ispresently the world’s largest manufacturer of single engine certifiedaircraft.  Both models of Cirrus Design’saircraft utilize the Company’s parachute system as a required standardequipment feature.  In addition, in July 2002and July 2003, the Company began delivering its aftermarket FAA certifiedparachute system for the Cessna 172 and 182 aircraft called the BRS172 andBRS182, respectively.

 

Thedevelopment of the parachute systems for the SR20 and SR22 aircraft was a jointeffort between the Company and Cirrus Design. The Company has retained the developed technology for the parachutesystems in general and Cirrus Design has retained the developed technology thatis specific to their individual aircraft.

 

CirrusDesign continues to make enhancements and advancements in both the SR20 andSR22 versions of their aircraft and they have new aircraft designs currentlyunder development.  It is the expectationof both the Company and Cirrus Design to continue to offer the Company’s parachutesystems as standard equipment features of current and future designs.

 

Aftermarketsales for the BRS172 and BRS182 have been initially slow and the Company iscurrently looking at ways to expand its sales penetration in these markets.

 

Duringthe first part of fiscal year 2002, the Company was working under a contractwith the National Aeronautics and Space Administration (NASA) through its SmallBusiness Innovation Research (SBIR) program. The contract, which was a Phase I feasibility study, covered a six monthperiod and was a firm-fixed grant for $68,571. The Phase I award was entitled “Advanced Aircraft Parachute RecoverySystem” and was granted to allow the Company to investigate the feasibility ofdeveloping parachute systems for larger and faster aircraft than thosecurrently supported by the Company.  ThePhase I work was completed in May 2002 and effective September 16,2002, the Company was awarded a Phase II grant under a firm fixed contract for$598,694 with a period of performance not to exceed 24 months.  In September 2004, work was completedunder the contract with total billings amounting to approximately $575,000 ofthe allowable amount, with $386,000 and $189,000 billed in fiscal year 2004 and2003, respectively.

 

Overthe past several years, the Company has been successful in establishing variousthird party funding sources for its research and development.  Outside funding for research and developmentactivities is an ongoing objective for the Company; however, no assurances can bemade that the Company will be successful in this regard.

 

 

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**Business of the Company**

 

**Principal Products**:

 

TheCompany’s principal product line is whole-aircraft emergency parachute recoverysystems.  The product, when utilized in an in-airemergency and at the appropriate altitude, may be activated bythe pilot releasing a parachute that is designed to open quickly, slow thedescent of the aircraft, and lower the aircraft and its occupants safely to theground to prevent or reduce human injury and damage to the aircraft. Possibleparachute usage scenarios include: Mid-air collision (loss of integrity or control); severe weather upset(wind shear, turbulence); power loss with poor visibility (night or IMC); lossof control (component failure or malfunction); engine out over hostile(unlandable) terrain; structural failure (age-weakened parts); pilot medicaltrauma (heart attack, allergic reaction, stroke); overstress (due toaerobatics, violent weather); pilot error.

 

GeneralAviation Products:

 

TheCompany entered the general aviation market in the mid 1980’s when it begandevelopment of an emergency parachute recovery system for the Cessna 150/152series of aircraft.  In 1993, thissystem, known as the GARD-150 (now called the “BRS150”), received a SupplementalType Certificate (STC) from the FAA that allows owners of Cessna 150/152 modelaircraft to install the system.  Mediaattention for this new product resulted in domestic and internationaltelevision and radio broadcasts as well as coverage in domestic andinternational aviation and non-aviation print media.  The Company believes that the successfulcompletion of the product for the Cessna 150/152, which generated mediaattention for both the product and the Company, created interest in the Company’sproduct by general aviationmanufacturers.  Although theBRS150 was not successfully sold,the Company believes that it helped for the development of the Company’scurrent products.

 

In1994, the Company entered into an agreement with Cirrus Design, a privatelyheld company that began development and certification of a four-place allcomposite general aviation aircraft.  TheFAA certified the aircraft, known as the Cirrus Design SR20 (SR20), on October 23,1998.  This was the first FAA certifiedaircraft to offer one of the Company’s recovery systems as required standardequipment.  The Company began deliveringsystems for the SR20 infiscal year 1999.  During fiscal year 2000, Cirrus Design begandevelopment and certification efforts for their next generation aircraft calledthe SR22.  The SR22 is a heavier andfaster version of the SR20 and utilizes much of the same parachute technologydeveloped for the SR20.  The SR22received FAA certification in November 2000 and was certified with theCompany’s parachute system as a standard equipment component of theaircraft.  Deliveries of SR22 parachute systemsby the Company began in December 2000.  The SR22became the third of the Company’s products to have received FAA certification (the BRS150 and SR20 products beingthe others).  For fiscalyear 2004, approximately 74% of the Company’s total revenues were generatedfrom sales to Cirrus Design.

 

Infiscal year 2001 the Company began development of a parachute system for the Cessna172 model aircraft.  During fiscal year2001, the Company received $200,000 in funding from a third party investor,which took the form of equity and project specific funding, to develop and testsuch a recovery system.  The developmentand testing was completed in fiscal year 2002 and the Company received FAAcertification for the BRS-172 recovery system in July 2002.  The Company made its first customer deliveryin September 2002 with twelve total systems installed through the end offiscal year 2004.

 

Nearthe end of fiscal year 2004, the Company finalized development of a parachuterecovery system for the Cessna 182 model of aircraft, which is called the BRS-182.  The system utilizes many of the samecomponents used in the recovery systems for the Cirrus aircraft models and theCessna 172.  The Company received the SupplementalType Certificate or STC from the FAA on June 25, 2004.   This STC allows the product to be installedon certified Cessna 182 series aircraft. The first customer delivery

 

 

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andinstallation was completed in July 2004. The Company has begun a direct marketing campaign which resulted in thesale and delivery of six BRS-182 units through the end of fiscal year 2004.

 

RecreationalAviation Products:

 

Recreationalaviation products include products designed and manufactured for use onunregistered aircraft such as ultralights and aircraft registered with the FAAas experimental.  Like the general aviation product,these recreational aviation products are designed to prevent or reduce bodilyinjury to the human occupant.  TheCompany manufactures these products and sells them directly to individuals andthrough dealers and distributors who also market and sell the aircraft andrelated products.  The Company currently works withapproximately 200 dealers and distributors worldwide, although the Company doesnot have written distribution agreement with all distributors.  Accordingly, these dealers and distributorscould sell competing products.  Sales to internationalcustomers accounted for 42.2% of recreational aviation productsales.

 

ContractResearch and Development:

 

Contractresearch and development has allowed the Company to expand its product line andexpertise in whole-aircraft recovery systems. It has been and will continue tobe a goal of the Company to receive outside funding for its research anddevelopment activities to supplement its own financial commitment.

 

InNovember 2001, the Company entered into a contract with NASA for theCompany’s second Phase I SBIR research grant. The Company has been a successful recipient of both Phase I and Phase IISBIR research grants in prior years.  Thecontract, which was a Phase I feasibility study, was completed in May 2002and was a firm-fixed grant for $68,571. The Phase I award is entitled “Advanced Aircraft Parachute RecoverySystem” and was granted to allow the Company to investigate the feasibility ofdeveloping parachute systems for larger and faster aircraft than thosecurrently supported by the Company. Following the Phase I work, the Company applied for a follow-on Phase IIgrant and effective September 16, 2002 the Company began work under atwo-year contract for a firm fixed award of $598,694.  Work under the contract was completed in September 2004with total contract billings of $575,000. NASA and the United States Federal Government will have a royalty freeright to any developed technology, but only as a customer for product thatincorporates the developed technology that is purchased from the Company.

 

**Manufacturing Operations and Suppliers:**

 

TheCompany’s personnel perform assembly of the Company’s product line in a SouthSt. Paul, Minnesota facility.  Theparachutes utilized by the Company are purchased from a certain key supplieralthough there are other suppliers of parachutes. The Company manufactures itsown ballistic devices and receives its propellant from a single source.  The Company believes that there are alternatesources for propellant in the event that this source becomes unavailable.  Other components are purchased from a varietyof suppliers or internally produced.  TheCompany routinely searches for new vendors and believes alternate sources canbe found should any of these vendors be unable to meet the Company’sneeds.  The Company also attempts to holdreasonable inventory reserves of key components to provide time to securealternate suppliers should the need arise. In addition, the Company possesses or can acquire the expertisenecessary for internal production of substantially all key components.

 

**Patents**:

 

OnSeptember 5, 1989, United States Patent No. 4,863,119 was issued tothe Company on behalf of two of the Company’s employees for a “ParachuteReefing Device” as part of a parachute recovery system.

 

 

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Thetwo employees assigned the patent to the Company, which with the payment ofcontinuing maintenance fees is effective until 2006.  This patented feature is utilized in theCompany’s general aviation line as well as in its recreational aviationproducts.  Current development projectsalso utilize the reefing device as an integral design component.

 

OnMay 2, 2000, United States Patent No. 6,056,241 was issued to theCompany on behalf of one of the Company’s employees for a “Thin Film Parachutewith Continuous Lateral Reinforcing Fibers “. The employee assigned the patent to the Company, which with the paymentof continuing maintenance fees is effective until 2017.  The Company in connection with its NASA SBIRgrant program that was completed during fiscal year 1999 developed thispatented process. The Company does not have a current application for thepatented process, but the Company hopes that the patented process can be usedin both military and civilian applications complimenting or enhancing theCompany’s current product line.

 

**IntellectualProperty:**

 

Our goal is to obtain,maintain and enforce patent protection for our products, processes, methods andother proprietary technologies, preserve our trade secrets, and operate withoutinfringing on the proprietary rights of other parties, both in the UnitedStates and in other countries.  Ourpolicy is to actively seek to obtain, where appropriate, the broadestprotection possible for our products, proprietary information and proprietarytechnology through a combination of contractual arrangements and patents, bothin the United States and elsewhere in the world.

 

We also depend upon theskills, knowledge and experience of our personnel, none of which ispatentable.  To help protect ourproprietary know-how which is not patentable, and for inventions for whichpatents may be difficult to enforce, we rely on trade secret protection andconfidentiality agreements to protect our interests.  To this end, when possible, we requireemployees, consultants, and other contractors to enter into confidentialityagreements which prohibit the disclosure of confidential information and, whereapplicable, require disclosure and assignment to us of the ideas, developments,discoveries and inventions important to our business.

 

**Seasonality:**

 

Typically, the Companyexperiences seasonality in its recreational aviation line.  The second and third quarters have thehighest sales as this product line is marketed to recreational pilots who tendto fly their aircraft during the warmer months and equip their aircraft with arecovery system near the beginning of the flying season.  The Company’s expansion in the generalaviation market through the production of systems for the Cirrus Design SR20and SR22 has lessened the impact of seasonality on the Company.  This trend is expected to continue as theCompany increases its deliveries in the general aviation market over the nextseveral years.

 

**Dependence on a SingleCustomer:**

 

During the fiscal yearsended September 30, 2004 and 2003, the Company was dependent on onecustomer, Cirrus Design Corporation, for 74% and 74% of the Company’s totalsales in the respective fiscal years. The Company supplies parachute recovery systems to Cirrus from itsgeneral aviation product line.

 

**Dealer/Distributor Network:**

 

The Company’s recreationalaviation product sales are primarily to dealers and distributors who in turnsell to the end consumer.  The Companybelieves that in the event that any individual dealers or

 

 

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distributors cease torepresent the Company’s recreational aviation products, that alternativedealers or distributors can be established.  The Company does not haveagreements with its dealers and distributors and accordingly, such dealers anddistributors are not prohibited from selling products competitive with theCompany’s products.

 

**Backlog of Orders:**

 

As of September 30, 2004and 2003, the Company had a backlog of orders totaling approximately $1,842,000and $1,867,000, respectively. The backlogs included over $1.6 million of ordersfor the Cirrus Design aircraft for both periods.  The 2004 backlog is expected to be filled within 12months.  Cirrus Design is currentlyproducing aircraft at levels, which the Company understands has made it thelargest producer of single engine piston aircraft in the world ahead of CessnaAircraft Company.  Due to the backlogperiod involved, however, it is possible that there could be cancellations of aportion of the currently backlogged orders. The Company expects to fund the build out and sale of the backloggedorders through cash flow provided by the sale of those orders.  The Company cautions investors who mayutilize published bookings and backlog information as tools to forecast theCompany’s revenue during a given timeframe since certain purchase orders may besubject to cancellation and/or delivery schedule revision.

 

**Research and Development:**

 

A summary of research anddevelopment is as follows:

 
| ** **                                                                 | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                       |       |     |       |     |       |   |   |
| Total research  and development expenditures                               |       | $        | 658,401    |     | $          | 596,581 |   |
|                                                                       |       |     |       |     |       |
| Revenues  recognized under contract research and development relationships |       | (385,619 | )          | (189,410 | )          |
|                                                                       |       |     |       |     |       |
| Research and  development, net                                             |       | $        | 272,782    |     | $          | 407,171 |   |

 

Thesource for the 2004 and 2003 thirdparty funding was from NASA under the Phase II SBIR grant.  Work under the contract was completed in September 2004with total contract billings of $575,000. Gross research and development expenditures are expected to be higherfor fiscal year 2005 compared with fiscal year 2004 with no offsets anticipatedfrom outside sources.

 

**Competition**:

 

TheCompany sells its whole-aircraft emergency parachute systems in the UnitedStates and internationally.  The Companyentered into a covenant not to compete agreement on October 26, 1995 withSecond Chantz (“SCI”), whom the Company believes was the only domesticcompetitor for whole-aircraft emergency parachute systems for the domesticrecreational aviation market.  Severalforeign companies have or are attempting to introduce new competitive productsinto the international recreational aviation market. Competition is strong inthe European market based on price, but the Company continues to pursue salesin that market.  At present, none of theforeign companies have successfully entered the domestic market.  The Company believes its current systems werethe first in the market and that its products and service are superior to itscompetitors.

 

TheFAA, as part of the Cirrus Design SR20 and SR22 certification process, hascertified the Company’s product, which is standard and requiredequipment on those aircraft.  These arethe first whole aircraft recovery system ever certified by the FAA as standardequipment.  The Company also holds

 

 

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SupplementalType Certificates for the recovery systems for the Cessna 150/152, Cessna 172 andCessna 182 model aircraft.  At present,there are no other manufacturers with the FAA Supplemental Type Certificate orFAA certification under a manufacturer’s Type Certificate necessary to installa recovery system for the general aviation market.  The Company is unaware of any othermanufacturer performing contract or self-funded research and developmentactivities in an effort to obtain Supplemental Type Certificates or TypeCertificates for any other FAA certified aircraft.

 

Manycompanies with resources and capabilities greater than those of the Companycould develop, manufacture and market a parachute recovery system competitivewith that of the Company, although the Company believes that such developmentand approval could take several years to complete.

 

**Product Liability:**

 

The Company does not currently maintain productliability insurance.  Accordingly, thecosts of litigation must be funded directly by the Company.

 

**Environmental Compliance:**

 

TheCompany believes that it is in compliance with all current federal and stateenvironmental laws.

 

**Employees:**

 

Asof September 30, 2004, the Company had 21 full-time employees and one contractemployee at its South St. Paul facility, which are paid both hourly and bysalary.  No employees are represented bya labor union and we consider our relations with employees to be good.

 

**ITEM 2****. DESCRIPTION OF PROPERTY**

 

TheCompany leases a stand-alone 13,000 square foot office and production facilitylocated at Fleming Field Airport in South St. Paul, Minnesota.  The building is a World War II traininghangar, which the Company renovated. This lease expires December 31, 2007.  The Company has a second building on FlemingField, which it also leases.  This secondbuilding is also stand-alone and measures approximately 4,800 square feet ofcombined office and shop space and is used for engineering office space andtesting.  This lease expires October 31,2005.  The Company maintains all of itsequipment in good working order and has secured adequate insurance for thefacilities and its contents.

 

TheCompany believes that the current facilities are adequate for the current levelof business activities.  In the eventthat the Company requires additional facilities, the Company believes it couldprocure acceptable facilities.  We do notown any real estate.

 

**ITEM 3****.  LEGALPROCEEDINGS**

 

(a)  In August 2003,the Company was served in two related actions, Kathleen F. Fischer,Individually and as personal representative of the Estate of Joseph C. Fischerv. Cirrus Design Corp., Ballistic Recovery Systems, Inc., and Wings Aloft, Inc.,U.S. District Court for the Northern District of New York, File No. 03-CV-0782(HGM/DEP), and Susan Sedgwick, Individually, on her own behalf as survivingspouse of Thomas P. Sedgwick, as Executrix of the Estate of Thomas P. Sedgwick,deceased, and on behalf of all interested beneficiaries, including Jamie LynnSedgwick and Jacqueline Ann Sedgwick v. Cirrus Design Corp., Ballistic RecoverySystems, Inc. and Wings Aloft, Inc., U.S. District Court for theNorthern District of New York, File No. 03-CV-0592 (HGM/DEP).

 

 

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These actionsarise from the crash of a Cirrus Design Corp. SR22 airplane in April 2002near Parish, New York.  Plaintiffs have brought claims for strict productsliability, negligence and breach of warranty against Cirrus, the airplane’smanufacturer, the Company, which manufactures the CAPS (Cirrus AirframeParachute System), a parachute system which is a required component of theplane, and Wings Aloft, Inc., which provided training on the SR22 to thedecedents.

 

In preliminaryreports submitted to the court, the plaintiff in *Fischer* has estimated the damages to be sought at trial assixty million dollars, and the plaintiff in *Sedgwick*has submitted an estimate of seven million five hundred thousand dollars.

 

The mattershave been consolidated for purposes of discovery, which began in November 2003and is scheduled to be completed by March 31, 2005, with the trialscurrently scheduled to commence later in 2005.  At this time, the Company cannot state withany degree of certainty what the outcome of these matters will be or the amountor range of potential loss, if any.  The Company will vigorously defendthese matters.

 

(b)  In April 2004,the Company notified Charles F. Parsons of its intent to terminate the salesand marketing contract between the Company and Mr. Parsons relating to theBRS-172 and BRS-150 products for lack of performance.  Subsequent to the notification being sent to Mr. Parsons,both the Company and Mr. Parsons filed suit against each other.  The Company filed suit to formalize thetermination of the contract and Mr. Parsons filed suit to block thetermination of the contract.  At thistime, the Company cannot state with any degree of certainty what the outcome ofthis matter will be or if there will be any financial impact on theCompany.  The Company intends tovigorously defend this matter.

 

(c)  In September 2004,an action against the Company has been commenced by the estate of DouglasLefebvre arising from the crash of a Sabian Rans S-12XL near Mexican Hat, Utahon September 22, 2002.  Mr. Lefebvrewas the passenger on the aircraft.  Thesuit was only recently commenced and discovery has just begun.  However, the Company has the report of theNational Transportation Safety Board which investigated the accident.  The Safety Board concluded that the pilotinadvertently stalled the aircraft and then he failed “to follow the properemergency procedures for activating his Ballistic Recovery System.”  The Safety Board went on to say that “contributingfactors [in the accident] were the improper installation of the BRS by thepilot . . . .”  The Company believes thatit has strong defenses to the action, but is unable to predict the outcome orestimate what amount of damages, if any, that might be awarded in this action.

 

**ITEM4****.  SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.**

 

During the fourth quarter of our fiscal year ended September 30,2004, there were no matters submitted to a vote of our stockholders.

 

**PART II**

 

**ITEM5****.  MARKET FOR COMMON EQUITY AND RELATEDSTOCKHOLDER MATTERS**

 

**Market for Common Stock**

 

Our common stock is traded on the electronic bulletin boardon the over the counter market and on the pink sheets under the trading symbol “BRSI”or “BRSI.OB.”  Several internet stocktracking and trading services show the Company’s trading volumes with bid andask prices as far back as 1995.  Based on

 

 

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information provided by these internet stock trackingservices, the Company believes that the asking price and bid price was $2.22 asof September 30, 2004.

 

The following table lists the high and low price forour common stock as quoted, in U.S. dollars, on the internet tracking servicesduring each quarter within the last two fiscal years:

 
| ** **        | ** ** | **Price Range** | ** ** |
|-------------------|------------|-----------------|------------|
| ** **        | ** ** | **2004**        | ** ** | **2003** | ** ** |
| **Quarter Ended** | ** ** | **High**        | ** ** | **Low** | ** ** | **High** | ** ** | **Low** | ** ** |
| December 31  |       | $               | 1.55       |   | $ | 1.02 |   | $ | 1.37 |   | $ | 0.85 |   |
| March 31     |       | 2.53            |       | 1.48 |   | 1.25 |   | 0.98 |   |
| June 30      |       | 2.99            |       | 1.95 |   | 1.25 |   | 0.90 |   |
| September 30 |       | 2.32            |       | 1.95 |   | 1.27 |   | 1.00 |   |
|                   |            |                 |            |  |  |  |  |  |  |  |  |  |  |

 

The quotations from the internet tracking servicesreflect inter-dealer prices, without retail mark-up, mark-down or commission,and may not represent actual transactions.

 

**Record Holders**

 

The number of holders of record of our common stock asof October 26, 2004 was approximately 1,500.

 

**Dividends**

 

Duringfiscal year 2004, the Company declared a dividend in the amount of $0.06 pershare, payable January 5, 2004 to all Common Shareholders of Record on December 15,2003 and declared a dividend in the amount of $0.0655 per share, payable April 5,2004 to all Common Shareholders of Record on March 29, 2004.  During fiscal year 2003, the Company declareda dividend in the amount of $0.05 per share, payable January 30, 2003 toall Common Shareholders of Record on January 15, 2003.

 

**RecentSales of Unregistered Securities**

 

On February 29, 2004, the Company issued securities in a transaction that was not registered under the Securities Act of 1933, as amended, to Cirrus Design Corporation.  The transaction arose from the issuance of stock warrants to Cirrus in conjunction with a Purchase and Supply Agreement between the Company and Cirrus.  In order to execute the warrants, Cirrus had to meet certain purchase levels of the Company’s emergency parachute systems for the SR20, SR22 and derivative aircraft during calendar year 2003.  Cirrus met their minimum purchase commitment for warrants number two and three, and exercised these warrants for 500,000 shares of the Company’s common stock, on February 29, 2004, for an aggregate exercise price of $562,500.  The transaction was exempt from registration under Section 4(2) of the Securities Act of 1933, as amended.

 

On August 16, 2004, the Company issued securities in a transaction that was not registered under the Securities Act of 1933, as amended, to John Dunham.  The transaction arose from the exercise of stock options held by Mr. Dunham under a stock subscription agreement backed by a promissory note.  The Company issued 50,000 shares of common stock in exchange for the note which has a principal sum of $12,500 together with aggregate interest on the unpaid principal balance of $2,500.  Payments under the note begin July 1, 2005 and continue monthly with a final maturity date of October 1, 2005.  The transaction was exempt from registration under Section 4(2) of the Securities Act of 1933, as amended.

 

 

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**Equity Compensation Plan Information**

 

The following table summarizes outstanding optionsunder our 2004 Stock Option Plan, as well as outstanding options that we haveissued to certain officers, directors and employees of our company outside ofany plan as of September 30, 2004. 

 
| **Plan category**                                           | ** ** | **Number of securities to  be issued upon exercise  of outstanding options,  warrants and rights** | ** ** | **Weighted average  exercise price of  outstanding  options, warrants  and rights** | ** ** | **Number of securities  remaining available for  future issuance  (excluding securities  reflected in column (a))** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                  | ** ** | **(a)**                                                                                            | ** ** | **(b)**                                                                             | ** ** | **(c)**                                                                                                             | ** ** |
| Equity  compensation plans approved by stockholders (1)     |       | 0                                                                                                  |       | N/A                                                                                 |       | 600,000                                                                                                             |       |
| Equity  compensation plans not approved by stockholders (2) |       | 960,000                                                                                            |       | $                                                                                   | 1.20       |                                                                                                                | 0          |   |
|                                                             |            |                                                                                                    |            |                                                                                     |            |                                                                                                                     |            |  |

 

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(1)          Representsshares of common stock authorized for issuance under the 2004 Stock OptionPlan.

 

(2)          650,000shares represent stock warrants issued to Cirrus Design under terms of a supplyagreement.  These stock warrants expire February 28,2005 if unexercised.  The remaining sharesrepresent stock options granted to employees and directors at then currentmarket prices.

 

**ITEM 6****.****                            ****MANAGEMENT’S DISCUSSION ANDANALYSIS OR PLAN OF OPERATION.**

 

**Operations:**

 

Sales

 

Sales for fiscal year 2004 were $6,558,551, up 0.1%,compared to $6,549,011for fiscal year 2003. A reduction in sales was recorded in both fiscal years which wereattributed to an accounting-related adjustment for stock based compensationrelating to the Cirrus Design (Cirrus) stock purchase warrants. These warrantswere granted as part of the purchase and supply agreement between the Companyand Cirrus.  No further reductions tosales are expected for stock based compensation relating to the Cirrus stockpurchase warrants.  The reductionsrecorded were $474,481 and $20,880 for fiscal year 2004 and 2003,respectively.  In the current fiscalyear, sales derived from the Company’s general aviation products, which consistprimarily of sales to Cirrus Design, were up 2.0% over the prior fiscalyear.  Sales from the Company’s generalaviation products accounted for 76.0% of total sales for fiscal year 2004compared to 75.0% of total sales for fiscal year 2003.

 

The Company’s general aviation product isstandard equipment on the Cirrus SRV, SR20 and SR22 model aircraft.   The Company delivered 532 and 466 units toCirrus in fiscal year 2004 and 2003, respectively.  The Company believesthat Cirrus has a backlog of aircraft orders, all of which are required toinclude the Company’s parachute systems.  The Company understands thatCirrus expects to be able to fill the backlog of firm aircraft orders duringthe next 12 months.  The Company also understands that Cirrus is expectedto exceed fiscal year 2004 manufacturing volumes for its aircraft throughoutfiscal year 2005.  As a result, the Company is forecasting further growthin 2005 in its general aviation revenues.  However, with respect toCirrus, sales and manufacturing projections and timing is uncertain at thistime.  Accordingly, no assurance can be given that general aviation revenueswill increase as anticipated.  Futureproduction volumes for the Cirrus aircraft, and therefore, the Company’sparachute systems, will be dictated by ultimate market demands for Cirrus’products.  Accordingly, the Company is,

 

 

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and will likely be, dependent on Cirrus for amaterial portion of its revenues for fiscal year 2005.  Any negativeimpact on Cirrus’ sales would have a significantly negative impact on theCompany’s revenues.

 

Nearthe end of fiscal year 2004, the Company finalized development of a parachuterecovery system for the Cessna 182 model of aircraft, which is called the BRS-182.  The system utilizes many of the samecomponents used in the recovery systems for the Cirrus aircraft models and theCessna 172.  The Company received the STCfrom the FAA on June 25, 2004.  This STC allows the product to be installed on certified Cessna 182series aircraft.  The first customerdelivery and installation was completed in July 2004.  The Company has begun a direct marketingcampaign which resulted in the sale and delivery of six BRS-182 units throughthe end of fiscal year 2004.  The Companyhas begun a direct marketing campaign on a factory direct basis for the BRS-182.  No assurances can be made as to the successof sales efforts or if the product will sell in sufficient volumes to impactthe Company’s financial performance.

 

The Companyalso has in production the BRS-172 product for the Cessna 172 modelaircraft.  Since certified in July 2002, twelve systems have beensold.  The Company is reanalyzing its strategies for marketing the BRS-172in an effort to expand market penetration.  Although certified, there canbe no assurances that the BRS-172 product will sell in volumes that will have amaterial impact on the Company.

 

The Company’srecreational aircraft product line sales, which largely consist of products forultralight aircraft, decreased by 6.4% during fiscal year 2004 compared to theprior fiscal year and accounted for 23.1% of the Company’s revenues for fiscalyear 2004 versus 23.2% of the Company’s revenues for the prior fiscal of2003.  The recreational aircraft products business continues to beimpacted by several factors including general economic conditions, which havedramatically affected the United States recreational aircraft business, anddelayed federal regulations that will change the rules under whichrecreational aircraft are operated.

 

There are newfederal regulations that were enacted in July 2004, that managementbelieves will positively affect the Company’s future recreational aircraftproduct sales.  The new regulations are expected to increase sales of anew category of aircraft called Light Sport Aircraft or LSA, which managementbelieves may in turn increase demand for the Company’s recreational aircraftproducts.  No assurances can be given ifthese new regulations will have a positive impact on sales of the Company’srecreational aircraft products.  TheCompany has implemented plans to expand market penetration for the domesticmarket for recreational aircraft products with the restructuring of itsdistribution network and pricing schedules. No assurances can be made that such plans as implemented will have amaterial impact on the Company’s recreational aircraft product sales.

 

The Companyanticipates being able to expand its general aviation and recreational productlines to include other certified and non-certified aircraft as the Company’srecovery systems gain further market acceptance.  The Company is inongoing discussions with other domestic and foreign, general aviation andrecreational aircraft companies that have expressed interest in utilizingcertain of the Company’s products.  These companies produce both certifiedand non-certified aircraft.  No assurance can be made as to the futurebenefits, if any, that the Company will derive from these discussions.

 

GrossMargin

 

Gross margin asa percentage of revenues was 35.2% for fiscal year 2004 compared to 39.4% forfiscal year 2003.  A substantial portionof the decrease in the gross margin is a result of price reductions granted toCirrus Design under terms of the Purchase and Supply Agreement between the twocompanies.  The Company expects toprovide additional pricing reductions to its larger customers in the future andas a result, gross margins are expected to be impacted as the Company provides thesepricing concessions to

 

 

----

 

its customers.  However, the Company has been successful inidentifying cost savings and receiving material cost reductions and willcontinue to look for further savings and cost reductions on an ongoing basis.  The Company’s objective is to maintain orimprove overall gross margins in the future.

 

Selling,General and Administrative

 

Selling,general and administrative costs as a percentage of sales were 22.8% for fiscalyear 2004 as compared to 18.5% for fiscal year 2003.  These costs have increased as a result ofadjustments in the corporate office staff and sales staff, marketingoutsourcing, expanded trade show activity, increased compensation, businessdevelopment expenses and legal fees.  The increase in legal fees relatedto the legal proceedings noted in Item 3, increasing selling, general andadministrative costs by approximately $40,000 for fiscal year 2004 compared tofiscal year 2003.  Expenditures in thiscategory are expected to increase as the Company accelerates its efforts toexpand the general aviation market while strengthening the sport andrecreational market sales.  Furthermore, the Company does not haveproducts liability insurance and must fund the expenses of its current productliability litigation.  In addition,requirements under the Sarbanes-Oxley Act will require increased expendituresas the Company implements expanded compliance infrastructure and oversight.

 

###### **Research and Development, net**

###### ** **

EffectiveSeptember 16, 2002, the Company was working under a contract with theNational Aeronautics and Space Administration (NASA) through its Small BusinessInnovation Research (SBIR) program.  Thecontract, which was a follow on to a Phase I feasibility study, and wasentitled “Advanced Aircraft Parachute Recovery System” and was granted to allowthe Company to investigate the feasibility of developing parachute systems forlarger and faster aircraft than those currently supported by the Company.  The Phase II award was granted under a firmfixed contract for $598,694 with a period of performance not to exceed 24months.  In September 2004, work wascompleted under the contract with total billings amounting to approximately$575,000 of the allowable amount, with $386,000 and $189,000 billed in fiscalyear 2004 and 2003, respectively.  Noassurances can be made that the Phase II contract work will result in futureproducts and revenues for the Company.

 

Thirdparty funding has offset a portion of the Company’s research and developmentcosts for the current and prior fiscal years.  Offsets of $385,619 and$189,410 were reflected in the financial statements for fiscal years 2004 and2003, respectively.  Gross research and development costs were 10.0% and9.1% of sales for fiscal years 2004 and 2003, respectively and 4.2% and 6.2% ofsales on a net basis for fiscal years 2004 and 2003, respectively.  Management believes that research anddevelopment is an integral part of the growth strategy for the Company, andwill continue to play an important role in the Company’s success. Therefore, increases in research and development expenditures are planned forthe future in the areas of new product development and in the expansion ofcurrently developed products for additional applications.  Gross researchand development expenditures are expected to be higher for fiscal year 2005compared with fiscal year 2004 with no offsets anticipated from outsidesources.

 

NetIncome and Earnings per Share

 

Income before income taxes as a percentage ofrevenues was 7.6% and 13.9% for fiscal years 2004 and 2003, respectively.    On a fully diluted basis, after-taxnet income of $301,474 for fiscal year 2004 was 4.6% of sales or $0.04 pershare, as compared to net income of $549,567, which was 8.4% of sales or $0.09per share for the prior fiscal year.

 

 

----

 

**Liquidity and Capital Resources:**

 

Managementintends to continue to fund its operations out of its current sales.  TheCompany will continue to look for non-equity sources to fund contract researchand development projects, but there can be no assurances that the Company willbe successful in its efforts.  The Company funds its non-contract researchand development out of operations.  In February 2004,Cirrus Design exercised warrants to acquire 500,000 shares of Common Stock atan average exercise price of $1.13 per share for an aggregate cashconsideration of $562,500.  As of September 30,2004, the Company had a cash balance of $1,314,557.  On January 15, 2004 and April 5,2004, the Company paid cash dividends of $0.06 and $0.0655 per share,respectively, for an aggregate of $820,176. On November 22, 2004, the Company paid a cash dividend of $0.08 pershare for an aggregate of $547,543.  TheCompany has a secured line-of-credit for $500,000, which was increased in October 2003from its previous level of $250,000.  The Company has not drawn on thatline during the current fiscal year as a result of positive cash flow fromoperations.  There is no balance currently outstanding under the line-of-credit. Management believes that cash from current business operations, along with theline-of-credit, is adequate to support the ongoing operations of the Companyduring the next twelve-month period.

 

The Companyanticipates a need to make continuing capital improvements to its currentproduction facility and continued equipment and tooling upgrades, consistentwith that of prior years.  In addition,the Company anticipates the need for expenditures to increase inventory levelsduring the fiscal year and beyond as a result of the production of generalaviation recovery systems and further market penetration.  It is currentlythe intention of the Company to fund the expenditures through currentoperations as well as revenues generated by those units.  Furthermore, theCompany does not presently have product liability insurance and must fund theexpenses of its pending lawsuits.  TheCompany has incurred approximately $190,000 in legal fees for fiscal year 2004attributable to all legal support matters and the defense of its pendinglawsuits.  In addition, requirementsunder the Sarbanes-Oxley Act will require increased expenditures as the Companyimplements expanded compliance infrastructure and oversight.

 

The PrivateSecurities Litigation Reform Act of 1995 provides “safe harbor” forforward-looking statements.  Certain information included in this Form 10-KSBand other materials filed or to be filed by the Company with the Securities andExchange Commission (as well as information included in oral statements orother written statements made or to be made by the Company) contain statementsthat are forward-looking, such as statements relating to anticipated CirrusDesign delivery orders and schedules, plans for research projects, development,anticipated delivery orders and schedules for the Cessna 182 system,  the Cessna 172 system,  success ofcontracts for NASA SBIR research projects, the timing and impact of regulationson Light Sport Aircraft sales, other business development activities as well asother capital spending, financial sources, and the effects ofcompetition.  Such forward-looking information involves important risksand uncertainties that could significantly affect anticipated results in thefuture and, accordingly, such results may differ from those expressed inany forward-looking statements made by or on behalf of the Company.  Theserisks and uncertainties include, but are not limited to, dependence on CirrusDesign, potential product liability claims, federal transportation rules andregulation which may negatively impact the Company’s ability to ship itsproducts in a cost efficient manner, the elimination of funding for newresearch and development projects, the decline in registered and unregisteredaircraft sales, dependence on discretionary consumer spending, dependence onexisting management, general economic conditions, changes in federal or statelaws or regulations.

 

**Critical Accounting Policies and Estimates**

 

Our discussion and analysis or plan of operationis based upon our financial statements, which have been prepared in accordancewith accounting principles generally accepted in the United States ofAmerica.  The preparation of these financial statements requires us tomake estimates and assumptions that affect the reported amounts of assets andliabilities at the date of the financial statements, the reported

 

 

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amounts of revenues and expenses during thereporting period, and related disclosures of contingent assets and liabilitiesfor the periods indicated.  The notes to the financial statementscontained herein describe our significant accounting policies used in thepreparation of the financial statements.  On an on-going basis, weevaluate our estimates, including, but not limited to, those related to our allowancefor doubtful accounts, inventory valuation allowance, the lives and continuedusefulness of furniture, fixtures and leasehold improvements andcontingencies.  Due to uncertainties, however, it is at least reasonablypossible that management’s estimates will change during the next year, whichcannot be estimated.  We base our estimates on historical experience andon various other assumptions that we believe to be reasonable under thecircumstances, the results of which form the basis for making judgments about thecarrying values of assets and liabilities that are not readily apparent fromother sources.  Actual results could differ from these estimates underdifferent assumptions or conditions.

 

**Disclosures about Contractual Obligations and CommercialCommitments**

 

Thefollowing summarizes our contractual obligations at September 30, 2004,and the effects of these contractual obligations are expected to have on ourliquidity and cash flows in future periods:

 
| ** **                 | ** ** | **Total** | ** ** | **1 Year  or Less** | ** ** | **1-3  Years** | ** ** | **Over  3 Years** | ** ** |
|----------------------------|------------|-----------|------------|---------------------|------------|----------------|------------|-------------------|------------|
| Operating Leases           |       | $         | 72,671     |                | $          | 39,397         |       | $                 | 33,274     |   | — |   |
| Line of Credit  Borrowings |       | —    |       | —              |       | —         |       | —            |       |
| Total                      |       | $         | 72,671     |                | $          | 39,397         |       | $                 | 33,274     |   | — |   |

 

**ITEM 7****.****                                                   FINANCIALSTATEMENTS**

 

For a list of the financial statements and relatedfootnotes filed as part of this report, see the Index to Financial Statementsbeginning at Page F-1 of this annual report on Form 10-KSB/A.

 

**ITEM 8****.****                                                   CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON****ACCOUNTING AND FINANCIAL DISCLOSURE**

 

TheCompany filed a report on Form 8-K on July 9, 2003 disclosing thechange in the registrant’s certifying accountants.  The July 9, 2003 Form 8-K as filedwith the SEC is incorporated herein by reference.

 

Therehave been no disagreements with the Company’s independent certified publicaccountants on accounting principles or practices or financial statementdisclosures.

 

**ITEM 8A****.              CONTROLS AND PROCEDURES**

 

As of September 30,2004, the Company carried out an evaluation, with the participation of ourchief executive/chief financial officer, of the effectiveness of the design andoperation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) of the Securities Exchange Act of 1934, as amended). Based uponthat evaluation, our chief executive officer/chief financial officer concludedthat our disclosure controls and procedures are effective in alerting him on atimely basis to material information required to be disclosed in our periodicreports to the Securities and Exchange Commission.  During the fourth quarter fiscal year 2004, therewere no changes in our internal control over financial reporting that havematerially affected, or reasonably likely to materially affect, our internalcontrol over financial reporting.  Subsequentto the end of the fiscal year, in October 2004, the chief

 

 

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executive/chief financialofficer resigned and was replaced on an interim basis by the chairman of theboard as the chief executive officer/chief financial officer.  Although not anticipated, the resignation ofthe chief executive/chief financial officer could impact our internal controls andcould be a factor which could significantly affect internal controls subsequentto such evaluation.

 

**PART III**

 

**ITEM 9.****                                                  ****DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT**

 

Theinformation required by this item is incorporated by reference from the ProxyStatement.

 

**ITEM10.****                                            ****EXECUTIVE COMPENSATION**

 

Theinformation required by this item is incorporated by reference from the ProxyStatement.

 

**ITEM 11.****                                            ****SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**

 

Theinformation required by this item is incorporated by reference from the ProxyStatement.

 

**ITEM12.****                                            ****CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**

 

Theinformation required by this item is incorporated by reference from the ProxyStatement.

 

**ITEM 13****.****                                             EXHIBITSAND REPORTS ON FORM 8-K**

 

**Exhibits**

 

The following documents are included or referenced inthis report.

 
| **Page Number** | ** ** | **Exhibit Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                            |
|----------------------|------------|-------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| —               |       | 3.1                     |       | Company’s  Articles of Incorporation, as amended, appear as Exhibit 3.1 to the  Company’s Registration Statement on Form S-1 (No. 33-21843) filed  May 12, 1988 (“Form S-1”) and are incorporated herein by reference.                                                        |
| —               |       | 3.2                     |       | Company’s  Restated Bylaws as amended, were filed as Exhibit 3.2, under  Form 8, Amendment No. 1 (“1990 Amendment”) to the Company’s Report  on Form 10-K for the fiscal year ended September 30, 1990 (the  “1990 10-K”) and are incorporated herein by reference. |
| —               |       | 10.1                    |       | Cessna  172 Development and Funding Agreement dated October 26, 2000 between the  Company and Charles F. Parsons appears as exhibit 10.1 to the Company’s  Report on Form 8-K filed November 13, 2000 and is incorporated  herein by reference.                                                        |
| —               |       | 10.2                    |       | Purchase  and Supply Agreement dated September 17, 1999 between the Company and  Cirrus Design Corporation appears as exhibit 10.1 to the Company’s Report on  Form 8-K filed September 20, 1999 and is incorporated herein by  reference.                                                             |
| —               |       | 10.3                    |       | Covenant  not to Compete Agreement dated October 26, 1995                                                                                                                                                                                                                                                             |

 

 

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|   |   |   |   | between  the Company and the President and majority shareholder of Second Chantz  Aerial Survival Equipment, Inc. appears as Exhibit 10.1 to the  Company’s Report on Form 10-KSB for the fiscal year ended  September 30, 1995 and is incorporated herein by reference.                     |
|--------|--------|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| — |   | 10.4   |   | The  Company filed a report on Form 8-K on July 9, 2003 disclosing the  change in the registrant’s certifying accountants. The July 9, 2003  Form 8-K as filed with the SEC is incorporated herein by reference.                                                                             |
| — |   | 10.5   |   | Employment Agreement  dated January 1, 2004, between the Registrant and Mark B. Thomas  (incorporated by reference to Exhibit 10.1 to the Registrant’s  Form 10-QSB for the quarter ended December 31, 2003).                                                                                |
| — |   | 10.6   |   | The  Company filed a report on Form 8-K on March 2, 2004 disclosing the  receipt of an equity contribution of $562,500 as a result of Cirrus Design  Corporation’s exercise of common stock warrants. The March 2, 2004  Form 8-K as filed with the SEC is incorporated herein by reference. |
| — |   | 10.7   |   | The  Company filed a report on Form 8-K on March 19, 2004 disclosing the  declaration of a $0.0655 per share dividend. The March 19, 2004  Form 8-K as filed with the SEC is incorporated herein by reference.                                                                                    |
| — |   | 10.8   |   | The  Company adopted the 2004 Stock Option Plan in conjunction with the 2004 Proxy  Statement filed January 23, 2004 with the SEC. The 2004 Stock Option  Plan as found under Appendix A of the filing is incorporated herein by  reference.                                                                     |
| — |   | 10.9   |   | The  Company adopted a Code of Ethics for Senior Financial Executives in  conjunction with the 2004 Proxy Statement filed January 23, 2004 with  the SEC. The Code of Ethics as found under Appendix B of the filing is  incorporated herein by reference.                                                       |
| — |   | 31.1   |   | Rule 13a-14(a)/15d-14(a) Certifications.                                                                                                                                                                                                                                                                    |
| — |   | 31.2   |   | Rule 13a-14(a)/15d-14(a) Certifications.                                                                                                                                                                                                                                                                    |
| — |   | 32.1   |   | Section 1350  Certifications.                                                                                                                                                                                                                                                                                    |
| — |   | 32.2   |   | Section 1350  Certifications.                                                                                                                                                                                                                                                                                    |

 

**Reports on Form 8-K**

 

TheCompany filed no reports on Form 8-K during the three months ended September 30,2004.

 

**ITEM 14****.               PRINCIPALACCOUNTANT FEES AND SERVICES**

 

AuditFees

 

Theaggregate fees billed or expected to be billed by the Company’s auditors forprofessional services rendered in connection with the audit of the Company’sannual financial statements for fiscal year 2004 and 2003 and reviews of thefinancial statements included in the Company’s Form 10KSB for fiscal year2004 and 2003 were $23,020 and $32,700, respectively.

 

 

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Audit-RelatedFees

 

Forfiscal 2004 and 2003, the Company’s auditors did not bill any fees forassurances and related services that are reasonably related to the performanceof the audit or review of the Company’s financial statements and are notreported under “Audit Fees” above.

 

TaxFees

 

The aggregate fees billed bythe Company’s auditors for professional services for tax compliance, taxadvice, and tax planning were $24,410 and $0 for fiscal year 2004 and 2003,respectively.

 

AllOther Fees

 

Forfiscal 2004 and 2003 the Company’s auditors did not bill any fees for any othernon-audit services rendered to the Company, such as attending meetings andother miscellaneous financial consulting.

 

AuditCommittee

 

Thepolicy of the Company’s audit committee is to review and pre-approve both auditand non-audit services to be provided by the independent auditors (other than *de minimis* exceptions permitted by the Sarbanes Oxley Act of2002).  This duty may be delegated to oneor more designated members of the audit committee with any such approvalreported to the committee at its next regularly scheduled meeting.  Approval of non-audit services shall bedisclosed to investors in periodic reports required by section 13 (a) ofthe Securities and Exchange Act of 1934. Approximately 100% of fees paid to the Company’s auditors werepre-approved by the audit committee.

 

 

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**SIGNATURES**

 

In accordance with Section 13 or 15(d) ofthe Securities Exchange Act, Ballistic Recovery Systems, Inc. has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized, on May 24, 2005.

 
|   | Ballistic Recovery Systems, Inc. |
|--------|---------------------------------------|
|   |                                  |
|   | By:                                   | /s/ Larry E. Williams |   |
|   |                                  | Larry E. Williams |
|   |                                  | Principal Executive Officer, |
|   |                                  | President and Chief Operating Officer |
|   |                                  |
|   | By:                                   | /s/ Robert L. Nelson |   |
|   |                                  | Robert L. Nelson |
|   |                                  | Principal Accounting Officer |

 

 

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**Index toFinancial Statements**

 
| Report  of Independent Registered Public Accounting Firm Virchow, Krause &  Company, LLP |   |
|---------------------------------------------------------------------------------------------------|--------|
| Balance Sheets as of September 30,  2004 and 2003                                            |   |
| Statements of Operations for  the Years Ended September 30, 2004 and 2003                    |   |
| Statements of  Shareholders’ Equity for the Years Ended September 30, 2004 and 2003     |   |
| Statements of Cash Flows for  the Years Ended September 30, 2004 and 2003                    |   |
| Notes to Financial  Statements                                                                    |   |

 

 

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

 

Shareholders, Audit Committeeand Board of Directors

BallisticRecovery Systems, Inc.

St.Paul, Minnesota

 

We haveaudited the accompanying balance sheet of Ballistic Recovery Systems, Inc.as of September 30, 2004 and 2003 and the related statements ofoperations, shareholders’ equity and cash flows for the years then ended. Thesestatements are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these financial statements based on our audits.

 

We conducted our audit inaccordance with standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management as well as evaluating the overall financial statementpresentation.  We believe that our auditsprovide a reasonable basis for our opinion.

 

In our opinion, the financialstatements referred to above present fairly, in all material respects, thefinancial position of Ballistic Recovery Systems, Inc. as of September 30,2004 and 2003 and the results of its operations and its cash flows for theyears then ended in conformity with accounting principles generally accepted inthe United States of America.

 

As discussed in Note 13to the financial statements, the Company has restated its balance sheet as of September 30,2004 and the related statements of operations, shareholders’ equity and cashflow for the year ended September 30, 2004 to change the valuation of thewarrants that became exercisable during the year ended September 30, 2004.

 
|   | /s/ Virchow, Krause & Company, LLP |
|--------|---------------------------------------------|

 

 

Minneapolis, Minnesota

November 4, 2004

(except as to notes 2, 8 and 13, as to which the date is May 23,2005)

 

 

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**Ballistic Recovery Systems, Inc.**

**Balance Sheets**

**September 30, 2004 and 2003**

 
| ** **                                                                                                                          | ** ** | **Restated** | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|--------------|------------|------------|------------|
| ** **                                                                                                                          | ** ** | **2004**     | ** ** | **2003**   | ** ** |
| Assets                                                                                                                              |       |         |       |       |       |
| Current assets:                                                                                                                     |       |         |       |       |       |
| Cash and cash  equivalents                                                                                                          |       | $            | 1,314,557  |       | $          | 862,495 |   |
| Accounts  receivable - net of allowance for doubtful accounts of $10,000 and $10,000  respectively                                  |       | 402,113      |       | 326,321    |       |
| Note receivable –  shareholder                                                                                                 |       | 12,500       |       | —     |       |
| Inventories                                                                                                                         |       | 1,132,496    |       | 1,118,190  |       |
| Deferred tax  asset – current portion                                                                                          |       | 252,700      |       | 114,000    |       |
| Prepaid expenses                                                                                                                    |       | 44,025       |       | 60,695     |       |
| Total current  assets                                                                                                               |       | 3,158,391    |       | 2,481,701  |       |
|                                                                                                                                |       |         |       |       |       |
| Furniture,  fixtures and leasehold improvements                                                                                     |       | 591,767      |       | 467,578    |       |
| Less accumulated  depreciation and amortization                                                                                     |       | (292,164     | )          | (207,038   | )          |
| Furniture, fixtures  and leasehold improvements – net                                                                          |       | 299,603      |       | 260,540    |       |
|                                                                                                                                |       |         |       |       |       |
| Other assets:                                                                                                                       |       |         |       |       |       |
| Patents, net of  accumulated amortization of $10,053 and $9,367, respectively                                                       |       | 1,611        |       | 2,297      |       |
| Long-term  prepaid expenses                                                                                                         |       | 53,120       |       | 77,972     |       |
| Covenant not to  compete, net of accumulated amortization of $335,908 and $300,388,  respectively                                   |       | 43,530       |       | 79,050     |       |
| Total other  assets                                                                                                                 |       | 98,261       |       | 159,319    |       |
|                                                                                                                                |       |         |       |       |       |
| Total assets                                                                                                                        |       | $            | 3,556,255  |       | $          | 2,901,560 |   |
| Liabilities And Shareholders’ Equity                                                                                           |       |         |       |       |       |
| Current  liabilities:                                                                                                               |       |         |       |       |       |
| Current portion  of covenant not to compete, shareholder                                                                            |       | $            | 45,255     |       | $          | 40,561 |   |
| Accounts payable                                                                                                                    |       | 173,515      |       | 122,714    |       |
| Customer  deposits                                                                                                                  |       | 79,061       |       | 116,827    |       |
| Accrued payroll                                                                                                                     |       | 100,451      |       | 103,229    |       |
| Other accrued  liabilities                                                                                                          |       | 342,635      |       | 198,415    |       |
|                                                                                                                                |       |         |       |       |       |
| Total current  liabilities                                                                                                          |       | 740,917      |       | 581,746    |       |
|                                                                                                                                |       |         |       |       |       |
| Covenant not to  compete, shareholder, less current portion                                                                         |       | 4,000        |       | 49,254     |       |
|                                                                                                                                |       |         |       |       |       |
| Shareholders’  equity:                                                                                                         |       |         |       |       |       |
| Common stock  ($.01 par value; 10,000,000 shares authorized; 6,844,284 and 6,245,929  shares, respectively, issued and outstanding) |       | 68,443       |       | 62,459     |       |
| Additional  paid-in capital                                                                                                         |       | 3,838,132    |       | 2,784,635  |       |
| Accumulated  deficit                                                                                                                |       | (1,095,237   | )          | (576,534   | )          |
| Total  shareholders’ equity                                                                                                    |       | 2,811,338    |       | 2,270,560  |       |
|                                                                                                                                |       |         |       |       |       |
| Total  liabilities and shareholders’ equity                                                                                    |       | $            | 3,556,255  |       | $          | 2,901,560 |   |

 

See notes to financial statements.

 

 

----

 

**Ballistic Recovery Systems, Inc.**

**Statements of Operations**

**For the Years Ended September 30, 2004 and 2003**

 
| ** **                                                    | ** ** | **Restated** | ** ** | ** ** | ** ** |
|---------------------------------------------------------------|------------|--------------|------------|------------|------------|
| ** **                                                    | ** ** | **2004**     | ** ** | **2003**   | ** ** |
| Sales                                                         |       | $            | 6,558,551  |       | $          | 6,549,011 |   |
| Cost of sales                                                 |       | 4,252,531    |       | 3,966,125  |       |
|                                                          |       |         |       |       |       |
| Gross profit                                                  |       | 2,306,020    |       | 2,582,886  |       |
|                                                          |       |         |       |       |       |
| Selling, general  and administrative                          |       | 1,494,447    |       | 1,211,567  |       |
| Research and  development                                     |       | 242,782      |       | 407,171    |       |
| Intangible  amortization                                      |       | 35,519       |       | 43,083     |       |
|                                                          |       |         |       |       |       |
| Income from  operations                                       |       | 503,272      |       | 921,065    |       |
|                                                          |       |         |       |       |       |
| Other income  (expense):                                      |       |         |       |       |       |
| Interest expense                                              |       | (7,875       | )          | (14,905    | )          |
| Other income  (expense)                                       |       | 4,377        |       | 3,407      |       |
|                                                          |       |         |       |       |       |
| Income before  income taxes                                   |       | 499,774      |       | 909,567    |       |
|                                                          |       |         |       |       |       |
| Income taxes expense                                          |       | 198,300      |       | 360,000    |       |
|                                                          |       |         |       |       |       |
| Net income                                                    |       | $            | 301,474    |       | $          | 549,567 |   |
|                                                          |       |         |       |       |       |
| Basic earnings  per common share                              |       | $            | 0.05       |       | $          | 0.09 |   |
|                                                          |       |         |       |       |       |
| Weighted average  number of shares outstanding – Basic   |       | 6,577,281    |       | 6,222,399  |       |
|                                                          |       |         |       |       |       |
| Diluted earnings  per common share                            |       | $            | 0.04       |       | $          | 0.09 |   |
|                                                          |       |         |       |       |       |
| Weighted average  number of shares outstanding – Diluted |       | 6,910,530    |       | 6,346,373  |       |
|                                                          |       |         |       |       |       |
| Dividends per  share                                          |       | $            | 0.1255     |       | $          | 0.05 |   |

 

See notes tofinancial statements.

 

 

----

 

**Ballistic Recovery Systems, Inc.**

**Statements of Shareholders’ Equity**

**For the Years Ended September 30, 2004 and 2003**

 
| ** **                                                       | ** ** | **Common Stock**      | ** ** | **Additional** | ** ** | ** **           | ** ** | **Share-**               | ** ** |
|------------------------------------------------------------------|------------|-----------------------|------------|----------------|------------|----------------------|------------|--------------------------|------------|
| ** **                                                       | ** ** | **Number of  Shares** | ** ** | **Amount**     | ** ** | **Paid-in  Capital** | ** ** | **Accumulated  Deficit** | ** ** | **holders’  Equity** | ** ** |
| Balance  September 30, 2002                                 |       | 6,209,737             |       | $              | 62,098     |                 | $          | 2,764,197                |       | $ | (817,185 | ) | $ | 2,009,110 |   |
|                                                             |       |                  |       |           |       |                 |       |                     |       |   |   |
| Issuance of  stock in cashless transactions                      |       | 36,192                |       | 361            |       | (361                 | )          | —                   |       | — |   |
| Expenses from  stock based transaction                           |       | —                |       | —         |       | 20,799               |       | —                   |       | 20,799 |   |
| Dividend  declaration                                            |       | —                |       | —         |       | —               |       | (308,916                 | )          | (308,916 | ) |
| Net Income                                                       |       | —                |       | —         |       | —               |       | 549,567                  |       | 549,567 |   |
|                                                             |       |                  |       |           |       |                 |       |                     |       |   |   |
| Balance  September 30, 2003                                 |       | 6,245,929             |       | 62,459         |       | 2,784,635            |       | (576,534                 | )          | 2,270,560 |   |
|                                                             |       |                  |       |           |       |                 |       |                     |       |   |   |
| Issuance of  stock in cashless transactions                      |       | 27,105                |       | 271            |       | (271                 | )          | —                   |       | — |   |
| Stock warrant  exercise                                          |       | 500,000               |       | 5,000          |       | 557,500              |       | —                   |       | 562,500 |   |
| Stock option  exercises for cash                                 |       | 21,250                |       | 213            |       | 9,787                |       | —                   |       | 10,000 |   |
| Stock option  exercises under note receivable – shareholder |       | 50,000                |       | 500            |       | 12,000               |       | —                   |       | 12,500 |   |
| Expenses from  stock based transaction                           |       | —                |       | —         |       | 474,481              |       | —                   |       | 474,481 |   |
| Dividend  declaration                                            |       | —                |       | —         |       | —               |       | (820,177                 | )          | (820,177 | ) |
| Net Income –  restated                                      |       | —                |       | —         |       | —               |       | 301,474                  |       | 301,474 |   |
|                                                             |       |                  |       |           |       |                 |       |                     |       |   |   |
| Balance  September 30, 2004 – restated                 |       | 6,844,284             |       | $              | 68,443     |                 | $          | 3,838,132                |       | $ | (1,095,237 | ) | $ | 2,811,338 |   |

 

See notes to financial statements.

 

 

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**Ballistic Recovery Systems, Inc.**

**Statements of Cash Flow**

**For the Years Ended September 30, 2004 and 2003**

 
| ** **                                        | ** ** | **Restated** | ** ** | ** ** | ** ** |
|---------------------------------------------------|------------|--------------|------------|------------|------------|
| ** **                                        | ** ** | **2004**     | ** ** | **2003**   | ** ** |
| Cash flows from  operating activity:              |       |         |       |       |       |
| Net income                                        |       | $            | 301,474    |       | $          | 549,567 |   |
| Adjustments to  reconcile net income to net cash  |       |         |       |       |       |
| From operating  activity:                         |       |         |       |       |       |
| Deferred income  tax                              |       | (138,700     | )          | 305,000    |       |
| Depreciation and  amortization                    |       | 85,813       |       | 68,639     |       |
| Amortization of  covenant not to compete          |       | 35,519       |       | 37,944     |       |
| Expense from  stock based transaction             |       | 474,481      |       | 20,799     |       |
| Loss on  retirement of furniture and equipment    |       | —       |       | 1,096      |       |
| (Increase)  decrease in:                          |       |         |       |       |       |
| Accounts  receivable, net                         |       | (75,792      | )          | (247,376   | )          |
| Inventories                                       |       | (14,306      | )          | (290,292   | )          |
| Prepaid expenses                                  |       | 16,670       |       | (12,324    | )          |
| Long-term  prepaid expenses                       |       | 24,852       |       | 25,239     |       |
| Increase  (decrease) in:                          |       |         |       |       |       |
| Accounts payable                                  |       | 50,801       |       | 71,132     |       |
| Customer  deposits                                |       | (37,766      | )          | (75,927    | )          |
| Accrued payroll  and other accrued liabilities    |       | 141,442      |       | (115,930   | )          |
|                                              |       |         |       |       |       |
| Net cash from  operating activities               |       | 864,488      |       | 337,567    |       |
|                                              |       |         |       |       |       |
| Cash flows from  investing activities:            |       |         |       |       |       |
| Capital  expenditures                             |       | (124,189     | )          | (127,430   | )          |
|                                              |       |         |       |       |       |
| Net cash from  investing activities               |       | (124,189     | )          | (127,430   | )          |
|                                              |       |         |       |       |       |
| Cash flows from  financing activities:            |       |         |       |       |       |
| Proceeds from  exercise of common stock warrants  |       | 562,500      |       | —     |       |
| Proceeds from  exercise of common stock options   |       | 10,000       |       | —     |       |
| Principal  payments on covenant not to compete    |       | (40,560      | )          | (36,355    | )          |
| Dividends paid                                    |       | (820,177     | )          | (308,916   | )          |
|                                              |       |         |       |       |       |
| Net cash from  financing activities               |       | (288,237     | )          | (345,271   | )          |
|                                              |       |         |       |       |       |
| Increase  (decrease) in cash and cash equivalents |       | 452,062      |       | (135,134   | )          |
| Cash and cash  equivalents - beginning of year    |       | 862,495      |       | 997,629    |       |
|                                              |       |         |       |       |       |
| Cash and cash  equivalents - end of year          |       | $            | 1,314,557  |       | $          | 862,495 |   |

 

See notes to financial statements.

 

 

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**Ballistic Recovery Systems, Inc.**

**Notes to Financial Statements**

**September 30, 2004 and 2003**

 

**1.****             ****Nature of Business**

 

BallisticRecovery Systems, Inc. (the “Company”) designs, manufactures anddistributes rocket deployed whole-aircraft emergency parachute systems for useon general aviation and recreational aviation aircraft. The emergency parachutesystems are intended for use in the event of an in-air emergency and aredesigned to bring down the entire aircraft and its occupants under theparachute canopy.  In the generalaviation market, the Company is currently producing and selling emergencyrecovery systems for four four-place general aviation aircraft, known as theCirrus Design SR20 (SR20) and SR22, and the Cessna 172 and 182.  The products for Cirrus Design were developedin a joint effort between the Company and Cirrus Design.  The Cirrus Design aircraft were certified bythe Federal Aviation Administration (FAA) in 1998 and 2000, respectively, andfeatures the Company’s parachutes as standard equipment.  In July 2002 and July 2004,respectively, the Company received FAA approval for the Cessna 172 and 182systems for the aftermarket.  In therecreational aviation market, the Company sells products to several hundreddifferent aircraft designs that are categorized as ultralights and experimentalaircraft.  The Company’s products aresold both domestically and internationally.

 

**2.****             ****Summary of Significant AccountingPolicies**

 

***Accounting Principles***

 

Thefinancial statements and accompanying notes are prepared in accordance withaccounting principles generally accepted in the United States of America.

 

***Use of Estimates***

*** ***

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect certainreported amounts of assets and liabilities and disclosure of contingent assetsand liabilities at the date of the financial statements and the reportedamounts of expenses during the reporting period. Actual results could differfrom those estimates.

 

***Cash Concentrations***

 

Bank balances exceeded federally insured levels during2004 and 2003 and exceeded federally insured levels as of September 30,2004.  Generally, these balances may beredeemed upon demand and therefore bear minimal risk.

 

***Cash and Cash Equivalents***

 

Short-term investments with an original maturity ofthree months or less are considered to be cash equivalents and are stated attheir fair value.

 

***Accounts Receivable, credit riskand allowance for doubtful accounts***

 

The Company sells its products to domestic and foreigncompanies.  The Company reviews customers’credit history before extending unsecured credit and established an allowancefor doubtful accounts based upon factors surrounding the credit risk ofspecific 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 writesoff accounts receivable when they are deemed uncollectible.  Accounts receivable are shown net of an

 

 

----

 

allowance for doubtful accounts of $10,000 at both September 30,2004 and 2003.The Company’s contract research and development projects arebilled to its customers on an uncollateralized credit basis.  The estimated loss that management believesis probable is included in the allowance for doubtful accounts.  Due to uncertainties in the collectionprocess, however, it is at least reasonably possible that management’s estimatewill change during the next year, which cannot be estimated.

 

***Customer Concentration***

 

The Company had sales to one major customer, CirrusDesign, which represented 74% of the Company’s total sales for fiscal year 2004and 75% of the Company’s total sales for fiscal year 2003.  This customer also accounted for 81% (or $325,000)and 44% (or $142,000) of accounts receivable at September 30, 2004 and 2003,respectively.  The Company suppliesparachute systems to Cirrus Design from the Company’s general aviation productline.

 

In its recreational aviation product line, the Companyprimarily distributes its products through dealers and distributors who in turnsell the products to the end consumer. The Company believes that in the event that any individual dealers ordistributors cease to represent the Company’s products, alternative dealers ordistributors can be established.

 

***Valuation of Inventories***

 

Out inventories are stated at the lower of cost ormarket.  Cost is determined by thefirst-in, first-out (“FIFO”) method.  Wemaintain a standard costing system for our inventories.  Assumptions with respect to direct laborutilization, standard direct and indirect cost rates, vendor pricing andutilization of factory capacities are formulated in the development of ourstandard costing system.  Sudden orcontinuing changes in the Company’s product markets could result in significantproduction variances from our standard rates. These variances could directly impact our gross profit performance andmay cause variability in gross profit results from reporting period toreporting period.  Our labor and overheadrates are set for production rates that match typical market conditions.  Production variances are charged to cost ofsales each quarter as incurred.  Materialstandards are based upon normal purchase volumes.  Purchase price variances are charged to costof sales each quarter as incurred.

 

Provisions to reduce inventories to the lower of costor market are made based on a review of excess and obsolete inventories throughan examination of historical component consumption, current market demands andshifting production methods.  Significantassumptions with respect to market trends and customer product acceptance areutilized to formulate our provision methods. Sudden or continuing downward changes in the Company’s product marketsmay cause us to record additional inventory revaluation charges in future periods.  No write-off provision was made to ourinventories for the year ended September 30, 2004.

 

***Customer Deposits***

 

The Company requires order deposits from most of itsdomestic and international customers. These deposits represent either partial or complete down payments fororders.  These down payments are recordedas customer deposits.  The deposits arerecognized as revenue when the product is shipped.

 

***Income Taxes***

 

Differences between accounting rules and tax lawscause differences between the bases of certain assets and liabilities forfinancial 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 (SFAS)109.  Temporary differences relateprimarily to: stock based compensation; allowances for doubtful accounts;inventory valuation allowances; depreciation; valuation of warrants issued to acustomer; and accrued expenses not currently deductible.

 

***Furniture, Fixtures and LeaseholdImprovements***

 

Furniture, fixtures and leasehold improvements arestated at cost. Depreciation is computed using the straight-line method overthe estimated useful lives of the related assets, ranging from three to sevenyears for equipment and leasehold improvements and ten years for the airplane.When assets are retired or otherwise disposed of, the cost and relatedaccumulated depreciation are removed from the accounts and the resulting gainor loss is recognized in income for the period. The cost of maintenance and repairs is expensed as incurred; significantrenewals and betterments are capitalized. Deduction is made for retirementsresulting from renewals or betterments. Leasehold improvements are amortized using the straight-line method overthe shorter of the lease term, or the estimated useful life of the assets.

 

***Intangibles***

 

Patents are recorded at cost and are being amortizedon a straight-line method over 17 years. The covenant not to compete is recorded at cost and is being amortizedusing the straight-line method over the ten-year term of the agreement.  Other intangible assets are recorded at costand are being amortized on a straight-line method over five years.

 

Components of intangible assets are as follows:

 
| ** **                                  | ** ** | **September 30, 2004** | ** ** | **September 30, 2003** | ** ** |
|---------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                  | ** ** | **Gross Carrying**          | ** ** | **Accumulated**             | ** ** | **Gross Carrying** | ** ** | **Accumulated** | ** ** |
| ** **                                  | ** ** | **Amount**                  | ** ** | **Amortization**            | ** ** | **Amount** | ** ** | **Amortization** | ** ** |
| Intangible  assets subject to amortization: |       |                        |       |                        |       |   |   |   |   |
|                                        |       |                        |       |                        |       |   |   |   |   |
| Patents                                     |       | $                           | 11,664     |                        | $          | 10,053 |   | $ | 11,664 |   | $ | 9,367 |   |
| Other intangible  assets                    |       | $                           | 51,398     |                        | $          | 51,398 |   | $ | 51,398 |   | $ | 51,398 |   |
| Covenant not to  compete                    |       | $                           | 379,438    |                        | $          | 335,908 |   | $ | 379,438 |   | $ | 300,388 |   |

 

Amortizationexpense of intangible assets was $36,206 and $43,771 for the years ended September 30,2004 and 2003, respectively. Amortization expense is estimated to approximate $9,540, $9,540, $9,093,$8,853 and $8,115 for the years ending September 30, 2005, 2006, 2007,2008 and 2009, respectively.

 

***Comprehensive Income***

 

SFASNo. 130 establishes standards for the reporting and disclosure ofcomprehensive income and its components, which will be presented in associationwith a company’s financial statements. Comprehensive income is defined as the change in a business enterprise’sequity during a period arising from transactions, events or circumstancesrelating to non-owner sources, such as foreign currency translation adjustmentsand unrealized gains or losses on available-for-sale securities.  It includes all changes in equity during aperiod except those resulting from investments by or distributions toowners.  For the fiscal years ended September 30,2004 and 2003, net income and comprehensive income were

 

 

----

 

equivalent.

 

***Fair Value of Financial Instruments***

 

SFASNo. 107, “Disclosures About Fair Value of Financial Instruments” requiresdisclosure of the estimated fair value of financial instruments as follows:

 

Short-term Assets and Liabilities:

 

Thefair values of cash, accounts receivable, accounts payable, accruedliabilities, and short-term debt approximate their carrying values due to theshort-term nature of these financial instruments.

 

Long-term Debt:

 

The fair value of long-term debt approximatetheir carrying value because the terms are equivalent to borrowing rates currentlyavailable to the Company for debt with similar terms and maturities.

 

***Segment Reporting***

 

Abusiness segment is a distinguishable component of an enterprise that isengaged in providing an individual product or service or a group of relatedproducts or services and that is subject to risks and returns that aredifferent from those of other business segments. The Company’s segments havesimilar economic characteristics and are similar in the nature of the productssold, type of customers, methods used to distribute the Company’s products andregulatory environment.  Managementbelieves that the Company meets the criteria for aggregating its operatingsegments into a single reporting segment.

 

***Stock-BasedCompensation***

 

SFAS No. 123, *Accountingfor Stock-Based Compensation* (“SFAS 123”), provides for the use of afair value based method of accounting for employee stock compensation.  However, SFAS 123 also allows an entity tocontinue to measure compensation cost for stock options granted to employeesusing the intrinsic value method of accounting prescribed by AccountingPrinciples Board Opinion No. 25, *Accountingfor Stock Issued to Employees* (“APB 25”), which only requirescharges to compensation expense for the excess, if any, of the fair value ofthe underlying stock at the date a stock option is granted (or at anappropriate subsequent measurement date) over the amount the employee must payto acquire the stock*,* if suchamounts differ materially from historical amounts.  The Company has elected to continue toaccount for employee stock options using the intrinsic value method under APB25.  By making that election, it isrequired by SFAS 123 and SFAS 148, “Accounting for Stock-Based Compensation –Transition and Disclosure” to provide pro forma disclosures of net income andearnings per share as if a fair value based method of accounting had beenapplied.

 

Had compensation costs been determined in accordancewith the fair value method prescribed by SFAS No. 123 for all optionsissued to employees and amortized over the vesting period, the Company’s net incomeapplicable to common shares and net income per common share (basic and diluted)for plan options would have been decreased to the pro forma amounts indicatedbelow.

 

 

----

 

| ** **                          | ** ** | **Fiscal Year ended  September 30,** | ** ** |
|-------------------------------------|------------|-------------------------------------------|------------|
| ** **                          | ** ** | **Restated**                              | ** ** | ** ** | ** ** |
| ** **                          | ** ** | **2004**                                  | ** ** | **2003** | ** ** |
| Net Income:                         |       |                                      |       |   |   |
| As reported                         |       | $                                         | 301,474    |   | $ | 549,567 |   |
| Pro forma                           |       | $                                         | 301,474    |   | $ | 523,357 |   |
|                                |       |                                      |       |   |   |
| Basic earnings  per common share:   |       |                                      |       |   |   |
| As reported                         |       | $                                         | 0.05       |   | $ | 0.09 |   |
| Pro forma                           |       | $                                         | 0.05       |   | $ | 0.08 |   |
|                                |       |                                      |       |   |   |
| Diluted earnings  per common share: |       |                                      |       |   |   |
| As reported                         |       | $                                         | 0.04       |   | $ | 0.09 |   |
| Pro forma                           |       | $                                         | 0.04       |   | $ | 0.08 |   |
|                                |       |                                      |       |   |   |
| Stock based  compensation:          |       |                                      |       |   |   |
| As reported                         |       | $                                         | 474,481    |   | $ | 20,799 |   |
| Pro forma                           |       | —                                    |       | $ | 26,210 |   |

 

No options were granted orvested during fiscal year 2004.  The fairvalue of each option granted is estimated on the date of the grant using the Black-Scholesoption pricing model with the following assumptions used for the grants in2003: dividend yield of 5.0%; expected volatility of 36.6%; risk-free interestrate of 2.6%; and expected lives of five years.

 

***Earnings per Common Share***

 

Basicearnings per common share is computed by dividing net income by the weightedaverage number of common shares outstanding during the period.  Diluted earnings per common share is computedby dividing net income by the weighted average number of common sharesoutstanding plus all additional common stock that would have been outstandingif potentially dilutive common stock related to stock options and warrants hadbeen issued.  Weighted average sharesoutstanding-diluted includes 333,249 and 123,974 shares of dilutive securitiesfor fiscal year 2004 and 2003, respectively.

 

Followingis a reconciliation of basic and diluted earnings per common share for fiscalyear 2004 and 2003, respectively:

 

| ** **                                                        | ** ** | **Fiscal Year ended  September 30,** | ** ** |
|-------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                        | ** ** | **Restated**                              | ** ** | ** ** | ** ** |
| ** **                                                        | ** ** | **2004**                                  | ** ** | **2003** | ** ** |
| Earnings per  common share – basic:                          |       |                                      |       |   |   |
|                                                              |       |                                      |       |   |   |
| Net income                                                        |       | $                                         | 301,474    |   | $ | 549,567 |   |
|                                                              |       |                                      |       |   |   |
| Weighted average  shares outstanding                              |       | 6,577,281                                 |       | 6,222,399 |   |
|                                                              |       |                                      |       |   |   |
| Earnings per  common share – basic                           |       | $                                         | 0.05       |   | $ | 0.09 |   |
|                                                              |       |                                      |       |   |   |
| Earnings per  common share – diluted:                        |       |                                      |       |   |   |
|                                                              |       |                                      |       |   |   |
| Net income                                                        |       | $                                         | 301,474    |   | $ | 549,567 |   |
|                                                              |       |                                      |       |   |   |
| Weighted average  shares outstanding                              |       | 6,577,281                                 |       | 6,222,399 |   |
| Common stock  equivalents                                         |       | 333,249                                   |       | 123,974 |   |
|                                                              |       |                                      |       |   |   |
| Weighted average  shares and potential diluted shares outstanding |       | 6,910,530                                 |       | 6,346,373 |   |
|                                                              |       |                                      |       |   |   |
| Earnings per  common share – diluted                         |       | $                                         | 0.04       |   | $ | 0.09 |   |

 

 

----

 

TheCompany uses the treasury method for calculating the dilutive effect of thestock options and warrants (using the average market price).

 

Optionsand warrants to purchase 390,000 shares of common stock with a weighted averageexercise price of $1.28 were outstanding at September 30, 2003, but wereexcluded from the computation of common share equivalents for the fiscal yearended September 30, 2003 because their exercise prices were greater thanthe average market price of the common shares. No options were excluded from the computation of diluted earnings pershare for the fiscal year ended September 31, 2004.

 

***Research and Development Costs***

 

Researchand development costs are charged to expense as incurred.

 

***Advertising Expenses***

 

Non-directresponse advertising expenses are recognized in the period incurred.  Non-direct response advertising expensestotaled $45,399 in 2004 and $88,838 in 2003.

 

***Shipping and Handling Costs***

 

TheCompany records amounts being charged to customers for shipping and handling assales and costs incurred in cost of sales.

 

**3.****             ****New Product Development, Researchand Development Funding and Income Recognition**

 

In1994, the Company entered into an agreement with Cirrus Design, a privatelyheld company that began development and certification of a four-place allcomposite general aviation aircraft.  TheFAA certified the aircraft, known as the Cirrus Design SR20 (SR20), on October 23,1998.  This was the first FAA certifiedaircraft to offer one of the Company’s recovery systems as required standardequipment.  The Company began deliveringsystems for the SR20 infiscal year 1999.  During fiscal year 2000, Cirrus Design begandevelopment and certification efforts for their next generation aircraft calledthe SR22.  The SR22 is a heavier andfaster version of the SR20 and utilizes much of the same parachute technologydeveloped for the SR20.  The SR22received FAA certification in November 2000 and was certified with theCompany’s parachute system as a standard equipment component of theaircraft.  Deliveries of SR22 parachute systemsby the Company began in December 2000.  The SR22became the third of the Company’s products to have received FAA certification (the BRS150 and SR20 products beingthe others).  For fiscalyear 2004, approximately 74% of the Company’s total revenues were generatedfrom sales to Cirrus Design.

 

 

----

 

Infiscal year 2001 the Company began development of a parachute system for theCessna 172 model aircraft.  During fiscalyear 2001, the Company received $200,000 in funding, which took the form ofequity and project specific funding, to develop and test such a recoverysystem.  The development and testing wascompleted in fiscal year 2002 and the Company received FAA certification forthe BRS-172 recovery system in July 2002. The Company made its first customer delivery in September 2002 withtwelve total systems installed through the end of fiscal year 2004.

 

Duringfiscal year 2004, the Company developed a parachute recovery system for theCessna 182 model of aircraft, which is called the BRS-182.  The system utilizes many of the samecomponents used in the recovery systems for the Cirrus aircraft models and theCessna 172.  The Company received the STCfrom the FAA on June 25, 2004.  This Supplemental Type Certificate (“STC”) allows the product to beinstalled on certified Cessna 182 series aircraft.  The first customer delivery and installationwas completed in July 2004.  TheCompany has begun a direct marketing campaign which resulted in the sale anddelivery of six BRS-182 units through the end of fiscal year 2004.

 

InNovember 2001, the Company entered into a contract with NASA for theCompany’s second Phase I Small Business Innovation Research (“SBIR”)grant.  The Company has been a successfulrecipient of both Phase I and Phase II SBIR research grants in prioryears.  The contract, which was a Phase Ifeasibility study, was completed in May 2002 and was a firm-fixed grantfor $68,571.  The Phase I award isentitled “Advanced Aircraft Parachute Recovery System” and was granted to allowthe Company to investigate the feasibility of developing parachute systems forlarger and faster aircraft than those currently supported by the Company.  Following the Phase I work, the Companyapplied for a follow-on Phase II grant and effective September 16, 2002the Company began work under a two-year contract for a firm fixed award of$598,694.  Work under the contract wascompleted in September 2004 with total contract billings of $575,000.  During the years ended September 30,2004 and 2003, the Company offset expenses by $385,619 and $189,410,respectively.  NASA and the United StatesFederal Government will have a royalty free right to any developed technology,but only as a customer for product that incorporates the developed technologythat is purchased from the Company.

 

**4.****             ****Purchase and Supply Agreement**

 

OnSeptember 17, 1999, the Company entered into a Purchase and SupplyAgreement with Cirrus, the manufacturer of the SR20 and SR22 aircraft thatutilize the Company’s parachute system as standard equipment.  Under theAgreement, Cirrus was issued four warrants to acquire an aggregate of up to 1.4million shares of unregistered Company common stock.  In order to executethe warrants, Cirrus must meet certain purchase levels of the Company’semergency parachute systems for the SR20, SR22 and derivative aircraft over thesubsequent five years. Cirrus met their minimum purchase commitment forthe first warrant period, but such warrant for 250,000 shares expiredunexercised on February 28, 2003. Cirrus met their minimum purchasecommitment for warrants number two and three, and exercised these warrants for500,000 shares, on February 29, 2004, for an aggregate exercise price of$562,500.  Cirrus has met their minimumpurchase commitment for warrant number four. The corresponding number of shares under this remaining warrant and thewarrant strike price, are as follows:

 

| **Warrant #** | ** ** | **Exercise Period** | ** ** | **Warrant Shares** | ** ** | **Exercise Price per  Warrant Share** | ** ** | **Purchase  Commitment** | ** **         |
|---------------|------------|---------------------|------------|--------------------|------------|---------------------------------------|------------|--------------------------|--------------------|
| 4             |       | 01-2004 to 02-2005  |       | 650,000            |       | $                                     | 1.25       |                     | 500 Units in  2004 |   |
|               |            |                     |            |                    |            |                                       |            |                          |                    |  |

 

 

----

 

Cirrushas the right to exercise the warrant during the exercise period for the statedexercise price. Cirrus has not indicated to the Company its intentionswith regards to the exercise of this warrant.

 

Pursuantto Emerging Issues Task Force 96-18 (EITF 96-18), “Accounting for EquityInstruments that are Issued to Other Than Employees for Acquiring, or inConjunction with Selling, Goods or Services,” the Company has and will record areduction in sales related to the warrants earned by Cirrus for fiscal year2004 and 2003.  Sales have been reduced by $474,481 and $20,799 for fiscalyear 2004 and 2003, respectively.  Basedon EITF 96-18, the warrants are not considered earned until the products aresold.

 

AssumingCirrus exercises all of warrant number four, the impact on equity may be asfollows (assumes equity contributions based on the exercise of warrants nearthe end of the exercise period):

 
| **Fiscal Year** | ** ** | **Equity Contribution** | ** ** |
|-----------------|------------|-------------------------|------------|
| 2005            |       | $                       | 812,500    |   |
|                 |            |                         |            |  |

 

**5.****             ****Covenant Not to Compete**

 

OnOctober 26, 1995 the Company entered into an agreement with the presidentand majority shareholder of Second Chantz Aerial Survival Equipment, Inc.(SCI), whereby SCI ceased all business activities, and SCI’s president andmajority shareholder entered into a ten-year covenant not to compete with theCompany.  The payments required under this agreement contained anon-interest-bearing portion and a portion that bears interest at a rate belowthe Company’s incremental borrowing rate.  Under generally acceptedaccounting principles the future payments were discounted at the Company’sincremental borrowing rate.  The 4% tenyear note calls for monthly payments of $4,036 through October 2005. Payments under this agreement are unsecured.

 

OnAugust 16, 2004, the Company extended the non-compete period by fiveadditional years in exchange for the exercise of stock options held by SCI’spresident under a stock subscription agreement backed by a promissorynote.  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 begin July 1,2005 and continue monthly with a final maturity date of October 1, 2005.  The present value of the Company’s obligationunder this agreement was recorded as an intangible asset and is being amortizedover fifteen years as shown in the accompanying financial statements.

 

Futurepayments under this agreement are as follows:

 
| **Fiscal Year** | ** ** | **Future Dollars** | ** ** | **Present Dollars** | ** ** |
|-----------------|------------|--------------------|------------|---------------------|------------|
| 2005            |       | $                  | 48,436     |                | $          | 45,255 |   |
| 2006            |       | 4,036              |       | 4,000               |       |
|            |       | $                  | 52,472     |                | $          | 49,255 |   |

 

 

----

 

**6.****             ****Other Financial Information**

 

Inventories

 

Thecomponents of inventory consist of the following at September 30:

 
| ** **        | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------|------------|----------|------------|----------|------------|
| Raw materials     |       | $        | 778,707    |     | $          | 811,538 |   |
| Work in process   |       | 325,561  |       | 93,701   |       |
| Finished goods    |       | 28,228   |       | 212,951  |       |
| Total inventories |       | $        | 1,132,496  |     | $          | 1,118,190 |   |

 

Furniture, Fixtures and Leasehold Improvements

 

Furniture, fixtures and leasehold improvements consistedof the following categories at September 30:

 
| ** **                      | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|
| Office furniture  and equipment |       | $        | 237,587    |     | $          | 172,454 |   |
| Manufacturing  equipment        |       | 260,307  |       | 201,251  |       |
| Airplane                        |       | 93,873   |       | 93,873   |       |
| Total fixed  assets             |       | $        | 591,767    |     | $          | 467,578 |   |

 

Depreciation Expense

 

Depreciationexpense totaled $85,126 in 2004 and $62,812 in 2003.

 

Long-Lived Assets

 

Inaccordance with SFAS 144, Accounting For The Impairment Of Long-Lived AssetsAnd For Long-Lived Assets To Be Disposed Of, the Company reviews its long-livedassets and intangibles related to those assets periodically to determinepotential impairment by comparing the carrying value of the long-lived assetsoutstanding with estimated future cash flows expected to result from the use ofthe assets, including cash flows from disposition.  Should the sum of the expected future cashflows be less than the carrying value, the Company would recognize animpairment loss.  An impairment losswould be measured by comparing the amount by which the carrying value exceedsthe fair value of the long-lived assets and intangibles.  To date, management has determined that noimpairment of long-lived assets exists.

 

Other Accrued Liabilities

 

Otheraccrued liabilities consisted of the following categories at September 30,2004 and 2003:

 
| ** **                             | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|
| Bonus and Profit  Sharing Plan Accrual |       | $        | 132,733    |     | $          | 139,875 |   |
| Income Tax  Accrual                    |       | 182,602  |       | 39,071   |       |
| Other  Miscellaneous Accruals          |       | 27,300   |       | 19,469   |       |
|                                   |       | $        | 342,635    |     | $          | 198,415 |   |

 

Export Sales

 

TheCompany’s international sales are made through independent representatives invarious foreign countries.  Internationalsales as a percentage of total sales were 10% in 2004 and 5% in 2003.

 

 

----

 

Major Suppliers

 

Duringthe fiscal years ended September 30, 2004 and 2003, the Company purchasedits parachutes from a certain key vendor. The Company manufactures its ownballistic devices, but the propellant for the ballistic devices is purchasedfrom a single source.  In August 2004,the Company signed a three year supply agreement with extensions with itspropellant supplier.  The Companyroutinely searches for new suppliers and feels alternate sources can be foundshould any of these suppliers be unable to meet the Company’s needs.

 

### Related Parties

 

Through December 2003, the Company contractedwith an officer/shareholder of the Company to coordinate its advertising, atwhich time the arrangement was cancelled. Total advertising expenses were $45,399 and $88,838 for fiscal year 2004and 2003, respectively, with $15,100 and $39,259, respectively of these totalsbeing paid to this individual.  Theadvertising rates charged were at or below current market rates.  There were no outstanding balances due tothis related party as of September 30, 2004 or 2003.

 

The Company paid consulting fees to a member of theboard of directors for services provided in the amount of $4,101 in fiscal year2004.

 

### Profit Sharing Plan

 

TheCompany 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-timeemployees over age 21.  The Company willmatch 25% of the first 4% contributed by the employee.  Company match contributions made for theyears ended September 30, 2004 and 2003, respectively, were $11,514 and$8,668.  The Company can also makediscretionary profit sharing contributions. Company contributions made at the discretion of management and the boardof directors for the years ended September 30, 2004 and 2003,respectively, were $55,349 and $53,512.

 

Product Warranties

 

The Company offers itscustomers up to a one-year warranty on its products.  The warranty covers only manufacturingdefects, which will be replaced or repaired by the Company at no charge to thecustomer.  To date, the Company has not hadany material claims against its products. The Company has not recorded an accrual for possible warranty claims andbelieves that the product warranties as offered will not have a material effecton the Company’s financial position, results of operations or cash flows.

 

Backlog of Orders

 

As of September 30,2004 and 2003, the Company had a backlog of orders totaling approximately$1,842,000 and $1,867,000, respectively. The backlogs included over $1.6million of orders for the Cirrus Design aircraft for both periods.  The 2004 backlog is expected to be filled within 12months.  Cirrus Design is currentlyproducing aircraft at levels, which has made it the largest producer of singleengine piston aircraft in the world ahead of Cessna Aircraft Company.  Due to the backlog period involved, however,it is possible that there could be cancellations of a portion of the currentlybacklogged orders.  The Company expectsto fund the build out and sale of the backlogged orders

 

 

----

 

through cash flow providedby the sale of those orders.  The Companycautions investorswho may utilize published bookings and backlog information as tools to forecastthe Company’s revenue during a given timeframe since certain purchase ordersmay be subject to cancellation and/or delivery schedule revision.

 

**7.****             ****Line-of Credit Borrowings**

 

Forfiscal year 2003, the Company had a $250,000 line-of-credit for use inoperations.  In October 2003, theCompany negotiated an increase in the line-of-credit to $500,000.  The line-of-credit was established on anannual renewal basis and is secured by all of the Company’s assets.  The current line-of-credit expires March 6,2005.  The line calls for a variableinterest rate of 5.09% at September 30, 2004.  At September 30, 2004 and 2003 therewere no outstanding balances under the line of credit.  The Company expects to renew the line eachyear following the review of its financial results and projections with thebank.

 

**8.****             ****Income Taxes**

 

AtSeptember 30, 2004 and 2003, the Company did not have any federal or statenet operating loss carryforwards.  Theprovision for income taxes consisted of the following components for the yearsended September 30:

 
| ** ** | ** ** | **Restated** | ** ** | ** ** | ** ** |
|------------|------------|--------------|------------|------------|------------|
| ** ** | ** ** | **2004**     | ** ** | **2003**   | ** ** |
| Current:   | ** ** | ** **   | ** ** | ** ** | ** ** |
| Federal    |       | $            | 283,000    |       | $          | — |   |
| State      |       | 54,000       |       | 55,000     |       |
| Deferred   |       | (138,700     | )          | 305,000    |       |
|       |       | $            | 198,300    |       | $          | 360,000 |   |

 

Components of net deferredincome taxes are as follows at September 30:

 
| ** **                                                           | ** ** | **Restated** | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------|------------|--------------|------------|------------|------------|
| ** **                                                           | ** ** | **2004**     | ** ** | **2003**   | ** ** |
| Deferred income  tax assets:                                         | ** ** | ** **   | ** ** | ** ** | ** ** |
| Amortization                                                         |       | $            | 10,000     |       | $          | 12,000 |   |
| Allowance for  doubtful accounts                                     |       | 4,000        |       | 4,000      |       |
| Vacation  accruals                                                   |       | 23,000       |       | 28,000     |       |
| Asset valuation  reserves                                            |       | 40,000       |       | 51,000     |       |
| Warrants related  to purchase and supply agreement – see note 4 |       | 146,700      |       | —     |       |
| Other accruals                                                       |       | 2,000        |       | —     |       |
| Inventory  Section 263 adjustment                               |       | 40,000       |       | 40,000     |       |
|                                                                 |       | 265,700      |       | 135,000    |       |
| Deferred income  tax liabilities - depreciation                      |       | (13,000      | )          | (21,000    | )          |
| Net deferred  income tax assets                                      |       | $            | 252,700    |       | $          | 114,000 |   |

 

Reconciliationbetween the statutory rate and the effective tax rate for the years ended September 30,is as follows:

 

 

----

 
| ** **                           | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|
| Federal  statutory tax rate          |       | 34.0     | %          | 34.0     | %          |
| State taxes, net  of federal benefit |       | 6.4      |       | 6.4      |       |
| Other                                |       | (0.7     | )          | (0.8     | )          |
| Effective tax  rate                  |       | 39.7     | %          | 39.6     | %          |

 

**9.****             ****Common Stock**

 

Stock Options

 

InMarch 2004, the shareholders at their annual meeting approved the 2004Stock Option Plan (the 2004 Plan), which provides for the granting of up to600,000 options to officers, directors, employees and consultants for thepurchase of stock.  No grants were madeunder this plan in fiscal year 2004.

 

Duringfiscal year 2003, the Company has issued options to various directors,officers, employees and others on a discretionary basis.  Stock option activity for fiscal years 2004and 2003 is as follows:

 
| ** **                                                              | ** ** | **Number of  Shares** | ** ** | **Option Price Range per  Share** | ** ** |
|-------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------------------|------------|
| ** **                                                              | ** ** | ** **            | ** ** | ** **                        | ** ** |
| Balance at  September 30, 2002                                     |       | 417,086               |       | $0.25 to $1.38                    |       |
|                                                                    |       |                  |       |                              |       |
| Granted during  fiscal year 2003                                        |       | 80,000                |       | $1.05                             |       |
| Converted to  stock under cashless transaction                          |       | (70,836               | )          | $0.31 to $0.75                    |       |
|                                                                    |       |                  |       |                              |       |
| Balance at  September 30, 2003                                     |       | 426,250               |       | $0.25 to $1.38                    |       |
|                                                                    |       |                  |       |                              |       |
| Granted during  fiscal year 2004                                        |       | —                |       | —                            |       |
| Converted to  stock under cashless transaction                          |       | (35,000               | )          | $0.50 to $0.69                    |       |
| Options  exercised                                                      |       | (71,250               | )          | $0.25 to $0.50                    |       |
| Expirations                                                             |       | (10,000               | )          | $0.44                             |       |
|                                                                    |       |                  |       |                              |       |
| Balance at  September 30, 2004                                     |       | 310,000               |       | $0.44 to $1.38                    |       |
|                                                                    |       |                  |       |                              |       |
| Weighted average  fair value of options granted during fiscal year 2004 |       | —                |       |                              |       |
|                                                                    |       |                  |       |                              |       |
| Weighted average  fair value of options granted during fiscal year 2003 |       | $                     | 0.23       |                              |       |   |
|                                                                    |       |                  |       |                              |       |
| At  September 30, 2004:                                            |       |                  |       |                              |       |
| Options vested  and exercisable                                         |       | 310,000               |       |                              |       |
| Shares available  for options                                           |       | 600,000               |       |                              |       |
|                                                                    |       |                  |       |                              |       |
| At September 30,  2003:                                            |       |                  |       |                              |       |
| Options vested  and exercisable                                         |       | 426,250               |       |                              |       |
| Shares available  for options                                           |       | —                |       |                              |       |
|                                                                         |            |                       |            |                                   |            |  |

 

 

----

 

Thefollowing tables summarize information about stock options outstanding as of September 30,2004:

 
| **Options Outstanding** | ** ** |
|-------------------------|------------|
| **Exercise Price**      | ** ** | **Number  Outstanding** | ** ** | **Weighted-Average  Remaining  Contractual Life** | ** ** | **Weighted-Average  Exercise  Price** | ** ** |
|                    |       |   |   |   |   |   |   |
| $0.44                   |       | 30,000 |   | 1.13 |   | $ | 0.44 |   |
| $0.91                   |       | 60,000 |   | 1.46 |   | $ | 0.91 |   |
| $1.05                   |       | 80,000 |   | 3.46 |   | $ | 1.05 |   |
| $1.25                   |       | 60,000 |   | 0.46 |   | $ | 1.25 |   |
| $1.38                   |       | 80,000 |   | 2.46 |   | $ | 1.38 |   |
|                    |       |   |   |   |   |   |   |
| $0.44 to $1.38          |       | 310,000 |   | 2.00 |   | $ | 1.09 |   |

 

Stock Warrants

 

Asof September 30, 2004, the Company had a total of 650,000 common stock warrantsoutstanding relating to the Purchase and Supply Agreement with Cirrus Design.  Cirrus Design met their minimum purchasecommitment for the exercise of the outstanding warrant.  The price of these warrants is $1.25 pershare and the warrants expire February 28, 2005 if they are not exercised.

 

**10.****      ****Commitments and Contingencies**

 

Leases

 

TheCompany leases its production facility on an airport in South St. Paul,Minnesota. Total rental expense for this operating lease during 2004 and 2003was $40,556 and $39,706, respectively. The Company bought out the remaining portion of its five-year subleasewith its landlord in September 2002. This buyout resulted in short-term prepaid lease expense of $24,851 at September 30,2004 and 2003, and long-term prepaid lease expense of $53,120 and $77,972,respectively, as reflected in the accompanying financial statements.  This buyout allowed the Company to become adirect lessee with the City of South St. Paul. This lease expires December 31, 2007.

 

TheCompany leases a second facility on the same airport for use in research anddevelopment.  Total rental expense for thisoperating lease during 2004 was $30,839. This lease expires October 31, 2005.

 

Futureminimum lease payments required on non-cancelable operating leases at September 30,2004 are as follows:

 

 

----

 
| **Fiscal Year** | ** ** | **Amount** | ** ** |
|-----------------|------------|------------|------------|
| 2005            |       | $          | 39,397     |   |
| 2006            |       | 17,627     |       |
| 2007            |       | 15,647     |       |
| 2008            |       | 3,912      |       |
|            |       |       |       |
| Total           |       | $          | 76,583     |   |

 

Legal Proceedings

 

(a)  In August 2003, theCompany was served in two related actions, Kathleen F. Fischer, Individuallyand as personal representative of the Estate of Joseph C. Fischer v. CirrusDesign Corp., Ballistic Recovery Systems, Inc., and Wings Aloft, Inc.,U.S. District Court for the Northern District of New York, File No. 03-CV-0782(HGM/DEP), and Susan Sedgwick, Individually, on her own behalf as survivingspouse of Thomas P. Sedgwick, as Executrix of the Estate of Thomas P. Sedgwick,deceased, and on behalf of all interested beneficiaries, including Jamie LynnSedgwick and Jacqueline Ann Sedgwick v. Cirrus Design Corp., Ballistic RecoverySystems, Inc. and Wings Aloft, Inc., U.S. District Court for theNorthern District of New York, File No. 03-CV-0592 (HGM/DEP).

 

These actions arise from the crash of aCirrus Design Corp. SR22 airplane in April 2002 near Parish, NewYork.  Plaintiffs have brought claims for strict products liability,negligence and breach of warranty against Cirrus, the airplane’s manufacturer,the Company, which manufactures the CAPS (Cirrus Airframe Parachute System), aparachute system which is a required component of the plane, and Wings Aloft, Inc.,which provided training on the SR22 to the decedents.

 

In preliminary reports submitted to thecourt, the plaintiff in *Fischer*has estimated the damages to be sought at trial as sixty million dollars, andthe plaintiff in *Sedgwick* hassubmitted an estimate of seven million five hundred thousand dollars.

 

The matters have been consolidated forpurposes of discovery, which began in November 2003 and is scheduled to becompleted by March 31, 2005, with the trials currently scheduled tocommence later in 2005.  At thistime, the Company cannot state with any degree of certainty what the outcome ofthese matters will be or the amount or range of potential loss, if any. The Company will vigorously defend these matters.

 

(b)  In April 2004,the Company notified Charles F. Parsons of its intent to terminate the salesand marketing contract between the Company and Mr. Parsons relating to theBRS-172 and BRS-150 products for lack of performance.  Subsequent to the notification being sent to Mr. Parsons,both the Company and Mr. Parsons filed suit against each other.  The Company filed suit to formalize thetermination of the contract and Mr. Parsons filed suit to block thetermination of the contract.  At thistime, the Company cannot state with any degree of certainty what the outcome ofthis matter will be or if there will be any financial impact on theCompany.  The Company intends tovigorously defend this matter.

 

(c) In September 2004, an action against the Company has been commenced by theestate of Douglas Lefebvre arising from the crash of a Sabian Rans S-12XL nearMexican Hat, Utah on September 22, 2002. Mr. Lefebvre was the passenger on the aircraft.  The suit was only recently commenced anddiscovery has just begun.  However, theCompany has the report of the National Transportation Safety Board whichinvestigated the accident.  The SafetyBoard concluded that the pilot inadvertently stalled the aircraft and then hefailed “to follow the proper emergency procedures for

 

 

----

 

activatinghis Ballistic Recovery System.”  TheSafety Board went on to say that “contributing factors [in the accident] werethe improper installation of the BRS by the pilot . . . .”  The Company believes that it has strongdefenses to the action, but is unable to predict the outcome or estimate whatamount of damages, if any, that might be awarded in this action.

 

**11.****      ****Supplemental Cash FlowInformation**

 
| **Cash paid for:** | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------|------------|----------|------------|----------|------------|
| Interest           |       | $        | 7,875      |     | $          | 14,905 |   |
| Income taxes       |       | 201,469  |       | 121,463  |       |
|                    |            |          |            |          |            |  |  |

 

Summaryof non-cash activity:

 

•                  The Company issued 50,000 shares of commonstock on August 16, 2004 through the exercise of stock options in exchangefor a note receivable in the amount of $12,500 plus interest.

•                  Options to acquire 35,000 shares and 70,836shares of the Company’s common stock were converted into 27,105 shares and 36,192shares of the Company’s common stock in cashless transactions during fiscalyear 2004 and 2003, respectively.

 

**12.****      ****Subsequent Events**

 

On October 14,2004, Ballistic Recovery Systems, Inc., a Minnesota corporation (the “Company”)and Mark B. Thomas entered into a Resignation, Consulting, Non-Competition andGeneral Release Agreement (the “Agreement”) in connection with Mr. Thomas’resignation as Chief Executive Officer, Chief Financial Officer, President, andas a director of the Company.  Pursuant to the terms of the Agreement, Mr. Thomasresigned such offices effective October 14, 2004.  The Company and Mr. Thomasagreed to terminate that certain Employment Agreement between such partieswhich was effective January 1, 2004.  Mr. Thomas agreed tobecome a consultant to the Company for a 90 day period for $5,000 per monthpursuant to which Mr. Thomas would provide certain services to the Companyup to a maximum of 25 hours per month.  For services requested by theCompany’s Board beyond such monthly amount, Mr. Thomas would be paid $200per hour.  Mr. Thomas would also be reimbursed, consistent withCompany internal policy for accrued vacation time and reimbursable businessexpenses and would have his healthcare benefits extended for the shorter of 18months or such time as Mr. Thomas obtains comparable replacement coverage.

 

Ata meeting on October 27, 2004, the Company’s Board of Directors declared adividend of $0.08 per share for all holders of record as of the close ofbusiness on November 8, 2004 and payable November 22, 2004.

 

****13.Restatement****

 

Thefollowing table reconciles the previously reported amounts to the restatedamounts as of and for the year ended September 30, 2004.  The Company has restated its valuation of thewarrants issued to Cirrus Design Corporation that became exercisable during theyear ended September 30, 2004.  Therestatement was to decrease sales, gross profit, income from operations andincome before income taxes by $369,831, decrease the income tax expense by$146,700 and decrease net income by $223,131 for the year ended September 30,2004.  The restatement increased totalassets, deferred tax asset - current and shareholders’ equity by $146,700 as ofSeptember 30, 2004.  In addition,the basic earnings per common share and

 

 

----

 

dilutedearnings per common share decreased by $.03 and $.04 for the year ended September 30,2004, respectively.

 

Thefollowing table reconciles the previously reported balance sheet at September 30,2004 to the restated amounts:

 
| ** **                                                                                              | ** ** | **Deferred tax  asset - current  portion** | ** ** | **Total current  assets** | ** ** | **Total assets** | ** ** | **Additional  paid-in capital** | ** ** | **Accumulated  deficit** | ** ** | **Total  shareholders’  equity** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|---------------------------|------------|------------------|------------|---------------------------------|------------|--------------------------|------------|---------------------------------------|------------|
|                                                                                                    |       |                                       |       |                      |       |             |       |                            |       |                     |       |                                  |       |
| Previously  reported amounts                                                                            |       | $                                          | 106,000    |                      | $          | 3,011,691        |       | $                               | 3,409,555  |                     | $          | 3,468,301                             |       | $ | (872,106 | ) | $ | 2,664,638 |   |
| Income tax  impact of adjustment                                                                        |       | 146,700                                    |       | 146,700                   |       | 146,700          |       | —                          |       | 146,700                  |       | 146,700                               |       |
| Increase  valuation of warrants which became exercisable during the year ended  September 30, 2004 |       | —                                     |       | —                    |       | —           |       | 369,831                         |       | (369,831                 | )          | —                                |       |
| Restated amounts                                                                                        |       | $                                          | 252,700    |                      | $          | 3,158,391        |       | $                               | 3,556,255  |                     | $          | 3,838,132                             |       | $ | (1,095,237 | ) | $ | 2,811,338 |   |

 

Thefollowing table reconciles the previously reported statement of operations tothe restated amounts for the year ended September 30, 2004.

 
| ** **                                                                                              | ** ** | **Sales** | ** ** | **Gross profit** | ** ** | **Income  from  operations** | ** ** | **Income before  income taxes** | ** ** | **Income tax  expenses** | ** ** | **Net income** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|-----------|------------|------------------|------------|------------------------------|------------|---------------------------------|------------|--------------------------|------------|----------------|------------|
| Previously  reported amounts                                                                            |       | $         | 6,928,382  |             | $          | 2,675,851                    |       | $                               | 873,103    |                     | $          | 869,605        |       | $ | 345,000 |   | $ | 524,605 |   |
| Income tax  impact of adjustment                                                                        |       | —    |       | —           |       | —                       |       | —                          |       | (146,700                 | )          | 146,700        |       |
| Increase  valuation of warrants which became exercisable during the year ended  September 30, 2004 |       | (369,831  | )          | (369,831         | )          | (369,831                     | )          | (369,831                        | )          | —                   |       | (369,831       | )          |
| Restated Amounts                                                                                        |       | $         | 6,558,551  |             | $          | 2,306,020                    |       | $                               | 503,272    |                     | $          | 499,774        |       | $ | 198,300 |   | $ | 301,474 |   |

 

Thefollowing tables reconcile the previously reported earnings per common shareamounts to the restated amounts for:

 
| ** **                                    | ** ** | **Year ended  September 30, 2004** | ** ** |
|-----------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                    | ** ** | **Basic**                               | ** ** | **Diluted** | ** ** |
| Basic and  diluted earnings per common share: |       |                                    |       |   |   |
| Previously  reported amounts                  |       | $                                       | .08        |   | $ | 0.08 |   |
| Restated amounts                              |       | (.03                                    | )          | (0.04 | ) |
| Restated  earnings per common share           |       | $                                       | .05        |   | $ | .04 |   |

 

 

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